    [Senate Hearing 108-779]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 108-779

                                                            Senate Hearings

                                     Before the Committee on Appropriations

    _______________________________________________________________________

                                             Departments of Transportation,

                                           Treasury and General Government,

                                                       and Related Agencies

                                                             Appropriations

                                                                Fiscal Year
                                                                       2005

                                             108th CONGRESS, SECOND SESSION

                                                          H.R. 5025/S. 2806

    DEPARTMENT OF THE TREASURY

    DEPARTMENT OF TRANSPORTATION

    NONDEPARTMENTAL WITNESSES

    UNITED STATES POSTAL SERVICE

      Departments of Transportation, Treasury and General Government, and
           Related Agencies Appropriations, 2005 (H.R. 5025/S. 2806)

    For Sale by the Superintendent of Documents, U.S. Government Printing Office
    Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512�091800
    Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                                                            S. Hrg. 108-779

      DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND
              RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2005

    =======================================================================

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                          ONE HUNDRED EIGHTH CONGRESS

                                 SECOND SESSION

                                       on

                               H.R. 5025/S. 2806

    AN ACT MAKING APPROPRIATIONS FOR THE DEPARTMENTS OF TRANSPORTATION AND
         TREASURY, THE EXECUTIVE OFFICE OF THE PRESIDENT, AND CERTAIN
    INDEPENDENT AGENCIES FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2005, AND
                               FOR OTHER PURPOSES

                                   __________

                           Department of the Treasury
                          Department of Transportation
                           Nondepartmental witnesses
                          United States Postal Service

                                   __________

             Printed for the use of the Committee on Appropriations

     Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                     senate

                                   __________
                          COMMITTEE ON APPROPRIATIONS

                         TED STEVENS, Alaska, Chairman
    THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
    ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
    PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
    CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
    MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
    CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
    RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
    JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
    ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
    BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
    LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
    KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
    MIKE DeWINE, Ohio                    TIM JOHNSON, South Dakota
    SAM BROWNBACK, Kansas                MARY L. LANDRIEU, Louisiana
                        James W. Morhard, Staff Director
                     Lisa Sutherland, Deputy Staff Director
                  Terence E. Sauvain, Minority Staff Director
                                     ------

     Subcommittee on Transportation, Treasury and General Government, and
                                Related Agencies

                      RICHARD C. SHELBY, Alabama, Chairman
    ARLEN SPECTER, Pennsylvania          PATTY MURRAY, Washington
    CHRISTOPHER S. BOND, Missouri        ROBERT C. BYRD, West Virginia
    ROBERT F. BENNETT, Utah              BARBARA A. MIKULSKI, Maryland
    BEN NIGHTHORSE CAMPBELL, Colorado    HARRY REID, Nevada
    KAY BAILEY HUTCHISON, Texas          HERB KOHL, Wisconsin
    MIKE DeWINE, Ohio                    RICHARD J. DURBIN, Illinois
    SAM BROWNBACK, Kansas                BYRON L. DORGAN, North Dakota
    TED STEVENS, Alaska (ex officio)

                               Professional Staff

                                  Paul Doerrer
                                  Lula Edwards
                                  Alan Hanson
                            Peter Rogoff (Minority)
                            Kate Hallahan (Minority)
                       Diana Gourlay Hamilton (Minority)

                             Administrative Support

                                Matthew McCardle
                         Meaghan L. McCarthy (Minority)

                                C O N T E N T S

                                  ----------

                             Tuesday, March 9, 2004

                                                                       Page
    Department of Transportation: Office of the Secretary............     1

                            Thursday, April 1, 2004

    United States Postal Service.....................................   115

                            Wednesday, April 7, 2004

    Department of the Treasury: Internal Revenue Service.............   155

                            Tuesday, April 20, 2004

    Department of the Treasury: Office of the Secretary..............   277

                            Thursday, April 22, 2004

    Department of Transportation:
        Federal Aviation Administration..............................   397
        Office of the Inspector General..............................   411

    Material Submitted by Agencies Not Appearing for Formal Hearings.   477
        Saint Lawrence Seaway Development Corporation................   477
        Merit Systems Protection Board...............................   483
        U.S. Access Board............................................   487
        Office of Personnel Management...............................   495
            Office of the Inspector General..........................   498
        General Services Administration:
            Public Buildings Service.................................   500
            General Services Administration..........................   501
        Department of Transportation:
            Federal Motor Carrier Safety Administration..............   505
            Bureau of Transportation Statistics......................   509
            Research and Special Programs Administration.............   511
        Department of the Treasury:
            Financial Crimes Enforcement Network.....................   513
            Alcohol and Tobacco Tax and Trade Bureau.................   520
        U.S. Office of Special Counsel...............................   524
        Federal Election Commission..................................   527
        Office of National Drug Control Policy.......................   530
        Surface Transportation Board.................................   534
        Office of Government Ethics..................................   539
    Nondepartmental Witnesses........................................   543

      DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND
              RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2005

                                  ----------

                             TUESDAY, MARCH 9, 2004

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:01 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard C. Shelby (chairman)
    presiding.
        Present: Senators Shelby, Bennett, Stevens, and Murray.

                          DEPARTMENT OF TRANSPORTATION

                            Office of the Secretary

    STATEMENT OF HON. NORMAN Y. MINETA, SECRETARY

                 opening statement of senator richard c. shelby

        Senator Shelby. Good morning. The committee will come to
    order.
        This is the first hearing of the Transportation, Treasury
    Subcommittee for the year, fiscal year 2005. Today we welcome a
    familiar face, Secretary Norman Mineta, back to this
    subcommittee. Mr. Secretary, welcome. We are pleased to have
    you with us today to discuss the Department's budget for the
    upcoming fiscal year and to hear your report on progress
    towards your goals for the Department of Transportation (DOT).
        I believe it is only fitting that we begin our hearings
    with an overview of the budgetary and management challenges
    facing the Department of Transportation. Clearly the budget
    pressures faced by the administration and the Congress are
    reflected in this budget. Secretary Mineta, I looked through
    the budget submission for good news and I found myself at the
    end of the story with little to cheer about, as I am sure you
    have.
        I want to applaud you though for not proposing any new user
    fees in this year's request that affect the budget. With our
    economy struggling to recover, I believe that now would be the
    worst time to increase the burden on transportation users or on
    the economy through the imposition of new transportation taxes.
    Our goal should be to do more with less and to relieve
    unnecessary impediments to efficiency in the transportation
    system. This budget provides the opportunity to explore how to
    do more with less.
        I also want to commend you, Mr. Secretary, for the request
    for highway spending. While it is not as high as I hoped for, I
    am pleased that the budget abandons the RABA mechanism that
    would have generated a much lower amount of highway investment
    number for fiscal years 2004 and 2005. While the highway
    request is relatively flat, I want my colleagues to realize
    that it could have been much, much worse if the administration
    had blindly followed the previous authorization's flawed budget
    mechanism. Mr. Secretary, you are to be applauded for not
    embracing that folly.
        As important as any of the shortcomings in this request, I
    am concerned with the National Highway Traffic Safety
    Administration's (NHTSA) request as it relates to anti-impaired
    driving efforts. I am saddened to note that alcohol-related
    deaths were up in 2002. NHTSA has made great strides over the
    last couple of years to improve seatbelt usage rates but this
    is something that I think we must do better.
        I am also concerned about the lack of progress on the
    Amtrak fair bid concept for State-supported trains included in
    the fiscal year 2004 appropriations measure. I have been told
    that several States have contacted the Federal Railroad
    Administration for guidance on implementation of the language
    and nothing has been forthcoming.
        Mr. Secretary, given the request for Amtrak for this coming
    year and its abysmal performance over the past 20 years, I
    would think this language would be an opportunity for the
    Department to take a positive step for people who want to ride
    trains and for the American taxpayer. I would also like to hear
    your thoughts on when the Department will move forward on this
    important initiative and would welcome your thoughts on what we
    should be doing to stop the financial bleeding at Amtrak.
        As predictable as the request for Amtrak may have been, Mr.
    Secretary, no area of the Department's request was more
    unexpected than the Federal Aviation Administration (FAA)
    budget. Just a couple of months ago, shortly before the
    submission of your 2005 request to OMB, the administration made
    an all-out push for passage of the Vision 100 aviation
    reauthorization legislation. Now I look at this budget request
    and I am surprised to see that the FAA's capital account does
    not reflect the investment levels anticipated in that
    legislation. Your budget, Mr. Secretary, calls for a 13.6
    percent reduction, roughly $400 million, to the Federal
    Aviation Administration's capital account to update air traffic
    control facilities and equipment.
        I am concerned not only about the timing of the cut, but
    also about its effect. The administration's budget proposal
    puts this committee in the untenable position of having to find
    an additional $400 million or being subject to points of order
    in the Senate. It is difficult and unseemly to support
    budgetary protections and points of order protecting capital
    investment levels and, at the same time, to also support the
    kinds of cuts your budget proposes for the FAA capital account.
        Within the reduced account, I am disappointed that the FAA
    has protected troubled acquisition programs and has shelved
    others that show real promise. Tighter budgets do not translate
    to greater discipline at the FAA. I do not know how the
    Department expects to develop the Next Generation Air Traffic
    Control System if the FAA continues to spare from critical
    evaluation or from the budget axe the programs that have
    unbridled cost growth, schedule delays, and deferred
    capabilities.
        Mr. Secretary, if the calculus in the F&E submission was to
    try to protect the most bloated of programs with the
    expectation that Congress would restore funding for the needed
    new technologies for efficiency and safety, there may be a few
    surprised faces at the FAA's procurement shop.
        Before recognizing Senator Murray, I would like to raise
    one more issue. Although only briefly mentioned in budget
    documents, your staff has begun briefing the Hill on a major
    Department reorganization proposal affecting several modes.
    Clearly, the Department needs to improve the coordination of
    the enforcement of hazardous materials regulations and
    inspection of hazmat shipments. In fact, the Inspector General
    has identified this issue as one of the top 10 management
    challenges at the Department.
        While improvement is warranted, I think we must be mindful
    that previous reorganization efforts have failed. And, I want
    to register my strong reservation about centralizing HAZMAT
    inspection and enforcement activities within the Office of the
    Secretary. The Office of the Secretary does some things well,
    such as policy development, but the modal administrations are
    better staffed and structured to execute operational functions
    like the HAZMAT program. It is highly unusual, and I would
    argue risky, to establish an operations function in the
    Secretary's office.
        Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you, Mr. Chairman. Mr. Chairman, I am
    pleased that Secretary Mineta can be with our subcommittee this
    morning. I understand he testified before the House
    Transportation Appropriations Subcommittee just a few days ago
    and I understand during that hearing the Secretary explained
    this budget reflects the President's top priorities. If this is
    true, then it is true that the President places an extremely
    low priority on the needs of our Nation's transportation
    system. At a time when congestion on our Nation's highways is
    getting worse and when our road, rail, airport and air traffic
    control infrastructure is deteriorating, the President's budget
    for the Transportation Department is effectively frozen. While
    there are increases in some select programs, these increases
    are offset by deep cuts to our efforts to modernize our air
    traffic control system and to provide air service to rural
    America.
        Once again the administration is proposing a cut to
    Amtrak's budget that is so deep it will throw the railroad into
    bankruptcy if it is enacted. I cannot and will not agree with
    these priorities and I hope that my colleagues on this
    subcommittee will also reject them. For me this is about our
    jobs, our economy and our productivity. If we make the right
    investments in transportation we will create millions of jobs
    here at home, we will make our businesses and workers more
    productive, and we will lay the foundation for our future
    economic growth.
        The Senate has also recognized the importance of
    transportation for our economy. Less than a month ago more than
    three-quarters of the United States Senate voted in favor of a
    surface transportation authorization bill that placed an
    appropriate priority on investment in America's mobility,
    America's productivity, and the creation of American jobs. That
    bill called for substantial growth in our Federal highway,
    transit, and safety programs. It financed those increases by
    closing tax loopholes. The bill not only addressed America's
    broader needs to relieve congestion and improve aging
    infrastructure, it also addressed the unique needs of different
    regions of the country.
        For example, I was successful in including an amendment to
    triple the amount of funding available for our Nation's ferry
    systems. Ferries are not just a tourist attraction in my State.
    They are the way thousands of my constituents get to work each
    and every day. The Bush Administration greeted that entire
    surface transportation bill with a promise to veto it. Yet when
    an amendment was offered on the Senate floor to reduce the size
    of the bill to a level that the President said he could accept,
    that amendment received only 20 votes.
        That vote was less than 4 weeks ago but, boy, things have
    changed. Today the Senate is debating a budget resolution that
    was reported by the Budget Committee just last week that
    actually cuts funding for highways and transit back to the
    level assumed in the President's budget. This budget resolution
    will allow for $45 billion less in funding over the next 6
    years for highways and transit than the levels the Senate
    endorsed just last month. That $45 billion reduction translates
    into more than 2.1 million jobs that will not be created as a
    result of the President's budget policy and this budget
    resolution. To my home State of Washington that is a cut of
    roughly $807.8 million. That corresponds to a loss of more than
    38,000 jobs in Washington State over 6 years.
        The President's cut will have a significant impact on every
    State. I hope my colleagues will reflect on that fact before
    they vote to pass this budget resolution. This budget negates
    every statement that we made a month ago about the importance
    of highway construction, new transit systems, congestion
    mitigation, and job creation. Mr. Chairman, this is hardly the
    first time that an administration has threatened to veto a
    highway bill because it is too large. In fact veto threats have
    been issued against each of the last three highway bills over
    last 18 years. But this may be the first time that a Congress
    has started to show signs of giving in to objections from the
    executive branch.
        We need to pass a 6-year surface transportation bill that
    invests in America and America's workers in a meaningful way.
    We should not succumb to the view that investment in a mission
    to Mars is more important than investments in our country and
    in our own people. No one made this point better than Norman
    Mineta when he implored his colleagues to ignore the veto
    threat of the administration of George Herbert Walker Bush and
    pass the Intermodal Surface Transportation Efficiency Act.
        Mr. Mineta said, and I will quote you, ``this legislation
    comes at the time when it is desperately needed, both in terms
    of our infrastructure and for Nation's economic health. At a
    time when the White House continues to deny the effects of the
    economic recession we have before us legislation that will
    create 2 million jobs over the next 6 years. While the people
    of 1600 Pennsylvania Avenue have not seen or felt the effects
    of the recession, Mr. Speaker, you have only to ask the people
    of Bethlehem, Pennsylvania if there is a recession, or the
    people of Chicago, or the people of Lafayette, or the people of
    San Jose. They will tell you that our economy is hurting. They
    will tell you that America needs this legislation and we need
    it now.''
        ``Mr. Speaker, this legislation will improve how Americans
    get from here to there as well as the air we breathe, our
    quality of life, and the future of our economy. Mr. Speaker,
    America's deserves nothing less.''
        Secretary Mineta, those words are as pertinent and on
    target today as they were when you delivered them on the floor
    of the House on November 26, 1991. America does deserve nothing
    less. We should send the highway and transit bill that the
    Senate passed last month to the President's desk, and I believe
    that if he listens to his Transportation Secretary he will sign
    it.
        Thank you, Mr. Chairman.
        Before I yield I do want to mention a couple of happy and
    surprising developments that have taken place within the past
    week on this subcommittee family. As you know, our majority
    clerk sitting to your left, Paul Doerrer, got engaged over the
    weekend to Leigha Shaw. We congratulate him. Leigha is a friend
    to all of us. She serves on the staff of the companion
    subcommittee in the House and I want to congratulate both of
    them and wish them well.

                               PREPARED STATEMENT

        And to my right, Peter Rogoff, who has been with the
    Appropriations Committee for 17 years, I believe 15 years on
    transportation, is celebrating his birthday today. I will not
    share with you which one, but I do want to say happy birthday
    to him as well and we wish both of you the very best.
        Thank you, Mr. Chairman.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        I'm pleased that Secretary Mineta can be with the subcommittee this
    morning. He testified before the House Transportation Appropriations
    Subcommittee just a few days ago. I understand that during that
    hearing, the Secretary explained this budget reflects the President's
    top priorities.
        If this is true, then it's clear that the President places an
    extremely low priority on the needs of our Nation's transportation
    system. At a time when congestion on our Nation's highways is getting
    worse, and when our road, rail, airport and air traffic control
    infrastructure is deteriorating, the President's budget for the
    transportation department is effectively frozen.
        While there are increases in some select programs, these increases
    are offset by deep cuts to our efforts to modernize our air traffic
    control system and to provide air service to rural America. And once
    again, the administration is proposing a cut to Amtrak's budget that is
    so deep it will throw the railroad into bankruptcy if it is enacted.
        I cannot and will not agree with these priorities, and I hope that
    my colleagues on this subcommittee will also reject them. For me, this
    is about jobs, our economy and our productivity. If we make the right
    investments in transportation we will create millions of jobs here at
    home, we'll make our businesses and workers more productive, and we'll
    lay the foundation for our future economic growth.
        The Senate has also recognized the importance of transportation for
    our economy. Less than 1 month ago, more than three-quarters of the
    United States Senate voted in favor of a surface transportation
    authorization bill that placed an appropriate priority on investment in
    America's mobility, America's productivity, and the creation of
    American jobs. That bill called for substantial growth in our Federal
    highway, transit and safety programs. It financed these increases by
    closing tax loopholes.
        The bill not only addressed America's broader needs to relieve
    congestion and improve aging infrastructure, it also addressed the
    unique needs of different regions of the country. For example, I was
    successful in including an amendment to triple the amount of funding
    available for our Nation's ferry systems. Ferries are not a tourist
    attraction in my State. They are the way thousands of my constituents
    get to work each day. The Bush Administration greeted that surface
    transportation bill with a promise to veto it.
        Yet, when an amendment was offered on the Senate Floor to reduce
    the size of the bill to a level that the President said he could
    accept--that amendment received only 20 votes. That vote was less than
    4 weeks ago, but my, how things have changed.
        Today, the Senate is debating a Budget Resolution that was reported
    by the Budget Committee just last week and that actually cuts funding
    for highways and transit back to the level assumed in the President's
    budget. This Budget Resolution will allow for $45 billion less in
    funding over the next 6 years for highways and transit than the levels
    the Senate endorsed just last month. That $45 billion reduction
    translates into more than 2.1 million jobs that will not be created as
    a result of the President's budget policy and this Budget Resolution.
    For Washington State, that is a cut of roughly $807.8 million. That
    corresponds to a loss of more than 38,000 jobs in Washington State over
    6 years.
        The President's cut will have a significant impact on every State.
    I hope my colleagues will reflect on that fact before they vote to pass
    this Budget Resolution. This budget negates every statement that we
    made a month ago about the importance of highway construction, new
    transit systems, congestion mitigation and job creation.
        Mr. Chairman, this is hardly the first time that an administration
    has threatened to veto a highway bill because it is too large. In fact,
    veto threats have been issued against each of the last 3 highway bills
    over the last 18 years. But this may be the first time that a Congress
    has started to show signs of giving in to objections from the Executive
    Branch. We need to pass a 6-year surface transportation bill that
    invests in America and America's workers in a meaningful way. We should
    not succumb to the view that investment in a mission to Mars is more
    important than investments in our own country and our own people.
        No one made this point better than Norman Y. Mineta when he
    implored his colleagues to ignore the veto threat of the administration
    of George Herbert Walker Bush and pass the Intermodal Surface
    Transportation Efficiency Act. Chairman Mineta said:

        ``[t]his legislation comes at a time when it is desperately
    needed--both in terms of our infrastructure, and for our Nation's
    economic health. At a time when the White House continues to deny the
    effects of the economic recession, we have before us legislation that
    will create two million jobs over the next 6 years. And while the
    people of 1600 Pennsylvania Avenue haven't seen or felt the effects of
    the recession, Mr. Speaker, you have only to ask the people of
    Bethlehem, PA, if there is a recession. Or the people of Chicago. Or
    the people of Lafayette, LA. Or the people of San Jose, CA. They will
    tell you that our economy is hurting. They will tell you that America
    needs this legislation, and we need it now. Mr. Speaker, this
    legislation will improve how Americans get from here to there, as well
    as the air we breathe, our quality of life, and the future of our
    economy. Mr. Speaker, America deserves nothing less.''

        Secretary Mineta, these words are as pertinent and on target today
    as they were when you delivered them on the Floor of the House on
    November 26, 1991.
        America does deserve nothing less. We should send the highway and
    transit bill that the Senate passed last month to the President's desk.
    I believe that, if he listens to his Transportation Secretary, he will
    sign it. Thank you, Mr. Chairman.

        Senator Shelby. Thank you, Senator Murray.
        Senator Bennett.

                     STATEMENT OF SENATOR ROBERT F. BENNETT

        Senator Bennett. Thank you very much, Mr. Chairman. With
    that announcement I think we can expect some late night
    conferences between the House and the Senate.
        Mr. Secretary, let me welcome you here and publicly thank
    you for the continued support that has come from the Department
    of Transportation for transportation concerns in Utah. We are
    particularly pleased with the support and assistance we
    received from the Federal Transit Administration. Administrator
    Jenna Dorn and her staff have always been responsive and I
    would be remiss if I did not publicly acknowledge that here and
    in a forum directly with you. We think we have a model program
    going in the transit system along the Wasatch Front has proven
    to be very successful, exceeded all expectations and
    projections as to ridership and we are enormously proud of it.
    But we recognize that if we had not had the kind of support and
    responsive reaction that has come from Administrator Dorn we
    would not be where we are. So in a time when people are beating
    other people up on all kinds of issues, I want to have the
    record show how grateful we are for the work that you have
    done.
        We do have an issue which I will deal with in some detail
    perhaps during the question period. In the wide open spaces of
    the West, particularly following 9/11, we have had a shift in
    air transportation away from what people call the main line
    carriers into the regional carriers, and a regional carrier
    that is very successful in Utah, SkyWest in particular, has
    added some new jets and some new routes. The economics of what
    happened after 9/11 has dictated this.
        But it has created a problem in that DOT and FAA
    regulations regarding the transportation of medical specimens
    for diagnosis has hit us because the regional carrier is not
    designated to handle these specimens as much as the trunk
    carriers are, and with the University of Utah Medical Center
    serving the entire region, not just the State of Utah, we have
    to get some of those diagnostic specimens to the University of
    Utah. They would be transferred to regional carrier flights
    rather than the trunk line flights before. This is an issue
    that we have just found out about. I am not sure that you are
    aware of it either but I wanted to raise it here and we might
    get into it at some point.
        With that, Mr. Chairman, I will be happy to hear the
    witness.
        Senator Shelby. Thank you.
        Mr. Secretary, your written testimony will be made part of
    the record in its entirety. You may proceed as you wish.
    Welcome again to the committee.

                         STATEMENT OF NORMAN Y. MINETA

        Secretary Mineta. Thank you very much, Mr. Chairman, and
    members of the subcommittee. Thank you for this opportunity to
    appear before you today to discuss the administration's fiscal
    year 2005 budget request for the Department of Transportation.
    I might say parenthetically in response to Senator Murray, then
    is then and now is now.
        As we begin our discussion, I want to thank the members of
    the subcommittee for your support of the work of the Department
    of Transportation. I am confident that together we will
    continue to build a strong economy by providing a safer,
    simpler, and smarter transportation system for our great
    Nation. Let us turn now to the budget specifics.
        President Bush is requesting $58.7 billion in total
    budgetary resources for the Department of Transportation. As
    you are very well aware, last year we sent the President's
    proposal for reauthorizing our surface transportation programs
    for the next year to the Congress. This legislation, the Safe,
    Accountable, Flexible and Efficient Transportation Equity Act,
    or SAFETEA, is a responsible plan. It supports the economy
    through record investments in our highway and transit and
    safety programs without raising gasoline taxes, without
    increasing the Federal deficit, and without taking money from
    other important programs. So I look forward to working with the
    Congress on enactment of the President's 2005 budget for
    highway, safety, and transit programs. While it does not fall
    under the jurisdiction of this committee, I do want to
    underscore the need for swift action on this pending SAFETEA
    proposal by the Congress.

                       FUNDING FOR SURFACE TRANSPORTATION

        The 2005 budget reaffirms the President's commitment to
    SAFETEA by providing a total of $256 billion over the 6-year
    life of the bill up from the $247 billion in the original
    proposal. For highway and transit programs, the budget would
    continue the recently enacted 2004 funding level, and within
    this level we are increasing funding for transit new starts.
    These new start projects will carry over 243 million passengers
    annually and they will save over 121 million hours in travel
    time and significantly improve air quality and mobility in
    America.
        The budget specifically designates more than $14 billion
    for transportation safety with increases in annual funding for
    safety initiatives in both the National Highway Traffic Safety
    Administration, NHTSA, and the Federal Motor Carrier Safety
    Administration, FMCSA. Today, travel on America's highway is
    safer than in recent memory. Statistics show that 75 percent of
    all Americans are using their safety belts, the highest level
    in our Nation's history. We are proud of this progress and will
    continue the Department's aggressive efforts to save lives and
    to reduce the more than $230 billion that the economy loses
    each year because of traffic crashes.

                        FUNDING FOR RAILROADS AND AMTRAK

        For railroads, the President's 2005 budget includes $188
    million for the Federal Railroad Administration to support
    enhanced track inspection and research activities. The
    President's Amtrak reform legislation, the Passenger Rail
    Investment Reform Act, is also pending before the Congress. The
    2005 budget requests $900 million for Amtrak in 2005 with the
    potential for an increase to $1.4 billion in the years 2006
    through 2009 if the Administration's management and financial
    reforms are enacted. Now these reforms are critical if we are
    to justify further spending of taxpayer dollars on Amtrak
    service.

                FUNDING FOR THE FEDERAL AVIATION ADMINISTRATION

        The President's 2005 budget for the Federal Aviation
    Administration provides $14 billion in overall funding. We
    recognize that air travel has become a cornerstone of our
    transportation system in the more than 100 years since the
    Wright brothers' first flight. While holding the line on
    Federal spending, the President's budget makes a modern and
    efficient air transportation system a key priority. Let me
    assure you that we are making the necessary investments to keep
    America flying safely and smoothly.
        Our plans include continued near-term investments in
    aviation systems and technology to avoid gridlock in the skies
    and to improve air safety. At the same time we support the
    design of the next generation air transportation system to
    secure America's place as a global leader in aviation's second
    century. We are constantly considering new and better ways to
    make sure that transportation supports the Nation's growing
    economy. One option that we are exploring would enable the
    Maritime Administration and the Lawrence Seaway Development
    Corporation to expand capacity to use our ports and waterways
    to move commercial freight. Giving businesses reliable and
    affordable options for moving commercial goods has the
    potential to lessen truck traffic on our highways.
        Transportation research plays a vital role in developing
    transportation solutions. That is why I have asked our staff to
    study reorganizing the research programs, hazardous materials
    oversight, and pipeline safety within the Department. I believe
    that there are ways to strengthen and improve our work in all
    of these important areas and you will be hearing more from us
    on these plans.
        Finally, I want to close by underscoring my continued
    commitment to the President's management agenda initiative. The
    Department of Transportation has made significant improvements
    in all management areas. Consequently, we are delivering
    results for the American people, helping the President build a
    strong economy through a strong transportation system. There is
    still much to be done, but I am confident that we are on the
    right path.

                               PREPARED STATEMENT

        I have touched on only a few key highlights and you will
    find additional details within my full written statement
    submitted to the committee as well in our Budget in Brief,
    which all of you have received. It is this multicolored
    pamphlet. At this time, Mr. Chairman, I would be more than
    happy to answer your questions.
        [The statement follows:]

                     Prepared Statement of Norman Y. Mineta

        Mr. Chairman, Members of the subcommittee, thank you for the
    opportunity to appear before you today to discuss the administration's
    fiscal year 2005 budget request for the Department of Transportation.
    President Bush is requesting $58.7 billion in total budgetary resources
    for transportation programs--nearly the same as the fiscal year 2004
    enacted level. I am particularly pleased that within this total funding
    level more than $14 billion will support transportation safety
    projects--my top priority.
        Today, travel on America's highways is safer than in recent memory.
    Statistics show that 79 percent of all Americans are using their safety
    belts--the highest level in the Nation's history. We are proud of this
    progress and of the Department of Transportation's role in encouraging
    safety belt use. Yet sadly, more than 40,000 people still die in
    traffic crashes each year. Many die needlessly just because they failed
    to ``buckle-up''. This is a tragic statistic that affects all of us and
    one that both the President and I have pledged to address. We are
    committed to reducing traffic fatalities. The President's fiscal year
    2005 budget request acknowledges this priority and includes annual
    funding increases for our important safety programs.
        Over the past year, the Department of Transportation provided to
    the Congress legislative proposals to reauthorize our Nation's surface,
    aviation, and intercity-passenger rail programs. As a result, the
    ``Vision 100--Century of Aviation Reauthorization Act'' was passed
    providing the Federal Aviation Administration with a blue-print from
    which to guide its work over the next 4 years.
        The fiscal year 2005 President's budget reflects the
    administration's commitment to aviation and the key role it plays in
    keeping America moving. On December 17, 2003, we celebrated the 100-
    year anniversary of the Wright Brothers' first flight. Today, air
    travel has become a cornerstone of our transportation system. Continued
    investment in aviation systems and technology is critical to ensuring
    the reliability of air travel. The recent passage of the ``Vision 100''
    which authorizes aviation programs for the next 4 years, includes more
    than $60 billion in Federal resources--a 31 percent increase above
    previous authorization levels for aviation.
        The fiscal year 2005 President's budget request is $14 billion for
    the Federal Aviation Administration (FAA). The fiscal year 2005 request
    will enable the agency to continue to fund the level of service it
    provides today, while ensuring that critical capital investments stay
    on track. In addition, ``Vision 100'' will result in hundreds of
    thousands of additional jobs in the aviation industry over the 4-year
    life of the bill while at the same time providing a plan for guiding
    FAA's programs in the future.
        Although we have new aviation reauthorization, work continues to
    provide reauthorization legislation for our surface programs, and long-
    term legislative solutions have not been completed to date. The
    recently enacted surface transportation extension bill is an interim
    step that falls short of addressing the long-term needs of these
    programs. We welcome the opportunity to work with the Congress to
    complete a 6-year reauthorization bill that meets the administration's
    principles recently outlined in a letter Treasury Secretary Snow and I
    sent to the Senate Majority Leader and that will provide the resources
    and planning horizon to keep our surface transportation programs moving
    forward.
        Enactment of the administration's surface transportation
    reauthorization proposal--the ``Safe, Accountable, Flexible, and
    Efficient Transportation Equity Act'', or ``SAFETEA'' would accomplish
    this goal. Last May, the President proposed ``SAFETEA''--the largest
    investment in history for America's surface transportation programs.
    The President's fiscal year 2005 budget reaffirms the principles
    outlined in ``SAFETEA'' while amending our proposal to include a total
    of $256 billion over the 6-year life of the bill--an additional $8.6
    billion more than the $247 billion in our original ``SAFETEA'' funding
    request--and a 21 percent increase over the funding included in the
    Transportation Equity Act for the 21st Century (TEA21). Much of this
    investment will be used to provide improvements on our roads and
    highways which will reduce traffic congestion.
        Our revised proposal would continue the funding levels for the
    Federal Highway Administration and the Federal Transit Administration
    enacted in fiscal year 2004 for each year 2005 through 2009. Moreover,
    the fiscal year 2005 President's budget request includes annual
    increases beginning in 2005 through 2009 for both the National Highway
    Traffic Safety Administration (NHTSA) and the Federal Motor Carrier
    Safety Administration (FMCSA) to ensure that improvements in safety are
    enhanced.
        Our fiscal year 2005 budget proposal accomplishes the
    administration's safety, mobility, and congestion relief goals by
    providing a historic level of surface transportation spending without
    raising taxes. Instead, the administration's request relies on spending
    resources available in the Highway Trust Fund while ensuring that a
    cash balance of approximately $5 billion is maintained throughout the
    authorization period. Further, the President's request would redirect
    the resources from the 2\1/2\ cents per gallon levied on gasohol, and
    currently deposited in the General Fund, to the Highway Trust fund.
    This redirection will increase annual receipts to the Highway Trust
    Fund by over $700 million per year--a change that, if enacted, will
    provide the resources needed to support the proposed annual funding
    increases for our safety programs.
        ``SAFETEA'' provides a plan that will enable us to reach our goals,
    while providing the vision necessary to guide our surface
    transportation programs in a fiscally responsible manner. I urge the
    Congress to act quickly to pass ``SAFETEA'' and the fiscal year 2005
    President's budget request for our surface transportation programs.
    Every day we delay is a missed opportunity to benefit America.
        Although highway, transit and highway safety programs play a major
    role in surface transportation, we also rely on railroads to move
    people and goods across our country. Intercity passenger rail is an
    essential element of the Nation's multi-modal transportation system.
    Accordingly, last year, in addition to our SAFETEA proposal, the
    administration sent to Congress the President's Passenger Rail
    Investment Reform Act. This proposal would align passenger rail
    programs with other transportation modes, under which States work in
    partnership with the Federal Government, in owning, operating, and
    maintaining transportation facilities, infrastructure and services.
    Putting passenger rail on a solid foundation of planning and investment
    will give this important mode of transportation the support it needs to
    grow. The President's fiscal year 2005 budget requests $900 million for
    Amtrak and includes the potential for an increase to $1.4 billion in
    each of fiscal years 2006 through 2009--if the administration's
    management and financial reforms are enacted.
        The fiscal year 2005 President's budget also includes a proposal
    for funding the Essential Air Service (EAS) program that would include
    a limited cost-sharing arrangement with selected communities
    participating in the program. Currently, the EAS program subsidizes
    scheduled air service to communities that received scheduled service at
    the time of deregulation in 1978. Although there have been tremendous
    changes in the industry since then, the program has remained static.
    The administration believes that requiring a modest contribution from
    communities benefiting from this program may energize civic officials
    and business leaders at the local and State levels to think more
    creatively about the potential of the program and about different means
    to meet the transportation needs of the community.
        The President's fiscal year 2005 budget request will continue to
    guarantee air service to the most isolated communities by restructuring
    the program to require communities to contribute either 10 or 25
    percent of the total subsidy, depending on their degree of isolation,
    and to expand service provided to include ground transportation,
    single-engine, single-pilot operations, air taxi, charter service or
    regional service. With these reforms, the Department would keep the
    most isolated communities connected to the national air transportation
    system with a $50 million budget funded entirely from overflight fees.
    We look forward to working with you on this plan.
        Although transportation continues to improve, we still have many
    challenges before us. Highway congestion and expected increases in air
    travel are issues we must be prepared to address. At the Department of
    Transportation, we are looking for new ways to address growing
    commercial freight transportation needs, consistent with our freight
    action plan. The President's budget includes programs to reduce
    bottlenecks in and around seaports and land borders with Canada and
    Mexico and to introduce technological innovations for improved freight
    efficiency and security. In addition, the Maritime Administration and
    the Saint Lawrence Seaway Development Corporation are advancing
    programs to expand our capacity to use ports and waterways to move
    freight and transport goods efficiently, thereby reducing dependence on
    our highways to meet growing freight needs.
        Over the past year, I have considered the important role that
    transportation research plays in developing transportation solutions.
    That is why I have asked our staff to study reorganizing the research
    programs, hazardous materials, and pipeline oversight within the
    Department. I believe there are ways to strengthen and improve our work
    in all of these important areas. As we continue to study alternative
    approaches, we will work closely with you and our colleagues within the
    administration to ensure that any potential reorganization will
    continue to serve the Nation's needs.
        I also want to highlight the fiscal year 2005 President's budget
    request for the new Department of Transportation headquarters building
    project. In fiscal year 2004, the Congress included $42 million for our
    new headquarters building in the General Services Administration's
    budget. Our request of $160 million in fiscal year 2005 would fund the
    next construction phase and the information technology infrastructure
    in the building. This would keep the project on track making it
    possible for the Department to begin taking occupancy as planned. Your
    support for this endeavor will ensure that the Department of
    Transportation will have an alternative site available when our current
    lease expires in 2006.
        In closing, I would like to share with you my continued commitment
    to the President's Management Agenda. President Bush has asked all
    Federal agencies to work towards improvements in the following five key
    areas:
      --enhanced budget requests that focus on results and performance;
      --improved financial management and strengthened financial controls;
      --targeted human capital initiatives that ensure our human resources
            are used as effectively as possible;
      --use of competitive sourcing as a resource solution; and
      --government-wide use of electronic government tools to improve
            efficiency.
        My team at the Department of Transportation is working hard to
    implement these initiatives and I am proud to note that we have already
    made significant progress towards these goals. I believe we are on the
    path to success and we are committed to continuing these improvements
    as stewards of the American public's resources.
        Thank you again for the opportunity to testify today. I look
    forward to working closely with all of you, and with the entire
    Congress, as you consider the fiscal year 2005 President's budget
    request and I look forward to responding to any questions you may have.

                      FUNDING FOR AIR TRAFFIC CONTROLLERS

        Senator Shelby. Thank you, Mr. Secretary.
        The budget proposes a $370 million increase for FAA
    operations, $141 million more than the authorized amount. FAA
    is taking modest steps to control costs, but it cannot afford
    continued increases in the operations account of 5 percent to 8
    percent annually. FAA salaries continue to increase sharply. We
    raised this issue last year when the average controller's
    salary was more than $106,000, and I am told that in the
    calendar year 2003 some controllers made more than $200,000.
    Controllers' salaries will further increase when the full 2004
    pay increase is implemented.
        Mr. Secretary, what steps is the Department taking to get
    the FAA's payroll under control, or how can you do it?
        Secretary Mineta. There are two ways that we are doing
    that. The first is through the contract negotiations that we
    have going on with the separate labor units. The one
    specifically for NATCA is one in which we have arrived at an
    impasse. We have submitted our letter of impasse to the
    Congress relating to the contract negotiations that we have
    going on. Much of that has to do with pay, because under the
    program that Congress passed for the FAA, we have pay and
    procurement practices that are different from the regular civil
    service. One of the things that are incorporated is pay-for-
    performance.
        One of the things that is involved in the impasse is the
    whole issue of multi-units and whether or not--and NATCA's
    proposal is that they want the full pay increase that everyone
    is getting, plus 1 percent. What we are looking at is not only
    individual performance but also whether the units themselves
    are meeting their performance goals. So we were not able to
    come to an agreement on that issue, and that has now been
    submitted for impasse.
        The other method of controlling costs, of course, is the
    typical budgetary restraint. After our initial submission to
    OMB and the passback, when we get our final amount, we then
    have to reprioritize and allocate those financial resources. So
    to the extent that we can look at what our pay will be, or what
    our financial resources will be, we can match those to what we
    anticipate in pay increases in the outyears.

             FEDERAL TRANSIT ADMINISTRATION ADMINISTRATIVE EXPENSES

        Senator Shelby. Mr. Secretary, I would like to discuss the
    budget request for FTA administrative expenses. People have
    been concerned about the annual increases for FAA operations
    for some time. As we review your budget submission, I note that
    the Federal Transit Administration's administrative expenses
    are growing at a faster rate than FAA's operations. This would
    catch anybody's attention. Why are FTA's administrative
    expenses growing so sharply?
        Secretary Mineta. I think one of the areas in which the FTA
    program is growing is transit services, both in urban areas as
    well as the increasing amount that is going to rural areas.
    These services require thorough reviews, and with the growth of
    the urban, rural, and the new starts programs, we are just
    spending a lot more time on going through the applications that
    are submitted to us. Even though most of these are earmarked
    programs, we still have to make sure that the ridership and
    financial capability of the system support what they are asking
    for. It takes a great deal of effort to go through those
    applications.

                    STATE SUPPORT FOR PASSENGER RAIL SERVICE

        Senator Shelby. Mr. Secretary, I mentioned in my opening
    statement that FRA has not issued guidance to implement the
    fair bid procedure for State-supported rail service. The funds
    that were set aside in the 2004 appropriations act expire at
    the end of the year and I would be disappointed if we let this
    opportunity to infuse competition into passenger rail slip
    away, especially given the interest of several States. When can
    we expect FRA to move forward on this initiative?
        Secretary Mineta. FRA has been moving forward, Mr.
    Chairman, with Missouri, St. Louis to Kansas City, and they got
    no outside bidders other than Amtrak on that route. There are
    other States that have submitted requests or inquiries about
    the fair bid, and I am not sure--I am not up to date on where
    we are on those States. But we will be utilizing the fair bid
    process because we think that that is the right approach.

                             MOTOR FUEL TAX EVASION

        Senator Shelby. Mr. Secretary, fuel tax evasion is a
    subject we get into from time to time. According to the Federal
    Highway Administration, the highway trust fund forgoes
    approximately $1 billion annually due to non-payment or
    fraudulent evasion of motor fuel taxes. Are you satisfied as
    the Secretary with the steps taken by the Internal Revenue
    Service to identify the scope of the diversion and stop this
    from happening in the future? In other words, that is a lot of
    money that we are missing.
        Secretary Mineta. It is a lot of money, and I am not happy
    with the level of enforcement on this issue. That is why our
    SAFETEA proposal has specific amounts for the Department of
    Treasury to enforce the Federal fuel tax, including the
    coloring of the fuel and tracing where it is going.
        Senator Shelby. This might be a subject that we can bring
    up with the IRS. Senator Murray and I have worked in that area
    before and we will take this up with the Internal Revenue
    Service too. You would not mind, I am sure.
        Secretary Mineta. Not at all. I would be pleased to join in
    the conversation.

                                IMPAIRED DRIVING

        Senator Shelby. Impaired driving. We are concerned about
    the increase in the number of alcohol-related traffic
    fatalities which have risen steadily since 1999. To what
    factors do you attribute this disturbing trend and how do you
    assess the Department's current efforts at curbing impaired
    driving? In other words, how are you going to reverse the
    trend?
        One last thing. I have a related point. I heard a report on
    a news program a couple days ago that said that if a drunk
    pedestrian walked in front of an automobile operated by a sober
    driver and was killed, the death would be treated as a drunk
    driving fatality. I do not understand the logic of that. Could
    you find out how the statistics are collected here and explain
    what has changed? In other words, how reliable are the
    statistics? If you are counting a drunk pedestrian that is
    killed by a sober driver, something is wrong. I do not know if
    that is right, but it would be worth looking into.
        Secretary Mineta. Let me take a look at that and find out,
    but it just does not make common sense.
        [The information follows:]

        Crashes involving a sober driver and a drunk pedestrian are not
    considered by NHTSA as DWI (Driving while Intoxicated). Rather, NHTSA
    considers them ``Alcohol-Related'' crashes. NHTSA's definition of an
    Alcohol-Related Crash, in particular a fatal crash, is a motor vehicle
    traffic crash in which any of the actively involved persons (drivers,
    pedestrians or pedalcyclists) had a Blood Alcohol Concentration (BAC)
    of 0.01 g/dl or more (a positive BAC).
        Most alcohol-related crashes involve at least one driver with a
    positive BAC. Some of these crashes also may involve a pedestrian or
    bicyclist with a positive BAC. However, there are also some crashes in
    each year in which no driver had a positive BAC but an involved
    pedestrian or bicyclist had a positive BAC. The data in NHTSA's
    Fatality Analysis Reporting System allows us to distinguish between
    these two categories, when analyzing alcohol-related crashes, as
    depicted in the following chart:

                                SAFETY BELT LAWS

        Secretary Mineta. In terms of the alcohol-related deaths,
    the 18-to-34 age group is the largest cause of fatal accidents.
    That combined with the issue of the seatbelt usage is why we
    are working very hard to get States to enact a primary safety
    belt law. In the SAFETEA legislation, there are incentives for
    States that have a primary safety belt law or a secondary
    safety belt law and attain 90 percent safety belt use.
        There are, frankly, no States that get anywhere close to
    that level of safety belt use with a secondary safety belt law.
    But the two, alcohol-related deaths and safety belt usage, work
    hand-in-hand. Those are two programs that we work at very hard.

                   OVERSIGHT OF HIGHWAY CONSTRUCTION PROJECTS

        Senator Shelby. Mr. Secretary, ineffective management and
    oversight have led to significant cost increases, financing
    problems, schedule delays and technical or construction
    difficulties on highway construction projects. For example, the
    cost for the Springfield interchange in Virginia has increased
    more than 180 percent from $241 million to $677 million, in
    part because State officials initially excluded basic cost
    items such as construction management, inflation, preliminary
    engineering, and even the design.
        What can you do or have you done to establish minimum
    standards for cost estimates so that basic cost items such as
    inflation, construction management, and design will not be
    excluded from estimates of what a highway project will cost? In
    other words, this seems to be lowballing the original cost. How
    do you analyze this and project costs to ensure that they are
    close to what they claim they will be?
        Secretary Mineta. Lowballing, of course, is always a
    problem and you try to catch this when you see change orders
    coming in. But what has happened more recently is the volatile
    steel prices. As I understand it, this has impacted on highway
    projects. But on large, what we call mega-projects, we have now
    assigned project managers to make sure that from a financial
    standpoint as well as scheduling and quality, if it is a 10-
    sack concrete job then we are in fact getting 10 sacks of
    concrete and not getting shortchanged in terms of the quality
    that goes into that work. Quality also impacts on the lifespan
    of that infrastructure. So we now have a specific project
    manager on those so-called megaprojects.
        Senator Shelby. Senator Murray, thanks for your indulgence.

                 FUNDING FOR AIR TRAFFIC CONTROL MODERNIZATION

        Senator Murray. Mr. Secretary, the only proposed cut in
    your budget that is larger than your proposed cut in Amtrak is
    the $400 million you are proposing in the FAA to modernize our
    air traffic control equipment. In your formal opening
    statement, you take the time to point out that the President
    signed the Vision 100 bill which authorizes more than $60
    billion in Federal resources, which is a 31 percent increase
    above previous authorizations for the FAA, yet your actual
    budget request, rather than honoring the increased
    authorizations in that Vision 100 bill, actually cuts
    investments for air traffic control modernization by 14 percent
    next year. When you look at the Bush Administration's multi-
    year budget it says that you want to cut modernization even
    lower in 2006. In total for the 4-year life of the Vision 100
    bill the Administration plans to underfund the authorized level
    of air traffic control modernization by more than $2 billion.
        What has changed since the date that the President signed
    the Vision 100 bill and today that has caused you to do such a
    sudden reversal when it comes to modernizing our air traffic
    control equipment?
        Secretary Mineta. First of all, we are not doing anything
    to impact on the modernization. There are programs that we
    feel, as we reevaluated the program, needed to, frankly, be
    shelved and not move forward at this time. But in terms of the
    overall next generation air transportation system, we are not
    shortchanging improvements in capacity, safety, delays, or
    better information for air traffic controllers. Whether it be
    the STARS program or ASDX, the programs that will improve the
    system are funded by the 2005 budget and in the outyears as
    well.
        What we are doing is reevaluating, from a priority
    perspective, what we have done in the past and asking ourselves
    whether we need to do those in the future. Many of those lower
    priority programs have been set aside. But important programs
    like WAAS and others are moving forward under the air traffic
    control modernization program, and we have funded it.
        Senator Murray. A lot of the equipment out there is dozens
    of years old and was scheduled to be replaced many years ago.
    We have systems operating in our air traffic control system
    that are no longer supported by their vendors and are still
    years away from being replaced. So how can we believe that a
    funding cut of this size will not have any impact on the pace
    at which we replace that aging equipment and the overall safety
    of our air traffic control system?
        Secretary Mineta. I will submit that for the record. I do
    not have it with me right now. All of the equipment at the air
    traffic control towers and en route centers is still being
    shoehorned into the budget that we proposed.
        Senator Murray. You will submit that to us for the record?
        Secretary Mineta. I will submit that for the record.
        Senator Murray. I will look at that.
        [The information follows:]

        The reductions in FAA's Facilities and Equipment (F&E) in the
    fiscal year 2005 budget were concentrated in new technologies that do
    not replace existing equipment, such as Data Link, the Local Area
    Augmentation System (LAAS), and Nexcom 1B (next generation
    communications). These new technologies were going to be expensive for
    both the agency and the industry. While there was support for these
    items by the users, it was not clear it made sense to move forward with
    them at this time given the economics of both the airline industry and
    Federal budget.
        The FAA did not make any significant reductions to any programs
    that are currently necessary to modernize the airspace system. Funding
    levels for major modernization efforts like En Route Automation
    Modernization, the Standard Terminal Automation Replacement System
    (STARS), airport surveillance radars (ASR-9 and ASR-11), NEXCOM 1A,
    Advanced Technologies and Oceanic Procedures (ATOP), and the Voice
    Switching and Control System (VSCS) will continue to move forward in
    fiscal year 2005. The reduction in the size of the F&E budget will not
    affect the success of these modernization efforts.

                             SAFETEA FUNDING LEVELS

        Senator Murray. Mr. Secretary, in my opening statement I
    voiced concern, as you heard, over the President's insistence
    that he will not support or sign a highway bill that exceeds
    $256 billion. One concern I have since we're talking about a 6-
    year authorization bill is that the President might support a
    bill authorizing funding at a certain level and then not live
    up to that commitment in his budgets.
        For example, when the Bush Administration sent up its own
    aviation reauthorization bill it requested a total of $12
    billion for air traffic control modernization over a 4-year
    period. Now when we look at the President's budget request for
    2005 and beyond we see that he plans to request $2 billion less
    than the amount that he himself asked to be authorized. He only
    wants to fund 83 percent of the level he himself asked to be
    authorized.
        Now when it comes to the surface transportation
    authorization bill, President Bush has said that he will not
    support a highway and transit bill that exceeds $256 billion
    over 6 years. Is the President committed to actually requesting
    that $256 billion in future budgets or is this merely a
    statement on what he will allow to be authorized?
        Secretary Mineta. First of all, when we were putting
    SAFETEA together over a year ago, we talked to the President
    and he laid out certain principles such as no new taxes, no
    bonding mechanisms, and no increase in the deficit. So taking
    those directions, we then fashioned our SAFETEA proposal. The
    original proposal was for $247 billion. Then within the last 3
    or 4 months, it was raised to $256 billion.
        But that action was based on the principles he laid out,
    principles that he still stands by. In fact, prior to the
    Senate consideration of the SAFETEA legislation, Treasury
    Secretary Snow and I submitted a letter reflecting the
    administration's position, saying that any bill that violated
    these principles and that went above $256 billion would be
    considered for veto.
        Senator Murray. What I am actually asking is, when the
    President sent up his aviation reauthorization bill he
    requested $12 billion. We are now seeing his request come in
    much lower than that; in fact $2 billion less. What assures us
    that the President will actually fund the $256 billion if that
    is what we authorize? Even though I disagree with that, I am
    just asking you, what is the assurance that a year from now we
    are not going to see less requested than even that $256
    billion?
        Secretary Mineta. We took the enacted 2004 levels and have
    reflected those in the budget proposal and in SAFETEA as well.
        Senator Murray. What I am asking is, will the President
    commit to asking for the budgets every year that meet that
    authorization, whatever it is, that he signs into law?
        Secretary Mineta. Based on our submitted SAFETEA proposal,
    we do that.

                                 HIGHWAY SAFETY

        Senator Murray. Mr. Secretary, we have not always agreed on
    budget matters when it comes to your department. One area where
    we have always agreed has been the overarching importance of
    improving safety in all transportation modes. I want to really
    commend you, Mr. Secretary, for including funding in this
    year's budget for paid TV advertising to enhance seatbelt use
    and reduce drunk driving. The Committee has added funding for
    the last 2 years and the administration has finally requested
    funding in its 2005 budget request. This has been a very
    successful effort, as you know.
        This year the administration gave its surface
    transportation authorization the title of SAFETEA, as you
    mentioned, to highlight the importance of safety provisions in
    the bill. Could you just take a minute to share with this
    committee what you consider to be the most critical safety
    enhancements that were included in the administration's bill?
        Secretary Mineta. There is probably no single silver bullet
    that addresses the whole issue of safety. Safety can be
    engineering. Safety can be education. Safety can be a number of
    things. All of these are reflected in the SAFETEA proposal.
        But also in the 2005 budget, we are putting a great deal of
    emphasis--in fact I am doing a lot of traveling on the issue of
    both safety belt use and driving while under the influence,
    DUI. I am traveling to different States right now to try to get
    primary safety belt laws, and have found this to be a
    responsive chord with many States. But we only have, I believe,
    20 States with primary safety belt laws, so we have a long way
    to go. But we think that this is a good effort and we are
    enlisting a lot of new players into the program. I am going
    down to the NASCAR races in Richmond, in May I believe, and
    they will be endorsing the whole safety belt program and
    initiating their program of promoting safety belt usage.
        We are doing this with a number of different new
    constituent groups to increase safety belt use in our country.
        Senator Murray. I commend you on that and want to keep
    working with you on that.

                         CONTRACTING OUT FAA FUNCTIONS

        Mr. Secretary, as you know, the only reason that the FAA
    bill was allowed to pass the Senate was because FAA
    Administrator Blakey provided a letter to the Senate Commerce
    Committee promising that she would not contract out any
    additional FAA functions to the private sector during fiscal
    year 2004. I suspect this could become a very serious issue for
    the fiscal year 2005 appropriations bill because we do not have
    a commitment from you or Administrator Blakey for fiscal year
    2005 or beyond.
        As of now, are you aware of any areas where the FAA is
    considering contracting government work in fiscal year 2005 or
    beyond?
        Secretary Mineta. Nothing additional that I anticipate. I
    think the letter that Administrator Blakely submitted for
    fiscal year 2004 still stands. There was consideration at one
    point about additional contract towers, but after the letter
    was sent----
        Senator Murray. What areas are under consideration?
        Secretary Mineta. The ones that we had under consideration
    prior to that letter relating to fiscal year 2004 were general
    aviation towers for VFR, visual flight rule towers. We do not
    have any further plans beyond the 2004 letter that she
    submitted.
        Senator Murray. Can we get an identical letter for fiscal
    year 2005?
        Secretary Mineta. Let me consult with Administrator Blakey
    on that and get back to you on that.
        [The information follows:]

        The Federal Aviation Administration is engaged in completing the
    public/private competition of the Flight Service Station (FSS)
    Services. The competition's results are expected in March 2005.

        Senator Murray. Mr. Chairman, I will wait for the remainder
    of my questions. Thank you.
        Senator Shelby. Senator Bennett.

                                HIGHWAY FUNDING

        Senator Bennett. Thank you very much, Mr. Chairman.
        Mr. Secretary, I have searched for things to question you
    about, areas to probe and prod, and things are going so well I
    do not have anything to complain about.
        Secretary Mineta. You did such a great job as Assistant
    Secretary of Transportation that----
        Senator Bennett. It is the legacy of my service there.
        Secretary Mineta. That is right.
        Senator Bennett. Last night we were alerted to this issue
    that I mentioned in my opening statement. I know that it
    catches you completely by surprise, as it did us. So I raise it
    now just so that we can be in correspondence with you on this
    issue and see if we cannot get it resolved.
        For the record, I support the President's effort to get a
    SAFETEA program in place, but I think at some point we are
    going to have to spend more money. And if after he is safely
    reelected he were to come back to the Congress and suggest that
    for the first time since Ronald Reagan's presidency it is time
    to raise the gas tax, he would find a fairly sympathetic ear,
    at least with this Senator. I know I am taking my own political
    career in my hands when I say that because I am up for election
    this year too.
        But the needs of our highway system, compound with the
    increasing population and the age of the interstate highway
    system--and one of the things that has happened that was not
    foreseen by any means when the interstate highway system was
    conceived is that interstates have now become the Main Streets
    of our major metropolitan areas. The interstate system was
    supposed to bypass downtowns so that people could go quickly
    across the whole country and never run into a traffic jam. Now
    the metropolitan centers have relocated themselves around the
    interstate and the interstate has become the main urban artery
    and therefore jam up now at rush hour. The whole purpose of
    getting the interstate system in place as conceived during the
    Eisenhower administration has been frustrated by that.
        There is a solution to it, and it is financial. We are
    going to have to face up to that at some point in the future.
    So if you are back here next year and I am back here next year,
    and both of those depend on two separate elections, I will be
    happy to talk to you about increased funding through that
    particular source.
        Secretary Mineta. Thank you, Senator. We will respond.
        Senator Bennett. Thank you.
        Senator Shelby. Mr. Secretary, we will get into another
    round, with your patience.
        Secretary Mineta. Surely.

                         FULL FUNDING GRANT AGREEMENTS

        Senator Shelby. The Senate passed a 6-year reauthorization
    on the surface transportation legislation, as you well know.
    The House has not yet acted and the House Transportation and
    Infrastructure Committee chairman has floated a proposal to
    pass a 2-year authorization bill. If a 2-year extension of
    TEA21 is enacted into law, is enough additional commitment
    authority created to execute a full funding agreement for all
    of the projects listed as pending and proposed in your 2005
    budget request?
        Do you want to get back with us for the record on that?
        Secretary Mineta. We will get back to you on that for the
    record.
        [The information follows:]

        The 6-year surface transportation bill, the Safe, Accountable,
    Flexible, and Efficient Transportation Equity Act, (SAFETEA) passed by
    the Senate on February 12, 2004, provides over $9.6 billion in budget
    authority over the fiscal year 2004-2009 period. Within this amount,
    $3.6 billion is needed to fully fund all approved or pending full
    funding grant agreements (FFGAs). This includes all projects with
    previous commitments or reserved authority under TEA21.
        Under the Senate-passed bill, $2.1 billion will cover anticipated
    FFGAs for the following projects: the first increment of New York East
    Side Access; Central Phoenix East Valley Corridor; Charlotte-South
    Corridor LRT; Raleigh-Regional Rail; and, Pittsburgh-North Shore
    Corridor. An additional $3.9 billion would be available for future
    commitments and funding of projects anticipated after fiscal year 2005.

        Senator Shelby. If there is not enough commitment authority
    to cover all of the proposed funding agreements in the request,
    how would FTA choose the projects that it would enter into a
    full funding agreement? You would have to make some decisions.
    We would be very interested in that. What would your
    methodology be?

                                 SHIP DISPOSAL

        Ship disposal. MARAD has made progress in contracting for
    the disposal of obsolete ships from the National Defense
    Reserve Fleet. Recently, environmental concerns and legal
    proceedings have hindered these efforts. What steps are being
    taken to address the environmental issues, and what assurances
    is the Department providing to the countries receiving these
    ships that there is no environmental danger to them? Do you
    want to do that for the record?
        Secretary Mineta. Let me do that for the record. We have 13
    ships under contract to a United Kingdom firm, of which four
    have already been delivered and are sitting in the shipyard in
    Teaside, England. With our 2005 budget request we hope to
    increase that to 21 ships.
        We have a very strict environmental process to go through
    in certifying those ships for movement to an overseas location.
    We used to sell the ships to Bangladesh or India just to get
    rid of them. But that is no longer possible. We have strict
    environmental requirements that have to be met. We do need the
    additional funding in fiscal year 2005 to dispose of these
    additional ships.
        [The information follows:]

        MARAD is pursuing all disposal alternatives in order to find the
    most cost-effective, environmentally sound disposal capacity available.
    Disposal alternatives include domestic recycling, foreign recycling,
    artificial reefing, deep sinking, vessel donation and vessel sales. The
    export of ships for recycling is a promising alternative that has
    provided an increase in competition and capacity, which allows more
    ships to be disposed of with available disposal funding. The ability to
    export ships for recycling will expedite the elimination of high-
    priority ships, significantly mitigate the environmental threat of oil
    discharge at the fleets and reduce the total number of obsolete vessels
    significantly. Although foreign facilities are not subject to the same
    worker and environmental laws as domestic facilities, MARAD's current
    process requires foreign companies to demonstrate to MARAD and the EPA
    that they can accomplish responsible vessel recycling in a manner that
    protects worker safety and health.
        MARAD's actions to ensure that the ship disposal process does not
    harm the environment include activities while the vessels are at our
    fleet anchorages, during tow preparations and while at the contractor's
    facility. Programmatic ship disposal priorities and decisions are also
    made in order to mitigate any threat to the environment.

                             AT THE FLEET ANCHORAGE

        MARAD has three reserve fleets sites where its non-retention,
    obsolete vessels are moored--the James River Reserve Fleet in Virginia,
    the Beaumont Reserve Fleet in Texas and the Suisun Bay Reserve Fleet in
    California. While the obsolete vessels are at the fleet anchorages
    awaiting disposal, four activities take place that are important to
    ensuring the environment is protected:
      --Condition assessments--the material condition of each vessel is
            assessed, rated and ranked. Information from this assessment is
            factored into programmatic disposal decisions.
      --Vessel condition monitoring--vessels are monitored for trim,
            stability, hull and fuel tank integrity, overall deterioration
            and adequate mooring.
      --Vessel protective measures--cathodic hull protection systems are
            utilized to inhibit underwater hull deterioration and advanced
            mooring systems are used to secure the ships and protect them
            against damage from high winds and storms.
      --Corrective repairs/maintenance--as required repairs and maintenance
            activities include pumping, patching, securing watertight
            closures, etc.

                    DURING TOW PREPARATIONS & TOW EVOLUTIONS

        MARAD's contracts require the prime contractor to accomplish tow
    preparations and the safe towing of the vessel to the contractor's
    facility. Proper tow preparations are ensured through the requirement
    for a U.S. Coast Guard inspection and issuance of a loadline
    certificate prior to the commencement of the tow. The contractor is
    also required to have in place an approved Emergency Spill Management
    Plan and a Spill Management Company to be on call to respond if needed
    throughout the duration of the tow. The contractor and tow company are
    also required to carry the appropriate level of insurance to cover
    response and cleanup costs in the event of a discharge incident.

                          AT THE CONTRACTOR'S FACILITY

        During the solicitation process prior to contract award,
    prospective contractors are assessed for their working knowledge of
    applicable environmental regulations. Technical Compliance Plans,
    required from the contractors, must provide comprehensive information
    related to environmental compliance measures to be followed during the
    course of the work. The contractor's documentation related to
    environmental activities is closely reviewed during the evaluation
    process, and a pre-award survey of the contractor's facility is
    accomplished if the contractor is new to MARAD.
        MARAD's ship disposal contracts require the contractor and sub-
    contractors to comply with all municipal, State and Federal regulations
    related to the removal, handling, storage, transport and disposal of
    hazardous materials. This includes prime and subcontractor compliance
    with regulations associated with permits and licenses associated with
    hazardous material remediation activities. MARAD's Office of
    Environmental Activities provides on-site oversight over all project
    environmental activities either directly or through the use of third-
    party commercial environmental monitoring companies. MARAD's oversight
    at disposal facilities is in addition to on-site inspections and
    oversight provided by regional EPA and OSHA offices.

                            PROGRAMMATIC PRIORITIES

        MARAD's ship disposal program priority remains focused on disposal
    of MARAD's worse condition, non-retention vessels. The material
    condition of the ship and the amount of residual fuels/oils contained
    onboard our vessels are factors that are considered in all vessel
    disposal decisions. Disposal of the ``worse ships first'' that contain
    the most residual oils/fuels mitigates the environmental threat at
    MARAD's fleet sites. MARAD's solicitations for disposal services
    include the higher priority vessels, and negotiations involving
    proposals that do not specify vessels will target the inclusion of
    higher priority vessels.

                        FUNDING FOR FAA CAPITAL PROGRAMS

        Senator Shelby. The FAA is requesting $2.5 billion for its
    capital account which is $400 million less than the authorized
    level and more than $300 million less than last year's enacted
    level. Hard decisions will have to be made there, Mr.
    Secretary. How will this impact the overall effort to modernize
    the air traffic control system? How are you going to do more
    with less? I would like to hear it. I would like to see you do
    it, but I do not know if you can.
        Secretary Mineta. There are a lot of things that were once
    part of the capital program that we had to reevaluate with a
    smaller pool of resources. Some of the programs that were in
    prior facilities and equipment budgets are not as high priority
    today as they might have been when we had more money available.
    We are setting those aside and the more high-priority items
    where we get more value for the dollars expended are the ones
    we are moving foreword.
        Safety, capacity and delay are our mantra. Those three
    criteria are what we use to look at what is in F&E and say, not
    as much is needed today as when we were more flush with funds.
    So we are doing a lot of reprioritizing to make sure that we
    can get more with less. It is not that we are adding more on
    top of what is already there, but we are taking some of the
    lower priority items and setting those aside, admittedly.

                                     AMTRAK

        Senator Shelby. Mr. Secretary, the administration has
    requested a subsidy of $900 million for Amtrak in 2005. Amtrak
    has once again asked Congress for $1.8 billion and continues to
    express a need for similar amounts over the next several years.
    Funding an increase above the current year level of $1.2
    billion will be extremely difficult. What is your long-term
    plan for Amtrak if the current reauthorization proposal is not
    enacted?
        Secretary Mineta. Mr. Chairman, the President's reform
    proposal that is before Congress is very important. We have
    requested $900 million for Amtrak, but we have also indicated
    that we would support $1.4 billion in the outyears, in fiscal
    years 2006 to 2009, conditional on Congress adopting the
    management and financial reforms that are in the President's
    reform proposal.
        We have already expended over $35 billion on Amtrak since
    1973, and we cannot continue down that path. The President is
    very supportive of intercity passenger rail, but not on the
    present path that we are on. We feel very strongly that there
    has to be reform of Amtrak. So if the Congress were to adopt
    the President's reform legislation, then we would support $1.4
    billion in the outyears.
        Another thing that has helped Amtrak is the action taken by
    the Appropriations Committees to direct that Federal grants for
    Amtrak be approved by DOT before going to Amtrak.
        Amtrak has to submit an annual operating and capital
    financial plan. We reviewed Amtrak's plan in fiscal year 2003,
    and we are now doing that for fiscal year 2004. We have just
    approved the operating grant agreement with Amtrak, and FRA is
    now renewing the capital grant agreement. I think that has been
    a very effective tool in making sure that the financial
    management of Amtrak is kept under control.

                      COMMERCIAL DRIVER'S LICENSE PROGRAM

        Senator Shelby. In spite of the greater attention that it
    has drawn in recent years, the practice of fraudulently
    obtaining a commercial driver's license continues to pose a
    significant national risk, both in terms of highway safety and
    terrorism prevention. While the Department is to be commended,
    and I think we should do this, for the efforts it has taken
    thus far to curb commercial driver's license abuse, I think a
    lot of work needs to be completed in order to properly address
    the problem.
        Mr. Secretary, what measures are being implemented and what
    do you plan to undertake during the next year in order to end,
    as much as you can, commercial driver's license fraud? How does
    the Department plan to oversee and coordinate with the States
    in order to assure that commercial driver's license fraud
    issuance is being conducted in accordance with Federal
    guidelines?
        Secretary Mineta. Mr. Chairman, let me properly respond to
    you in writing, but one of the things that we are doing is to
    complete 17 Federal compliance reviews of State commercial
    driver's license programs. The end result is to increase
    oversight of the commercial driver's license program.
        As you know, this has been the subject of some FBI fraud
    investigations, and we are making sure that we plug that hole.
    We are requesting $22 million for fiscal year 2005 for the
    State improvement of driver's license programs.
        [The information follows:]

        FMCSA has taken numerous actions to help prevent fraud in the
    Commercial Driver's License (CDL) Program. FMCSA's CDL State Compliance
    Review requirement is in the fourth year of implementation. These
    compliance reviews are a necessary part of the CDL program to ensure
    States have the statutes, administrative procedures, and equipment to
    administer their CDL programs in compliance with Federal requirements.
    Field personnel are receiving training on conducting compliance reviews
    and identifying testing and licensing procedures that may be
    susceptible to fraudulent activities. In continuation of supporting
    fraud prevention, FMCSA is funding the updating of the CDL
    Identification Manual. The manual contains color photographs of all
    U.S., Canadian, and Mexican commercial licenses for use by State
    licensing and enforcement officials to help identify fraudulent CDLs.
        FMCSA is addressing the 22 recommendations made by the Office of
    the Inspector General (OIG) in the May 8, 2002, audit report on
    ``Improving Testing and Licensing of Commercial Drivers,'' including
    ones related directly to fraud. Also in response to an OIG
    recommendation, FMCSA issued a policy memo on July 1, 2002,
    specifically recommending States use covert monitoring of CDL examiners
    as the preferred method of driver licensing oversight and control.
    Eighteen States have set up covert monitoring programs with CDL grant
    funds.
        The CDL grant program has six priority areas. Two of them include
    detection and prevention of fraudulent activities including covert
    monitoring and implementation of the social security number (SSN)
    verification for CDL drivers. FMCSA received a $5.1 million fiscal year
    2002 supplemental appropriation from Congress to verify all existing
    and new CDL driver's names, dates of birth and SSN with Social Security
    Administration (SSA) records to help prevent fraudulent identities from
    being created. To date, 40 States are verifying the CDL driver's
    identify through the SSA. The remaining States are being encouraged to
    establish SSN verification programs.
        Finally, FMCSA, in cooperation with the American Association of
    Motor Vehicle Administrators (AAMVA), identified 14 tasks to detect and
    reduce fraudulent activities related to driver licensing. FMCSA
    received an $8 million fiscal year 2002 supplemental appropriation to
    help fund these tasks through a cooperative agreement. In addition,
    through the cooperative agreement FMCSA and AAMVA have funded revisions
    and upgrades to the CDL Knowledge Tests and software that can generate
    multiple versions of the tests. To further the fraud prevention
    initiative AAMVA has formed a Special Task Force on Identification
    Security to identify strategies to achieve intended outcomes. FMCSA is
    working closely with AAMVA through participation on the Task Force
    working groups and is providing funding for these efforts.

        Senator Shelby. Senator Murray.

                    MOTOR CARRIER SAFETY COMPLIANCE REVIEWS

        Senator Murray. Thank you, Mr. Chairman.
        Just following up on that, the number of compliance
    reviews, as I understand, have dropped significantly. Are you
    aware of that? In December 2002, FMCSA did 817 compliance
    reviews but only completed 472 as of December 2003. Since that
    is one of the most reliable ways to identify unsafe motor
    carriers why has there been such a precipitous drop in the
    number of reviews?
        Secretary Mineta. I am not sure of those figures. I know
    that 17 compliance reviews are going on right now. Let me check
    on that State compliance number.
        Senator Murray. Can you get the historical numbers for us?
        Secretary Mineta. I will.
        [The information follows:]

        In fiscal year 2003, FMCSA began implementation of Section 210 of
    the Motor Carrier Safety Improvement Act of 1999 (MCSIA). MCSIA
    required FMCSA to establish regulations specifying minimum requirements
    for new entrant motor carriers seeking Federal interstate operating
    authority. There are approximately 40,000 to 50,000 new entrant
    carriers seeking operating authority each year.
        During December 2002, 280 compliance reviews (CRs) were completed,
    which was significantly lower than the normal average of 800 compliance
    reviews per month. This was a result of an increased emphasis on
    conducting Security Sensitivity Visits (SSVs) in response to the events
    surrounding the terrorist attacks on September 11, 2001. In December
    2003, 817 compliance reviews were completed, an increase of 537 (192
    percent) from the previous December. This shows that FMCSA returned to
    its normal CR production level. Overall, 7,584 compliance reviews were
    completed in fiscal year 2002 and 9,060 were completed in fiscal year
    2003, an increase of 1,476 (19 percent) for the year.
        During the first 5 months of fiscal year 2004, FMCSA completed
    3,348 compliance reviews, which is on target to meet FMCSA's projected
    goal of completing 8,000 compliance reviews for fiscal year 2004. While
    the fiscal year 2004 target is lower than the actual number of
    compliance reviews that were completed in fiscal year 2003, this is
    attributed to an increased emphasis on conducting New Entrant Safety
    Audits, as mandated by Congress.

                                     AMTRAK

        Senator Murray. Thank you. Also following up on the
    Chairman's comments on Amtrak--I know he is surprised that I
    am--as you know, the reforms that you are requiring have to be
    considered by the Commerce Committee. This committee has to set
    the number for fiscal year 2005. So I know that you are asking
    for the Commerce Committee to follow up on that, and then if
    they do it then you will go to the $1.4 billion in 2006 and
    beyond. But we are looking at 2005.
        A 26 percent reduction in the dollars to Amtrak is said by
    Amtrak's president to take it into bankruptcy. Your own
    Department of Transportation Inspector General has testified in
    the past that a precipitous cut of size would mean bankruptcy
    for Amtrak. So that does not get us to 2006, if the Commerce
    Committee even moves forward on this. I know you are a member
    of Amtrak's board of directors. Do you know something that we
    do not know that will allow them to somehow manage to make it
    on a huge cut like this until reforms are enacted, if they are
    enacted?
        Secretary Mineta. The operating financial management
    reviews that are going on right now, separate from the capital
    reviews, provide for some modicum of operational support. We
    cannot fund the full amount because that would require--I think
    you folks appropriated $1.3 billion in----
        Senator Murray. One-point-two billion dollars.
        Secretary Mineta [continuing]. And that was on a request of
    $1.8 billion from Amtrak. They are able to survive on $1.2
    billion. Again they're requesting $1.8 billion and again we are
    taking a very hard look at----
        Senator Murray. But your budget request is for $900
    million.
        Secretary Mineta. Nine hundred million dollars.
        Senator Murray. That is significantly below this year's
    level, and both the Amtrak president and your own IG have said
    that Amtrak cannot survive at that level.
        Secretary Mineta. Again, unless management and financial
    reforms are adopted----
        Senator Murray. So you are basically saying that if your
    reforms are not adopted that go into effect by 2006, Amtrak is
    not going to survive?
        Secretary Mineta. We are still holding by the need for
    reform.
        Senator Murray. I hope the President takes a really active
    approach with the Commerce Committee.
        Secretary Mineta. As I understand it, Senator McCain is
    about to introduce an Amtrak reform bill.
        Senator Murray. We have been down this road before. I would
    just warn all of us that if this is the bar that we have to be
    held to, we are going to be again looking at a shutdown in
    Amtrak I do not think any of us wants to see.

                          CONTRACTING OUT FEDERAL JOBS

        Mr. Secretary, earlier today you talked about your efforts
    in advancing the President's management agenda. Last year this
    subcommittee, as you will remember, was very involved in the
    issue of establishing standards for contracting out Federal
    jobs. One of the provisions that was included in last year's
    bill was a prohibition against using fiscal year 2004 funds to
    contract out any Federal job overseas. I was really surprised
    to see that the President's budget specifically requests that
    that provision be deleted for 2005.
        Could you cite for us some of the instances the Department
    of Transportation might look at to take work that is currently
    being conducted by Federal employees and send that work
    overseas?
        Secretary Mineta. I do not have any knowledge of that. I
    will have to take a look at that.
        Senator Murray. I can see all of your staff shaking their
    heads. Then can you tell us why the President wants flexibility
    if you have no place that you actually want to send jobs
    overseas why he is asking to eliminate that provision?
        Secretary Mineta. The President's request is a generic,
    government-wide request. But I am not familiar with any plan
    within our Department right now. Generally, we do not like to
    see these types of prohibitions in legislative language. In any
    event, I am not aware of any plans right now to send any jobs--
    --
        Senator Murray. I assume you would not object to that
    language staying in for fiscal year 2005?
        Secretary Mineta. On behalf of the administration, of
    course. But in terms of any plans for, other than normal FAA
    employees that are in foreign positions, I have got people in
    Iraq, Afghanistan--not Afghanistan, but Iraq right now. We have
    got air traffic controllers in overseas spots. We have other
    positions. But we are not--I do not see, other than----
        Senator Murray. But you do not see any problem with putting
    the provision in again that does not allow any contracting out
    of new jobs?
        Secretary Mineta. Again, I do not like to see those kinds
    of prohibitions placed in legislative language.
        Senator Murray. But you have no plans to contract anything
    out?
        Secretary Mineta. I do not believe so.
        [The information follows:]

        The general provision in the President's budget to delete the
    restriction on contracting out Federal jobs overseas would apply
    government-wide, not just to the Department of Transportation. The
    administration believes the restriction against contracting out Federal
    jobs overseas is generally unnecessary because the government wins a
    vast majority of the work and many activities that are the subject of
    competitive sourcing must be performed domestically, for example
    facilities maintenance, repair, and construction. In addition, the
    restriction could violate international agreements that accord our
    trading partners non-discriminatory treatment in government
    procurement. These agreements generally provide for non-discriminatory
    treatment to suppliers of foreign entities--i.e., they provide
    flexibility for both foreign and domestic contractors to perform work
    where performance will make the contractor most competitive.

                AIR TRAFFIC CONTROL MAINTENANCE STAFFING LEVELS

        Senator Murray. Mr. Secretary, last Monday a Federal
    arbitrator ruled that the FAA has not met the minimum staffing
    levels needed for the agency's air traffic control maintenance
    functions based on the agreement that was reached in fiscal
    year 2000 between the FAA and the union that represents the
    maintenance technicians. The arbitrator ruled that the FAA must
    immediately take action to raise the total number of technical
    employees to a minimum staffing of 6,100. How was the FAA
    allowed to drop below the agreed upon minimum staffing level?
        Secretary Mineta. I will have to get back to you for the
    record on that.
        [The information follows:]

        The Federal Aviation Administration believes that employees in
    operational control centers should be included in the air traffic
    control maintenance staffing level of 6,100.

                    NEED FOR FULL COMPLEMENT OF TECHNICIANS

        Senator Murray. Given the funding cuts you are requesting
    for modernizing air traffic control equipment, would you not
    agree that it would be prudent to have a full complement of
    technicians on board to maintain and repair the FAA's aging air
    traffic control system?
        Secretary Mineta. I will have to check on the labor
    negotiation with the technicians group, the Professional Airway
    System Specialist (PASS) union, and the budgetary amount.
        [The information follows:]

        The Professional Airways Systems Specialists (PASS) union disagrees
    with the Federal Aviation Administration's (FAA) position that
    employees in operational control centers should be included in the air
    traffic control maintenance staffing level. A Federal arbitrator ruled
    in favor of PASS, and the FAA has appealed the decision to the Federal
    Labor Relations Authority.

                       DECISION OF THE FEDERAL ARBITRATOR

        Senator Murray. If you could do that, and if you could let
    us know how quickly you expect the FAA to comply with the
    decision of the Federal arbitrator as well.
        Secretary Mineta. Right. I am not sure whether they are
    binding agreements or if there are any appeal provisions to
    that arbitrator. I will have to check on that as well.
        [The information follows:]

        The Federal Aviation Administration (FAA) had 30 days from the date
    of the Federal arbitrator's award (March 1, 2004) to file exceptions
    with the Federal Labor Relations Authority (FLRA). After reviewing the
    award, the FAA felt that the arbitrator exceeded his authority and
    abrogated management of its right to determine where employees would be
    assigned, a right that management chose not to waive according to the
    managers who were present in negotiations. The FAA's exceptions were
    filed on March 25, 2004, and we do not know how long the FLRA will take
    before rendering a decision. The FLRA will allow the Professional
    Airways Systems Specialists (PASS) union time to submit a response to
    the Agency exceptions and will then issue a decision. There is no
    statutory time frame in which the FLRA must issue a decision.

                  THIRD RUNWAY AT SEATAC INTERNATIONAL AIRPORT

        Senator Murray. One last question. Mr. Secretary, a lot has
    been said about the need to streamline the environmental review
    process for highways, runways, and rail systems. Unfortunately,
    the poster child project for long delays that impact many
    projects is the third runway project at Seattle Tacoma
    International Airport.
        As you know, we have been trying to complete construction
    of that third runway for more than 16 years. The added costs
    for complying with the environmental rules for the construction
    of that runway as well as the associated cost for delays have
    grown by over $200 million just in the last 4 years. As you can
    imagine, this has put an incredible amount of pressure on the
    ability of the airport authority to finance the completion of
    that project. Are you aware of that situation at Seattle Tacoma
    International Airport?
        Secretary Mineta. I was just made aware of this $198.1
    million request that SeaTac is making of FAA 2 days ago. This
    is the third request on the part of SeaTac. The original
    agreement for a letter of intent was in 1997 for, I believe,
    $198 million, or $190 million or so then. Then that was revised
    several years ago by an additional $55 million, $57 million.
    This is the third request for an increase in the letter of
    intent for the SeaTac Airport. We will have to take a look at
    what we are doing with that whole program.
        [The information follows:]

        In 1997, the FAA issued a Letter of Intent (LOI) to Seattle Tacoma
    International Airport (SeaTac) for construction of a third runway,
    committing $161.5 million in AIP funds over the period of fiscal year
    1998-2010 towards the then estimated $587 million total project cost.
    This represented a 28 percent Federal share of the total cost; higher
    than recent projects of a similar scope (e.g., Atlanta and St. Louis
    were around 18-20 percent). The LOI was amended in 2000 to add $55
    million in funds over the period fiscal year 2001-2010 to help offset
    unanticipated increases to the project cost, then estimated at $773
    million. This raised the total LOI amount to $216.5 million, but kept
    the Federal share around 28 percent.
        SeaTac has recently submitted an application for a second amendment
    to the LOI, this time for an additional $198.1 million over the period
    fiscal year 2005-2014. This would raise the LOI total to $414.6 million
    and the Federal share to 37 percent of the total project cost, now
    estimated at $1.1 billion.
        The Federal Aviation Administration is still reviewing SeaTac's
    application. There is some concern about the high level of Federal
    funding--the precedent-setting Federal share of 37 percent that would
    result from this amendment, which is significantly higher than similar
    recent projects. While we support the SeaTac third runway project, and
    are sensitive to the environmental burdens which have caused some of
    the cost increase, we need to examine the application in detail before
    committing to a funding decision. As part of that examination the FAA
    is retaining the services of an outside financial consultant to review
    SeaTac's financial condition.

        Senator Murray. I appreciate that. I am currently pursuing
    an amendment to the airport's existing Federal commitment to
    ensure that there is adequate financing to meet all of those
    new environmental costs. As you know, a lot of it has been
    because of Federal environmental laws and I want to pursue that
    with you, and I would like to ask----
        Secretary Mineta. I think that it is not only Federal
    environmental laws, but also local lawsuits that have been
    brought against----
        Senator Murray. Under Federal environmental laws. That is
    why the lawsuits have been brought.
        I just want to know from you, is DOT still committed to the
    completion of the third runway project and the economic
    benefits that it will bring to the Northwest region?
        Secretary Mineta. I assume so. I assume that it still is.
        Senator Murray. Would you be willing to sit down with
    myself, Marion Blakey and the appropriate airport officials to
    talk about this issue?
        Secretary Mineta. Absolutely.
        Senator Murray. I would appreciate that very much.
        Secretary Mineta. Absolutely.
        Senator Murray. Thank you.
        Thank you, Mr. Chairman, and thank you for your indulgence.

               ENVIRONMENTAL REVIEWS FOR ALASKAN HIGHWAY PROJECTS

        Senator Shelby. Senator Stevens, thank you for joining us.

                        STATEMENT OF SENATOR TED STEVENS

        Senator Stevens. Thank you very much. I am pleased to be
    here to be with young men who have brand new ideas. That is an
    in-house story up here, Mr. Secretary. I am pleased to have a
    chance to come before you because there are some significant
    transportation problems in Alaska in which the process seems to
    be changed, and it becomes significant because the increased
    reviews are burdensome and sometimes unwarranted as far as our
    State is concerned. I am sure you know, we have a fairly small
    allowance for highway construction in Alaska, and to take more
    of it for the environmental review is becoming burdensome.
        Let me just state this to you. The Federal Highway
    Administrator brought a training team to Alaska to assist in
    management and planning of environmental steps required in
    Title 23 of the Federal aid program. In addition, it relocated
    a third environmental review person in Juneau to help review
    the environmental documents prepared under the National
    Environmental Protection Act.
        Apparently, this work has become rather than an assistance
    to get the job done quicker, it has added additional thresholds
    for the transportation projects. We previously used some
    categorical exclusions versus an environmental assessment (EA)
    and now we are getting into the environmental impact statement
    (EIS) on very small items.
        For instance, an erosion control project on the Dalton
    Highway, that is the highway that goes north from Fairbanks to
    the North Slope, was slated for an EA. Last year it was
    processed as a categorical exclusion. It is a dirt highway. It
    has been there for years and it was an erosion control item
    that should have been handled just as routine maintenance as a
    matter of fact.
        A bridge replacement of an existing bridge on the Alaska
    Highway--that is our only highway that goes out to the south
    48--now requires a full EIS. This is a bridge that is critical
    to the gas pipeline that we are planning now, and I understand
    that the EIS on this bridge replacement will delay the project
    by 1 to 2 years. It could well add another year to two to the
    building of the pipeline.
        There is a brush cutting project that was performed by
    Saga, that is an AmeriCorps nonprofit, who was told to seek an
    EA. That is the environmental assessment. These always have
    been the categorical exclusion type things, just brush cutting.
    We are entirely in favor of strict environmental protection,
    but when it comes to have an increase in the level of
    requirements that have to be achieved, the heightened review is
    causing delays, increasing costs, moving projects from one year
    to another because of the short construction season that we
    have in Alaska.
        This is not associated only with the interior of Alaska.
    The Knik Arm Bridge project, the Juneau Access Road, the
    Gravina Road, all priority projects that are in the TEA21
    reauthorization have now been indicated to have the highest
    level of environmental review to proceed.
        I would like to see if you could explain why at this time
    we have--by the way, I think we have the highest level of
    unemployment per capita in the country. We have a declining
    economy because of the loss of our oil industry, our mining
    industry, our timber industry, the basic industries associated
    with the harvesting of timber. I cannot tell you--we have now
    got a series of projects that would have provided employment
    during this coming work season, hopefully, provide a slight
    bridge for many people over into the next year when some of
    these other things might be started up again.
        But why can we not go back to the simple processes that
    were used for years in connection with these highway projects
    and not go up the ladder in terms of environmental protection
    unless there is a significant new perspective involved. All the
    things I am talking about are facilities in place that require
    improvement or maintenance.
        Secretary Mineta. Mr. Chairman, I am not familiar enough
    with these projects to be able to respond, but let me get back
    to you in writing after talking to our Federal highway folks. I
    would think that if a new person has been dispatched to Juneau
    to deal with environmental reviews, it was done in the hope of
    speeding up the process. Let me find out why categorical
    exclusion for a maintenance project now requires an
    environmental assessment. I just do not know these projects or
    the process well enough to be able to respond.
        [The information follows:]

        The U.S. Department of Transportation is actively working to
    facilitate the environmental review processes in Alaska. For example,
    the Federal Highway Administration (FHWA) entered into an agreement
    with the Alaska Department of Transportation and Public Facilities
    (DOTPF) that allows many projects with minor environmental impacts to
    be processed as categorical exclusions without project-specific review
    by FHWA. Other projects do involve a FHWA review, but are determined to
    qualify as categorical exclusions. The net result is that the vast
    majority of Alaska DOTPF's projects are advanced as categorical
    exclusions. In a small number of cases, where the project facts do not
    support a categorical exclusion, FHWA will work with the Alaska DOTPF
    to prepare an environmental assessment (EA). In those situations where
    environmental impacts are found to be significant, a full environmental
    impact statement is required by law.
        With respect to the specific projects mentioned, the FHWA has
    reached an understanding with Alaska DOTPF that allows the projects to
    advance with the appropriate level of environmental review. For
    example, the brush cutting projects mentioned all qualify for a
    categorical exclusion under FHWA's agreement with the Alaska DOTPF. The
    Tanana River Bridge is being advanced with an environmental assessment
    because of potential impacts involving historic resources, native
    lands, hazardous wastes, and recreational lands. The Dalton Highway
    erosion control project was done with an environmental assessment,
    because the project involved extensive channelization of an
    environmentally important stream. The Alaska Division approved the EA
    for the Dalton project on April 7, 2004, and the Division expects to
    issue a Finding of No Significant Impact (FONSI) in the near future.
        FHWA is fully committed to efficient environmental review processes
    in Alaska. To position itself for success, FHWA has recently worked
    with Alaska DOTPF to host a number of training and process improvement
    efforts. FHWA is confident that these efforts will lead to timely
    project approvals and environmental outcomes that fully respect
    Alaska's unique environmental resources.

        Senator Stevens. I would hope personally you would take the
    time to come up this summer and go see some of these.
        Secretary Mineta. I will, yes, sir.
        Senator Stevens. In the last decade we have only had one
    court review of any environmental matter related to highways.
    We have been perfectly operating with total cooperation. Now it
    seems that because of the elevated requirement in each
    instance, we are building towards more and more court review.
    Since these are routine projects, brush cutting, bridge
    replacement, erosion control, I just do not quite understand
    it. So I would hope that you would take the time this summer
    sometime and come up and we will get a small plane and go out
    and look at some of these.
        Secretary Mineta. I would be more than happy to accept that
    invitation.
        Senator Stevens. Thank you. I shall give you some
    appropriate dates.
        Secretary Mineta. Great.

                               SHORT SEA SHIPPING

        Senator Shelby. Thank you, Chairman Stevens.
        Mr. Secretary, the Maritime Administration is considering
    exploring the potential for short sea freight shipping to
    assist in reducing highway congestion. Can you tell us more
    about this proposal?
        Secretary Mineta. The goal of short sea shipping is to
    utilize our ports and inland waterways. There are two factors
    that are driving this. One is that ships are getting larger
    with more containers onboard, and our own ports are unable to
    handle these larger container ships. When the larger ships come
    in, you can take the containers, put them on barges and
    lighters and then move the containers from Boston to New York
    to Baltimore to Savannah, or wherever their transshipment
    points might be. This can provide some relief to the traffic
    that is already on the highways, especially along the Eastern
    I-95 seaboard.
        Senator Shelby. What about the Tennessee-Tombigbee down in
    the southeast?
        Secretary Mineta. That is an inland waterway. We would look
    at inland waterways as part of this whole effort.

                 FEDERAL TRANSIT ADMINISTRATION REORGANIZATION

        Senator Shelby. Although FTA's senior management contends
    that its reorganization proposal is preliminary, the
    subcommittee has evidence that could lead a reasonable person
    to conclude that the plans have been finalized, Mr. Secretary,
    without your approval or Congressional approval. For example,
    we have information regarding staffing decisions,
    implementation schedules, and even office farewell parties. Not
    for you, of course.
        I would like to work with you, I think the committee would,
    to ensure that FTA follows internal Departmental guidelines and
    the requirements expressed in the appropriations act. Are you
    willing to do that?
        Secretary Mineta. Absolutely. There are situations where we
    have to ask what comes first? We have to abide by OPM
    regulations and by OMB regulations. The first body we have to
    look at related to reorganization is OPM.
        There are a lot of things that need to be started in a
    preliminary way. None of these are set in concrete because we
    have to come to you for reprogramming requests. The requests
    have to clear our own internal channels within the Department
    and with OMB as well. In terms of my own reorganization of the
    Department, there are a number of things going on related to
    hazmat and to other parts of our Department.
        So, yes, word gets out about intended organizational
    changes, but they are not carved in stone yet. We have to make
    sure that we are in compliance with what OPM says and OMB says.
    But we will definitely work with you, and we know that we have
    to do that. It is not a question of having to do it, we want to
    do it.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Shelby. Thank you.
        Senator Murray, do you have any other questions?
        Senator Murray. No.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]

                Questions Submitted by Senator Richard C. Shelby

                           NATCA: PAY FOR PERFORMANCE

        Question. Secretary Mineta, you stated earlier in testimony before
    the subcommittee that there are problems with NATCA units in delivering
    pay for performance. Please provide the Department's assessment of the
    problems that you alluded to in your testimony.
        Answer. As we stated, the impasse was submitted to Congress. The
    statutory 60-day timeframe for Congress to act on the impasse has
    passed, so the FAA is now proceeding to implement its pay plan in the
    remaining NATCA bargaining units. The FAA is currently considering what
    its next steps are in this regard.

                          FTA ADMINISTRATIVE EXPENSES

        Question. Please break out in detail the reasons for the
    administrative cost increases at the FTA.
        Answer. The $4.8 million dollar increase in FTA's administrative
    expenses is necessary to carry out its mission. Funds will be used to
    strategically manage human resources, competitively outsource
    commercial functions, expand electronic government, improve financial
    management, and integrate budget and performance, as outlined in the
    President's Management Agenda. In doing so, FTA will enable the long-
    term management of its workforce and fosters a citizen-centered,
    results-based government that is well organized, flexible, and will
    improve in performance.
        Additional administrative expenses are needed as follows:
      --An increase of $1.5 million is necessary to cover the annualized
            fiscal year 2004 pay raise and the annualized January 2005 pay
            raise, health benefits increase, and mandatory within grade
            increases.
      --An increase of $1.02 million is needed to support ten additional
            FTEs. These resources are needed to comply with the expanded
            technical assistance requirements of projects in the planning
            process, implement statutory requirements for New Starts
            projects, meet the requirements of major program initiatives,
            and coordinate projects and reviews with other agencies, States
            and local project sponsors.
      --An increase of $0.2 million is required due to the inability of the
            General Services Administration and the owner of the
            Headquarters' Nassif building to negotiate a new lease
            agreement at fair market value.
      --An increase of $0.5 million is needed to cover inflation and
            increased service costs, which increases are in line with the
            OMB deflator for non-pay activities. Failure to fund inflation
            results in the agency's inability to pay the full cost of
            essential non-pay activities.
      --An increase of $1.1 million is needed to continue improving our
            information technology infrastructure, which includes:
            application security and accreditation of information
            technology systems; an increase in the Transportation Award and
            Management System to facilitate grant processing and contract
            approval; and ensuring that the Information Technology
            infrastructure works with emerging technologies to support cost
            accounting and core accountabilities.
      --An additional $0.5 million is needed to support workforce planning
            and training to ensure that there is available staff of the
            appropriate skill mix to carryout program development and
            oversight responsibilities.

                             MOTOR FUEL TAX EVASION

        Question. Mr. Secretary, what suggestions do you have for getting
    the IRS to improve its efforts to reduce the estimated $1 billion in
    fuel tax evasion that occurs each year? Please provide for the record
    any correspondence from DOT to the Department of the Treasury about the
    importance of this issue.
        Answer. The Department has proposed the authorization of $54.5
    million for fiscal year 2005 to address motor fuel tax evasion. Of this
    amount, State enforcement agencies would share $4.5 million to enhance
    programs at the State level including but not limited to motor fuel tax
    audits and examinations, dyed fuel sampling, and training. Two million
    dollars would be set aside for intergovernmental enforcement efforts
    including specific projects coordinated with Federal and State agencies
    that are not traditionally involved in motor fuel tax enforcement as
    well as those that have been involved in the past, but currently may
    not be working on the issue.
        The Internal Revenue Service (IRS) would receive the remaining $48
    million. Of that amount, $4.5 million would be provided for the
    operation and maintenance of the automated fuel tracking system
    mandated by the Transportation Equity Act for the 21st Century. Forty-
    four million dollars would be used by the IRS to begin development,
    operation, and maintenance of a registration system for pipelines,
    vessels, and barges and their operators, that make bulk transfers of
    taxable fuels, including developing a decal/transponder to be used to
    display proof of payment. It would also be used to establish, operate
    and maintain an electronic database of heavy vehicle highway use tax
    payments; and for additional enforcement efforts including audits,
    examinations and criminal investigations.
        The automated fuel tracking system provides an important tool to
    the IRS and the States for monitoring fuel tax compliance. The
    additional requirement of electronic reporting will allow the IRS to
    have more complete information on the movement of fuel into and out of
    terminals thus assisting IRS and State enforcement efforts.
        The proposal to give the IRS significantly more funding than in the
    past comes with additional accountability. The IRS would be required to
    submit reports on progress made in the development of any new automated
    systems, criminal investigations, audits and examinations. Also, the
    Federal Highway Administration (FHWA) will be more involved in the
    development of any work plans related to new program requirements and
    in the oversight of such projects.
        The expanded resources that will be available to the IRS for
    improved database systems and greater enforcement efforts will allow
    the agency more flexibility in its role as enforcer. The combined
    efforts of the IRS and the States resulting from the significant
    increase in funding will provide an opportunity to reduce motor fuel
    tax evasion.
        Interaction between the FHWA and the IRS most often takes place
    over the telephone or through face-to-face meetings. A memorandum of
    understanding between the FHWA and the IRS was signed to provide for
    the development of the automated fuel tracking system mandated in the
    TEA21. A scanned copy is provided.

                           OVERSIGHT OF MEGA-PROJECTS

        Question. In your earlier testimony you indicated that project
    managers will provide improved oversight of mega-projects. What
    estimated cost savings can the committee expect to see in these types
    of projects? What type of review occurs prior to awarding a contract to
    determine if the contractor has actually underbid the true costs?
    Should more oversight occur in this area? What results could we expect
    to see?
        Answer. The Federal Highway Administration (FHWA) is assigning a
    designated Project Oversight Manager to each active major project,
    dedicated full-time to that specific major project. The Oversight
    Manager may draw upon resources from within his/her Division Office in
    order to form an integrated project team that is responsible for
    providing proper Federal stewardship and oversight of the major
    project. The Project Oversight Manager is responsible for the overall
    administration and operation of the Project from a Federal stewardship/
    oversight perspective. He/she maintains an ongoing review process to
    ensure that proper oversight and controls are in place and functioning
    including cost containment and financial management. While the cost
    savings are difficult to quantify, having an FHWA official on-site has
    resulted in efficiencies in project management. In addition, the FHWA's
    independent review of the costs and schedules via finance plans and
    annual updates have contributed to efficiencies in cost and schedule
    control.
        Title 23, Code of Federal Regulations (CFR), part 635, section
    114(a) requires design-bid-build Federal-aid contracts to be awarded
    only on the basis of the lowest responsive bid submitted by a bidder
    meeting the criteria of responsibility. This requirement applies to all
    Federal-aid projects, including major projects. For Federal-aid
    projects that are determined to be ``State-approved projects'', the
    State Transportation Agency (STA) may act for the FHWA in the bid
    analysis and award process, but must follow the justification and
    documentation procedures of 23 CFR 635.114(b-j) by documenting the
    project files. STAs may follow their own justification and
    documentation procedures for non-NHS projects.
        Bid analysis is the basis for justifying contract award or
    rejection of the bids. The bid analysis process, pursuant to 23 CFR
    635.114(c), is an examination of the unit bid prices for reasonable
    conformance with the engineer's estimated prices and other factors
    beyond the comparison of prices. A proper bid analysis helps to ensure
    that funds are being used in the most effective manner. The FHWA's
    review of the bids should parallel the STA's review. Together, both
    agencies should be assured that good competition and the lowest
    possible price were received. The FHWA's concurrence in award is a step
    in the obligation and expenditure of Federal funds and is the
    authorization to proceed with construction.
        The current oversight of the bidding process is adequate. Division
    Offices are actively involved with the processes of the State DOTs to
    assure that 23 CFR requirements are met. In addition, the concurrence
    in award process serves as an additional check and is only provided
    after receipt and review of the tabulation of bids. This applies to all
    Federal-aid oversight projects, including major projects. Division
    Offices also conduct process reviews of the bidding process when
    appropriate.
        The oversight provided by the Major Project Oversight Manager model
    has been successful and has provided for adequate oversight. However,
    the Agency is constantly striving to provide the employees in these
    positions the tools to enhance their abilities to improve their
    oversight. For instance, in the upcoming year, the Agency will be
    providing multidisciplinary training in several core competency areas:
    project management, financial management, cost estimating,
    communications, and leadership. In addition, the FHWA Contract
    Administration Course contains modules which address the bidding
    process.
        By continuing to improve the core competencies of the Major Project
    Oversight Managers, the Agency can expect to see a cadre of FHWA
    managers who are able to provide more of a collaborative leadership
    role to major projects. In this role, the Managers will work together
    with the entire project delivery team to deliver major projects that
    maintain the public's trust and confidence in our ability to deliver
    the Federal-aid Highway Program. The additional training provided about
    the bidding process to both Federal and State employees via the
    Contract Administration Course results in an awareness of the bidding
    process requirements and sound procedures that optimize process
    efficiencies and limits opportunities for legal challenges and fraud.
        For the Federal Transit Administration (FTA) and the oversight of
    mega-projects, future projects will be tightly managed to ensure the
    project cost will not exceed 5 percent of the baseline project cost. A
    project recovery plan will be required when the projected baseline cost
    is going to exceed more than 5 percent. To determine whether a
    contractor may have underbid the cost, a bid analysis will continue to
    be performed prior to awarding the contract. FTA will continue to
    review the grantee's bid analysis to ensure project cost control.
    Increased oversight reviews will result in more successful projects
    such as the New Orleans Canal Streetcar Line, Dallas North Central LRT
    and Interstate Max LRT in Portland.
        As for the Federal Aviation Administration (FAA), they too have a
    process to review the costs of major airport improvement projects and
    continue to perform significant oversight functions. All Airport
    Improvement Program grantees must perform an analysis of cost or price
    for all procurement actions, including contract modifications.

               FULL FUNDING GRANT AGREEMENT COMMITMENT AUTHORITY

        Question. Earlier in the hearing, Mr. Secretary, you were asked how
    FTA would chose from among projects that it has proposed to enter into
    full funding contracts during fiscal year 2005 without sufficient
    commitment authority to cover all of the projects. Please explain this
    for the record. What methodology would be used?
        Answer. There is sufficient commitment authority to cover all of
    the projects recommended for Section 5309 New Starts funding in the
    President's Budget for fiscal year 2005 and the Annual Report on New
    Starts: Proposed Allocations of Funds for fiscal year 2005 (the current
    ``Annual New Starts Report''). Year by year, in each Presidential
    Budget and Annual New Starts Report for the coming fiscal year, the
    Department and FTA make recommendations for New Starts funding only
    insofar as there is sufficient commitment authority available to cover
    those recommendations--the Department and FTA never exceed the amount
    of available commitment authority.
        In any given year, the selection of projects for proposed Full
    Funding Grant Agreements is based on: (1) the relative merits of the
    projects under consideration, and (2) the ``readiness'' of each project
    under consideration to begin construction. Specifically, the relative
    merits of each project are determined through FTA's application of both
    the project justification and local financial commitment criteria
    established by 49 U.S.C.  5309(e) and fleshed out by the regulations
    at 49 C.F.R. Part 611. The ``readiness'' of each project is a judgment
    of the reliability of the cost, budget, and schedule for that project,
    in light of a number of factors, including the grantee's demonstration
    of its technical capacity to build and operate the project, its
    execution of all principal third-party agreements relevant to the
    project, an assessment of the risks inherent in the project that could
    affect cost and schedule, and the level of engineering and final design
    that has been completed.

                          MOTOR CARRIER SAFETY AUDITS

        Question. Given the high passage rate of FMCSA safety audits, some
    critics charge that the FMCSA safety audit procedure has become more of
    an outreach and education campaign than a safety assurance mechanism.
    Please explain why the administration of the Safety Audit process of
    the New Entrant program by FMCSA is an optimal use of the resources
    allocated to ensuring that unqualified carriers are kept off the roads.
        Answer. Data shows that new entrants are identified as at-risk
    carriers. The program was originally designed as an outreach and
    education effort. FMCSA is retooling the program to give it a greater
    enforcement focus. The concept is to engage carriers at the beginning
    of operations so there is not as a great a need to perform compliance
    reviews, a more optimal use of Agency resources. FMCSA will work to tie
    new entrant audits and compliance reviews together as the programs
    advance.
        FMCSA is developing a rulemaking proposal that would strengthen the
    pass/fail criteria for the new entrant program. The rulemaking
    enhancements will identify carriers without basic safety management
    controls. As a result of our proposed changes, FMCSA anticipates a
    significant increase in the number of enforcement actions taken against
    new entrant carriers.

                        MOTOR CARRIER COMPLIANCE REVIEWS

        Question. As FMCSA has increased the number of new entrant safety
    audits, the number of compliance reviews it undertakes has dropped
    significantly. Why has the number of compliance reviews dropped so
    sharply in recent months? Is the level of funding that is requested in
    fiscal year 2005 sufficient to meet the goals of the agency? Do you
    believe that a safety audit can substitute for a compliance review? Do
    you intend to increase the number of compliance reviews in the
    remainder of fiscal year 2004 and fiscal year 2005?
        Answer. The number of compliance reviews has dropped significantly
    due primarily to the focus on Safety Security Visits as a result of
    September 11, 2001, and the implementation of the new entrant program.
    Prior to the program's implementation, FMCSA conducted approximately
    12,000 compliance reviews per year. Currently, the Agency conducts
    approximately 8,000 per calendar year. In fiscal year 2004, more States
    will begin to conduct safety audits. However, FMCSA does not expect to
    realize fully the benefit of State participation until fiscal year
    2005.
        The new entrant audit was originally designed as an educational
    tool for carriers beginning interstate operations rather than a
    substitute for the compliance review program. A compliance review may
    be conducted on new entrants during the safety monitoring period if
    their performance warrants such a review. To meet the Motor Carrier
    Safety Improvement Act's statutory requirement to conduct these new
    entrant safety audits, FMCSA diverted resources from the conduct of
    compliance reviews to the conduct of 40,000-50,000 new entrant audits
    annually. As a result, FMCSA expects to conduct approximately 7,500
    compliance reviews in fiscal year 2004, which is 500 lower than FMCSA's
    goal of completing 8,000 compliance reviews in fiscal year 2004.
    However, FMCSA expects to meet its target of 8,000 compliance reviews
    in fiscal year 2005.

             INTELLIGENT TRANSPORTATION SYSTEMS ADVISORY COMMITTEE

        Question. The Department disbanded the Intelligent Transportation
    Systems (ITS) Advisory Committee more than a year ago. Do you plan to
    appoint new members to the ITS Advisory Board or is this body no longer
    necessary?
        Answer. Two years ago, the Department of Transportation's (DOT)
    leadership undertook an internal review of the future direction of the
    ITS program. A key decision resulting from that examination was to
    establish a Federal Advisory Committee to the DOT for ITS. From the ITS
    program's inception a dozen years ago until June 2003, ITS America had
    served in this advisory capacity and was well positioned to bring
    government and industry together in development of the ITS program. As
    the ITS industry and the DOT's ITS program matured, DOT leadership
    concluded that the time was right to consider a new Advisory Committee.
    This tested method of consultation with the public serves the
    Department well across other modes of transportation, and the ITS
    Advisory Committee would give the Department a new and valuable
    consultative asset. A new DOT Advisory Committee is being considered
    under the Federal Advisory Committee Act. Organizations and individuals
    with resources and expertise to offer meaningful advice would be
    invited to serve.

                                 SHIP DISPOSAL

        Question. How many obsolete vessels from the National Defense
    Reserve Fleet will be disposed of with the funds provided in fiscal
    year 2004?
        Answer. The Maritime Administration (MARAD) has removed 13 ships so
    far in fiscal year 2004, resulting from contracts awarded with fiscal
    year 2003 funding. MARAD anticipates awards, utilizing funds provided
    in fiscal year 2004, to result in the disposal of an additional 12
    obsolete ships from the NDRF.
        Question. How many ships does MARAD plan to dispose of in fiscal
    year 2005 if the requested amount is provided?
        Answer. MARAD plans to dispose of approximately 15 vessels from the
    National Defense Reserve Fleet.
        Question. What is MARAD's plan for meeting the 2006 deadline to
    dispose of all of the obsolete fleet?
        Answer. While the Congressionally mandated September 30, 2006
    deadline was for the removal of all vessels, a more achievable goal is
    to remove all vessels that have a high or moderate risk by 2006. To
    reach that goal, MARAD plans to eliminate the backlog of vessels that
    accumulated in the 1990's; remove all ``high'' and ``moderate''
    priority ships (approximately 65 ships) at a rate of 20-24 ships per
    year; and maintain only ``low'' priority ships at the fleet sites.
    MARAD's annual target is to maintain no more than 40-60 low priority
    vessels at all three fleet sites. With the projected designation of 45
    ships as obsolete over the next 3-5 years, an annual disposal rate of
    20-24 ships will have to be maintained for 3-4 years beyond 2006, to
    achieve and maintain an obsolete vessel fleet size at a maximum range
    of 40-60 ships.
        In addition to maintaining only ``low'' priority obsolete ships at
    the fleets, further mitigation of environmental risks will be achieved
    by continuing to use the established protocol for the acceptance of
    vessels into the National Defense Reserve Fleet and the practices used
    when downgrading vessels to non-retention status. This includes
    accomplishment of material condition and liquid load surveys, removal
    of readily removable hazardous materials, preliminary residual
    hazardous material characterization, and defueling of vessels to the
    maximum extent. In addition, as newer vessels (built after 1980) are
    downgraded to non-retention status and enter the fleets, a decline in
    the quantities of hazmats, such as, PCBs will be evident.
        While MARAD will continue to pursue all disposal options to ensure
    the best value disposal decisions, having foreign recycling as a viable
    disposal option in 2004-2006 and beyond will help MARAD achieve the
    annual goal of reducing the inventory by 20-24 vessels.

                      MARITIME GUARANTEED LOANS (TITLE XI)

        Question. Public Law 108-11 prohibited the obligation of funds
    under the Title XI program until the Inspector General (IG) certifies
    that MARAD has adopted and implemented the recommendations of No. CR-
    2003-031 to his satisfaction. What is the status of the implementation
    of these recommendations?
        Answer. MARAD and the Office of the Inspector General have been
    working closely to adopt and implement the recommendations contained in
    the report. A formal IG report providing the certification is expected
    in June 2004.

                     PRESIDENTIAL AND POLITICAL APPOINTEES

        Question. Please provide the number of presidential and political
    appointees currently on board at the Department and break out by
    operating administration and office of the Office of the Secretary as
    well as by title and grade.
        Answer. The information follows.

        PRESIDENTIAL, SENIOR EXECUTIVE SERVICE NON-CAREER, AND SCHEDULE C
                          APPOINTEES AS OF MAY 4, 2004
    ------------------------------------------------------------------------
                       Title                                Grade
    ------------------------------------------------------------------------
              OFFICE OF THE SECRETARY

    Presidential Appointee--Immediate Office
     of the Secretary:
        Secretary.............................  EX-I
    Non-career SES--Immediate Office of the
     Secretary:
        Chief of Staff........................  ES-00
        Assistant to the Secretary for Policy.  ES-00
        Assistant to the Secretary for Policy.  ES-00
        Deputy Chief of Staff.................  ES-00
    Schedule C--Immediate Office of the
     Secretary:
        White House Liaison...................  GS-15
        Assistant to the Secretary for Policy.  GS-15
        Assistant to the Secretary for Policy.  GS-14
        Special Assistant to the Secretary and  GS-14
         Deputy Director for Scheduling and
         Advance.
        Director for Scheduling and Advance...  GS-15
        Special Assistant for Scheduling and    GS-13
         Advance.
        Scheduling and Advance Assistant......  GS-7
    Limited Term SES--Office of the Deputy
     Secretary:
        Acting Deputy Secretary/Counselor to    ES-00
         the Secretary.
    Schedule C--Office of the Deputy
     Secretary:
        Counselor to the Deputy Secretary.....  GS-15
    Presidential Appointee--Office of the
     Under Secretary of Transportation for
     Policy:
        Under Secretary.......................  EX-II
    Non-career SES--Office of the Under
     Secretary of Transportation for Policy:
        Counselor to the Under Secretary......  ES-00
    Schedule C--Office of the Under Secretary
     of Transportation for Policy:
        Executive Assistant to the Under        GS-12
         Secretary.
    Non-career SES--Executive Secretariat:
        Director..............................  ES-00
    Non-career SES--Office of Civil Rights:
        Director..............................  ES-00
    Non-career SES--Office of Small &
     Disadvantaged Business Utilization:
        Director..............................  ES-00
    Non-career SES--Office of the Chief
     Information Officer:
        Chief Information Officer.............  ES-00
    Non-career SES--Office of Public Affairs:
        Assistant to the Secretary and          ES-00
         Director of Public Affairs.
    Schedule C--Office of Public Affairs:
        Deputy Director of Public Affairs.....  GS-15
        Deputy Director of Communications.....  GS-15
        Associate Director for Speechwriting..  GS-15
        Speechwriter..........................  GS-15
        Speechwriter..........................  GS-14
        Special Assistant to the Director.....  GS-14
        Special Assistant for Public Affairs..  GS-10
    Presidential Appointee--Assistant
     Secretary for Budget and Programs:
        Assistant Secretary & CFO.............  EX-IV
    Non-career SES--Office of the Assistant
     Secretary for Budget and Programs:
        Deputy Assistant Secretary for          ES-00
         Management and Budget.
    Presidential Appointee--Office of the
     General Counsel:
        General Counsel.......................  EX-IV
    Presidential Appointee--Office of the
     Assistant Secretary for Transportation
     Policy:
        Assistant Secretary...................  EX-IV
    Non-career SES--Office of the Assistant
     Secretary for Transportation Policy:
        Deputy Assistant Secretary............  ES-00
    Schedule C--Office of the Assistant
     Secretary for Transportation Policy:
        Special Assistant to the Assistant      GS-12
         Secretary.
    Presidential Appointee--Office of the
     Assistant Secretary for Aviation and
     International Affairs:
        Assistant Secretary...................  EX-IV
    Non-career SES--Office of the Assistant
     Secretary for Aviation and International
     Affairs:
        Deputy Assistant Secretary............  ES-00
    Schedule C--Office of the Assistant
     Secretary for Aviation and International
     Affairs:
        Special Assistant.....................  GS-15
    Presidential Appointee--Office of the
     Assistant Secretary for Governmental
     Affairs:
        Assistant Secretary...................  EX-IV
    Non-career SES--Office of the Assistant
     Secretary for Governmental Affairs:
        Deputy Assistant Secretary............  ES-00
    Schedule C--Office of the Assistant
     Secretary for Governmental Affairs:
        Special Assistant to the Assistant      GS-15
         Secretary.
        Associate Director for Governmental     GS-14
         Affairs.
        Associate Director for Governmental     GS-13
         Affairs.
        Associate Director for Governmental     GS-13
         Affairs.
        Associate Director for Governmental     GS-13
         Affairs.
        Associate Director for                  GS-14
         Intergovernmental Affairs.

            OFFICE OF INSPECTOR GENERAL

    Presidential Appointee:
        Inspector General.....................  EX-IV

          FEDERAL AVIATION ADMINISTRATION

    Presidential Appointee:
        Administrator.........................  EX-II
        Deputy Administrator..................  EX-IV
    Non-career SES:
        Chief Counsel.........................  FJ-4
        Associate Administrator for Airports..  FJ-4
        Assistant Administrator for             FJ-4
         International Aviation.
        Assistant Administrator for Aviation    FJ-4
         Policy, Planning & Environment.
        Assistant Administrator for Government  FJ-4
         & Industry Affairs.
        Assistant Administrator for Public      FJ-4
         Affairs.
    Schedule C:
        Special Assistant to the Deputy         GG-15
         Administrator.

          FEDERAL HIGHWAY ADMINISTRATION

    Presidential Appointee:
        Administrator.........................  EX-II
    Non-career SES:
        Deputy Administrator..................  ES-00
        Chief Counsel.........................  ES-00
        Associate Administrator for Public      ES-00
         Affairs.
        Associate Administrator for Policy....  ES-00
    Schedule C:
        Special Assistant to the Administrator  GS-15
        Special Assistant.....................  GS-14
        Special Assistant to the Policy         GS-14
         Director.
        Special Assistant to the Chief Counsel  GS-13

          FEDERAL RAILROAD ADMINISTRATION

    Presidential Appointee:
        Administrator.........................  EX-III
    Non-career SES:
        Deputy Administrator..................  ES-00
    Schedule C:
        Director of Public Affairs............  GS-13

          NATIONAL HIGHWAY TRAFFIC SAFETY
                  ADMINISTRATION

    Presidential Appointee:
        Administrator.........................  EX-III
    Non-career SES:
        Deputy Administrator..................  ES-00
        Chief Counsel.........................  ES-00
        Associate Administrator for External    ES-00
         Affairs.
    Schedule C:
        Special Assistant.....................  GS-15

           FEDERAL MOTOR CARRIER SAFETY
                  ADMINISTRATION

    Presidential Appointee:
        Administrator.........................  EX-III
    Non-career SES:
        Deputy Administrator..................  ES-00
        Chief Counsel.........................  ES-00
    Schedule C:
        Director, Office of Communications &    GS-15
         Senior Policy Advisor.
        Special Assistant to the Administrator  GS-14
         for Intergovernmental Affairs.

          FEDERAL TRANSIT ADMINISTRATION

    Presidential Appointee:
        Administrator.........................  EX-III
    Non-career SES:
        Deputy Administrator..................  ES-00
        Chief Counsel.........................  ES-00
    Schedule C:
        Staff Assistant.......................  GS-10

           RESEARCH AND SPECIAL PROGRAMS
                  ADMINISTRATION

    Non-career SES:
        Deputy Administrator..................  ES-00
    Schedule C:
        Director of Policy and Program Support  GS-15

         SAINT LAWRENCE SEAWAY DEVELOPMENT
                    CORPORATION

    Presidential Appointee:
        Administrator.........................  EX-IV

           SURFACE TRANSPORTATION BOARD

    Presidential Appointee:
        Chairman..............................  EX-III

              MARITIME ADMINISTRATION

    Presidential Appointee:
        Administrator.........................  EX-III
    Non-career SES:
        Deputy Administrator..................  ES-00
        Chief Counsel.........................  ES-00
    Schedule C:
        Director, Office of Congressional and   GS-15
         Public Affairs.
        Special Assistant to the Administrator  GS-14
    ------------------------------------------------------------------------

        Question. Please provide by operating administration or office of
    the Office of the Secretary the number of vacant presidential and
    political positions and the grade and 2005 salary for each position.
        Answer. The information follows.

         VACANT PRESIDENTIAL AND POLITICAL POSITIONS--AS OF MAY 04, 2004
    ------------------------------------------------------------------------
                   Title                        Grade             Salary
    ------------------------------------------------------------------------
    Office of the Secretary:
        Deputy Secretary..............  EX-II...............        $158,100
        Special Assistant for           GS-7................          34,184
         Scheduling and Advance.
        Director of Drug Enforcement    GS-15...............         100,231
         and Program Compliance.
        Deputy Assistant Secretary for  ES-0................         125,264
         Governmental Affairs.
        Associate Director for          GS-14...............          96,572
         Governmental Affairs.
    Federal Aviation Administration:
        Deputy Assistant Administrator  GS-15...............         110,256
         for Government and Industry
         Affairs.
    Maritime Administration:
        Senior Policy Advisor.........  GS-15...............         113,597
    National Highway Traffic Safety
     Administration:
        Director, Office of Public and  GS-15...............         113,597
         Consumer Affairs.
        Director of Intergovernmental   GS-15...............         113,597
         and Congressional Affairs.
    Federal Transit Administration:
        Associate Administrator for     ES-0................         137,000
         Communications and
         Legislative Affairs.
    Research and Special Programs
     Administration:
        Administrator.................  EX-III..............         145,600
        Special Assistant.............  GS-12...............          68,722
        Director of Public Affairs....  GS-15...............         113,597
    Bureau of Transportation
     Statistics:
        Director......................  EX-V................         128,200
    Surface Transportation Board:
        Board Member..................  EX-IV...............         136,900
        Board Member..................  EX-IV...............        136,900
    ------------------------------------------------------------------------
    NOTES.--The PAS salaries are based on the statutory pay level. The SES
      salaries are based on the middle of the new senior executive pay
      range, or a salary determined for the proposed incumbent. The GS
      salaries are based on the middle of the range (step 5) for each grade
      (as previously encumbered), or as proposed.

        Question. How many new political positions are requested for fiscal
    year 2005?
        Answer. There are 10 new political positions being requested for
    fiscal year 2005.
        Question. Please display by office of the Office of the Secretary
    or operating administration, each new political position and its grade
    and salary.
        Answer. The information follows.

    ------------------------------------------------------------------------
                   Title                        Grade             Salary
    ------------------------------------------------------------------------
    Office of the Secretary:
        Special Counsel...............  GS-15...............        $113,597
        Special Assistant (to the A/S   GS-15...............         113,597
         for Trans. Policy).
        Special Assistant (to the A/S   GS-14...............          96,572
         for Aviation & International
         Affairs.
        Security Liaison..............  GS-15...............         113,597
        Special Assistant for           GS-15...............         113,597
         Information Technology
         Security.
    Federal Railroad Administration:
        Deputy Administrator..........  ES-0................         125,264
        Special Assistant.............  GS-15...............         113,597
    Federal Transit Administration:
        Special Assistant for           GS-15...............         113,597
         Intergovernmental Affairs.
    Federal Motor Carrier Safety
     Administration
        Special Assistant.............  GS-12...............          68,722
    Research and Special Programs
     Administration:
        Special Assistant.............  GS-12...............          68,722
    ------------------------------------------------------------------------

        The SES position salaries are estimated at the middle of the new
    senior executive pay range, or based on a salary determined for the
    proposed incumbent.
        The GS salaries are estimated at the middle of the range (step 5)
    for each grade proposed.
        Question. Please provide a timetable for filling vacant political
    positions up to the statutory cap.
        Answer. The information follows.

                 VACANT POLITICAL POSITIONS--AS OF MAY 04, 2004
    ------------------------------------------------------------------------
                 Title                 Grade      Salary    Incumbent Status
    ------------------------------------------------------------------------
    Office of the Secretary:
        Deputy Secretary..........  EX-II         $158,100  Pending Senate
                                                             Confirmation
                                                             Candidate to
                                                             come aboard--6/
                                                             13/04
        Special Assistant for       GS-15          100,231  Candidate to
         Scheduling and Advance.                             come aboard--6/
                                                             13/04
        Director of Drug            ES-00          125,264  Interviewing--ca
         Enforcement and Program                             ndidate to come
         Compliance.                                         aboard
        Associate Director for      GS-14           96,572  Interviewing
         Governmental Affairs.
    Federal Aviation
     Administration:
        Deputy Assistant            GS-15          110,256  Candidate to
         Administrator for                                   come on Board--
         Government and Industry                             6/13/04
         Affairs.
    Maritime Administration:
        Senior Policy Advisor.....  GS-15          113,597  Interviewing
    National Highway Traffic
     Safety Administration:
        Director, Office of Public  GS-15          113,597  Interviewing
         and Consumer Affairs.
        Director of                 ..........  ..........  ................
         Intergovernmental and
         Congressional Affairs.
    Federal Transit
     Administration:
        Associate Administrator     ES-0           137,000  Candidate to
         for Communications and                              come aboard--6/
         Legislative Affairs.                                1/04
    Research and Special Programs
     Administration:
        Administration............  EX-III         145,600  Interviewing
        Special Assistant.........  GS-12           68,722  Interviewing
        Director of Public Affairs  GS-15          113,597  Interviewing
    Bureau of Transportation
     Statistics:
        Director..................  EX-V           128,200  Interviewing
    Surface Transportation Board:
        Board Member..............  EX-IV          136,900  Pending Senate
                                                             Confirmation
        Board Member..............  EX-IV          136,900  Pending Senate
                                                             Confirmation
    ------------------------------------------------------------------------

        Question. Please provide a table that compares the number of
    political appointees by agency or by office of the Office of the
    Secretary over the last 5 years.
        Answer. The information follows.

    ----------------------------------------------------------------------------------------------------------------
                                                                                         Fiscal Year
                                                                        --------------------------------------------
                          Operating Administration                                                             2004
                                                                           2000     2001     2002     2003    As of
                                                                                                              5/4/04
    ----------------------------------------------------------------------------------------------------------------
    Secretarial Offices................................................       25       20       29       25       25
    Budget and Programs................................................        3        1        1        0        2
    General Counsel....................................................        0        1        1        1        1
    Governmental Affairs...............................................        9        7        9        8        8
    Administration.....................................................        1        0        0        0        0
    Transportation Policy..............................................        6        1        3        3        3
    Federal Aviation Administration....................................        5        4        7        9        9
    Federal Highway Administration.....................................        5        1        9        7        9
    National Highway Traffic Safety Administration.....................        7        2        7        5        5
    Federal Railroad Administration....................................        4        2        3        2        3
    Federal Transit Administration.....................................        3        2        5        5        4
    Saint Lawrence Seaway Development Corp.............................        1        1        1        1        1
    Research and Special Programs Administration.......................        4        2        3        3        2
    Office of the Inspector General....................................        1        1        1        1        1
    Bureau of Transportation Statistics................................        1        1        1        0        0
    Surface Transportation Board.......................................        3        3        2        1        1
    Maritime Administration............................................        5        1        5        5        5
                                                                        --------------------------------------------
          TOTAL........................................................       85       51       90       82       87
    ----------------------------------------------------------------------------------------------------------------

                                  OST STAFFING

        Question. Please provide a table that compares the estimated
    average grade for each office of the Office of the Secretary for fiscal
    year 2005 with the past 5 fiscal years.
        Answer. The information follows.

                      FISCAL YEAR 2001-2005 AVERAGE GRADES
    ------------------------------------------------------------------------
                                                                     Fiscal
                                       Fiscal    Fiscal    Fiscal     Year
                 Office                 Year      Year      Year      2004
                                        2001      2002      2003     (Est.)
    ------------------------------------------------------------------------
    Secretarial Offices.............      10.9      10.9      11.1      11.1
    Budget & Programs...............      11.6      11.8      11.8      11.3
    General Counsel.................      11.8      11.7      11.9      12.0
    Governmental Affairs............      10.1      11.0      11.6      11.2
    Administration..................      11.8      11.4      11.1      11.2
    Aviation & Int'l Affairs........      11.0      11.1      11.1      11.1
    Transportation Policy...........      10.6      10.0      10.0      10.3
    ------------------------------------------------------------------------
    NOTE.--Fiscal year 2005 data not available.

        Question. Please provide a table listing by office of the Office of
    the Secretary, onboard staffing and FTE for fiscal year 2000, through
    2004 and the fiscal year 2005 requested full-time positions and FTE.
        Answer. The information follows.

                                                      OST STAFFING SALARIES AND EXPENSES--POSITIONS AND FTE
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Fiscal Year     Fiscal Year     Fiscal Year   Fiscal Year 2003    Fiscal Year     Fiscal Year
                                                              2000 Actual     2001 Actual     2002 Actual        Request       2004 Request    2005 Request
                            Office                         -------------------------------------------------------------------------------------------------
                                                              FTP     FTE     FTP     FTE     FTP     FTE     FTP      FTE      FTP     FTE     FTP     FTE
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    General Counsel.......................................      87      81      92      81     112      92     112      106      106     100     106     100
    Under Sec Transportation Policy.......................      34      30      33      29      33      29     133      129      132     128     132     128
    Aviation/International Affairs \1\....................      94      94      92      87      92      92  .......  .......  ......  ......  ......  ......
    Budget and Programs...................................      56      56      56      51      56      44      56       56       55      55      55      55
    Governmental Affairs..................................      24      24      24      18      24      21      24       24       24      24      24      24
    Administration \2\....................................      81      61      81      67      82      99      83       79       86      84      86      84
    Public Affairs........................................      21      20      21      18      21      19      21       21       21      21      21      21
    Office of the Secretary...............................      23      22      22      22      22      21      22       22       22      22      22      22
    Office of the Deputy Secretary........................       7       6       7       4       7       6       7        7        7       7       7       7
    Office of Intermodalism \3\...........................      10      10  ......  ......  ......  ......  .......  .......  ......  ......  ......  ......
    Office of the Executive Secretariat...................      15      15      15      14      15      15      15       15       15      15      15      15
    Board of Contract Appeals.............................       6       5       6       5       5       5       6        6        6       6       6       6
    Small and Disadvantaged Business......................      12      12      12       9      12      10      12       12       11      11      11      11
    Intelligence and Security \4\.........................      12      11      12      11      12       8     [15]     [14]      15      15      15      15
    Ofc of the Chief Information Officer..................      21      21      21      21      21      22      25       23       25      25      25      25
                                                           -------------------------------------------------------------------------------------------------
          Total staffing, Salaries & Expenses.............     503     468     494     437     514     483     516      500      525     513     525     513
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Beginning in fiscal year 2003, the Office of Aviation/International Affairs is consolidated in the Office of the Under Secretary of Transportation
      for Policy.
    \2\ For fiscal year 2002, the Office of Administration includes FTE associated with the standup of the Transportation Security Administration.
    \3\ For fiscal years 2001 and 2002, the Office of Intermodalism is funded within FHWA. The fiscal year 2003 budget transfers the Office of Intermodalism
      from FHWA to OST Under Secretary of Transportation for Policy.
    \4\ For fiscal year 2003, the Office of Intelligence and Security is funded under reimbursable agreement.

                         FUNDING LEVELS FOR OST OFFICES

        Question. Please provide a table displaying the enacted level for
    fiscal years 2002, 2003, 2004 for each office of the Office of the
    Secretary and the amount of any transfers of funds between offices (or
    to date for fiscal year 2004).
        Answer. The table below provides the enacted level for fiscal years
    2002, 2003, 2004 for each office of the Office of the Secretary. There
    were no enacted transfers of funds between OST offices for fiscal years
    2002, 2003, or 2004 (as of May 31, 2004).

                    OFFICE OF THE SECRETARY ENACTED LEVELS FOR FISCAL YEAR 2002 THRU FISCAL YEAR 2004
                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                       Fiscal Year     Fiscal Year     Fiscal Year
                                Accounts                              2002 Enacted    2003 Enacted     2004 Enacted
    ----------------------------------------------------------------------------------------------------------------
    SALARIES & EXPENSES:
        Office of the Secretary....................................           1,929          2,197           2,179
        Office of the Deputy Secretary.............................             619            804             690
        Office of the Under Secretary of Transportation for Policy.  ..............         12,300          12,141
        Aviation/International Affairs \1\.........................          10,479  ..............  ...............
        Office of Intermodalism \2\................................  ..............  ..............  ...............
        Board of Contract Appeals..................................             507            607             690
        Office of Small & Disadvantaged Business Utilization.......             540          1,259           1,251
        Office of Intelligence & Security \3\......................           1,321         [1,631]          1,972
        Office of the Chief Information Officer....................           6,141         13,026           7,396
        Office of General Counsel..................................          13,355         15,466          14,985
        Office of Governmental Affairs.............................           2,282          2,423           2,267.6
        Office of the Assistant Secretary for Budget...............           7,728          8,273           8,418
        Office of the Assistant Secretary of Administration........          19,250         28,717          22,984
        Office of Public Affairs...................................           1,723          1,903           1,889
                                                                    ------------------------------------------------
          TOTAL: SALARIES & EXPENSES...............................          67,078         88,357          78,290
    TRANSPORTATION PLANNING RESEARCH & DEVELOPMENT (TPR&D).........          11,580         23,463          20,426
    OFFICE OF CIVIL RIGHTS.........................................           8,362          8,514           8,365
    MINORITY BUSINESS OUTREACH.....................................           3,000          2,949           2,958
    MINORITY BUSINESS RESOURCE CENTER PROGRAM (MBRC)...............             900            894             895
    ESSENTIAL AIR SERVICE/PAYMENTS TO AIR CARRIERS.................          62,952         51,761          51,662
    NEW HEADQUARTERS BUILDING......................................               0              0               0
                                                                    ------------------------------------------------
          TOTALS...................................................         153,872        175,938         162,596
    ----------------------------------------------------------------------------------------------------------------
    \1\ Beginning in fiscal year 2003, the Office of Aviation/International Affairs is consolidated in the Office of
      the Under Secretary of Transportation for Policy.
    \2\ For fiscal year 2002, the Office of Intermodalism was funded within FHWA. Beginning in fiscal year 2003 the
      Office of Intermodalism transfers from FHWA to OST Office of the Under Secretary of Transportation for Policy.

    \3\ In fiscal year 2003, the Office of Intelligence and Security was funded through a reimbursable agreement.

                     DETAILS TO THE OFFICE OF THE SECRETARY

        Question. Are any staff of the operating administrations detailed
    to the Office of the Secretary?
        Answer. Three employees from the Federal Highway Administration are
    detailed to the Office of the Secretary.

                                OST TRAVEL COSTS

        Question. Are any travel costs for the Office of the Secretary
    expected to be paid by the modes?
        Answer. In certain circumstances, travel costs for the Secretary
    are paid for by the operating administrations. For example, if the
    Secretary attends an event related to airports, the Federal Aviation
    Administration may pay for the Secretary's travel expenses. The
    Secretary's attendance at these events helps to enhance the missions of
    the operating administrations.
        Question. Please provide a table indicating the amount of travel
    costs for the Office of the Secretary that operating administrations
    paid for in part or in total. Please breakdown by operating
    administrations for the past 5 years.
        Answer. The information follows.

                                            IMMEDIATE OFFICE OF THE SECRETARY
    ----------------------------------------------------------------------------------------------------------------
                                                                 Fiscal     Fiscal     Fiscal     Fiscal     Fiscal
                              Direct                           Year 2000  Year 2001  Year 2002  Year 2003  Year 2004
    ----------------------------------------------------------------------------------------------------------------
    MARAD....................................................  .........  .........  .........     $1,400  .........
    FAA......................................................  .........  .........  .........  .........     $2,826
    NHTSA....................................................  .........  .........  .........  .........     12,633
    FTA......................................................     $1,638  .........     $3,804        541        122
    FRA......................................................        156       $703  .........  .........  .........
    FHWA.....................................................      1,865      1,891      1,339        730        988
    FMCSA....................................................  .........  .........  .........        724        584
    RSPA.....................................................  .........  .........  .........  .........        654
    USCG.....................................................        462  .........  .........  .........  .........
                                                              ------------------------------------------------------
          Total..............................................      4,121      2,594      5,143      3,395     17,807
    ----------------------------------------------------------------------------------------------------------------

        Question. Are there guidelines from the Office of the Secretary to
    the operating administrations that define the circumstances under which
    the Secretarial travel is paid by the modes? If so, please provide for
    the record.
        Answer. There are no formal written guidelines, but in practice,
    the modes may be asked to cover the cost of the Secretary's advance
    staff if an administrator requests the Secretary's presence at an event
    or conference that deals specifically with the mission of that
    particular mode. The Secretary's own travel and per diem costs are paid
    by his immediate office.
        Question. Has the DOT General Counsel ever looked at the practice
    of operating administrations paying for OST travel costs to be in
    compliance with the general provision carried annually in
    appropriations Acts prohibiting assessments? Please provide the legal
    opinion, if there is one, for the record.
        Answer. Staff attorneys in the Office of the General Counsel have
    periodically provided oral advice to agency officials and staff
    concerning applicable restrictions on making assessments to help fund
    OST travel costs that are contained in our annual appropriations acts.
    The General Counsel and his staff have not issued any legal opinions
    that address this subject.

                          CHARGES TO THE MODES BY OST

        Question. Please provide a list of all accounts that are financed
    by charges to the modes from OST.
        Answer. There are no OST accounts that are financed by charges to
    the modes. However, for services provided by OST to the modes, charges
    are collected through reimbursable agreements. For fiscal year 2004,
    Salaries and Expense and Office of Civil Rights accounts have
    reimbursable agreements with the modes.

                      PROPOSALS TO REORGANIZE OST OFFICES

        Question. Is there any proposal to consolidate or reorganize any
    office of the Office of the Secretary assumed in the fiscal year 2005
    budget request?
        Answer. No, there was no proposal to consolidate or reorganize any
    office of the Office of the Secretary assumed in the fiscal year 2005
    request; however, on June 25, 2004, President Bush transmitted a fiscal
    year 2005 budget amendment to Congress that would place the operational
    responsibility for the Office of Emergency Transportation and Crisis
    Management Center from the Research and Special Programs Administration
    to the Office of the Secretary.

                 PROPOSALS TO CONSOLIDATE OST BUDGET ACTIVITIES

        Question. Does the fiscal year 2005 budget request reflect any
    proposals to consolidate budget activities of the Office of the
    Secretary?
        Answer. The fiscal year 2005 request reflects a consolidated budget
    activity for the Office of the Secretary, the Office of the Deputy
    Secretary and the Executive Secretariat. This will provide greater
    flexibility in the day-to-day management of the Offices.

                     PROPOSALS TO REORGANIZE MODAL OFFICES

        Question. Are there any proposals or plans to consolidate,
    reorganize, or restructure any offices of the operating administrations
    in fiscal year 2005?
        Answer. In fiscal year 2005, the Department plans to consolidate,
    reorganize, or restructure the following offices:
    Federal Aviation Administration (FAA)
        The FAA continues to reorganize lines of business and services
    within the newly created Air Traffic Organization. Also, the Flight
    Service Stations are currently undergoing an A-76 study which will
    result in the contracting out or a restructuring of this operation
    within FAA. Results of this will not be finalized until March 2005.
    Research and Special Programs Administration (RSPA)/Office of the
            Secretary of Transportation (OST)
        On June 25, 2004, President Bush transmitted a fiscal year 2005
    budget amendment to Congress that would place the operational
    responsibility for the Office of Emergency Transportation and Crisis
    Management Center from RSPA to OST.

                       IMMEDIATE OFFICE OF THE SECRETARY

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Immediate Office of the Secretary by object
    class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................           1,522
    Other than full-time permanent..........................             364
    Other personnel compensation............................              29
                                                             ---------------
          Total personnel compensation......................           1,915
    Civilian personnel benefits.............................             507
    Travel & transportation of things.......................             209
    Other services..........................................              14
    Supplies and materials..................................              12
                                                             ---------------
          Total.............................................           2,738
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Immediate Office of the Secretary.
        Answer. The assumptions used to develop the Immediate Office of the
    Secretary's budget request for personnel compensation and benefits are
    computed as follows: (1) Salary and related benefits from the previous
    year (fiscal year 2004) are computed based on enacted levels; (2) The
    fiscal year 2004 enacted level is annualized to fund the full year cost
    of the fiscal year 2004 pay raise (4.1 percent for an additional one-
    fourth of a year) and to fully fund the cost of any other personnel
    actions that occurred in fiscal year 2004; (3) The fiscal year 2005
    base is inflated by the proposed fiscal year 2005 pay raise estimated
    at 1.5 percent (for three-fourths of a year). No new staff increases
    are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Immediate Office
    of the Secretary.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................              15              15
    Reimbursable............................               7               7
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Immediate Office of the Secretary compared to levels at the end of each
    quarter of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................              22
    FISCAL YEAR 2002 ACTUAL.................................              21
    FISCAL YEAR 2003 ACTUAL.................................              20
    FISCAL YEAR 2004 ENACTED................................              22
    FISCAL YEAR 2004 ON-BOARD...............................          \1\ 23
    FISCAL YEAR 2005 REQUEST................................              22
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract expenses
    in the Immediate Office of the Secretary.
        Answer. Anticipated contract expenses in the Immediate Office of
    the Secretary consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Subscriptions...........................................         $10,300
    Other small contracts...................................           4,000
    ------------------------------------------------------------------------

                    IMMEDIATE OFFICE OF THE DEPUTY SECRETARY

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of the Deputy Secretary by object
    class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................             534
    Other than full-time permanent..........................             214
    Other personnel compensation............................              40
                                                             ---------------
          Total personnel compensation......................             788
    Civilian personnel benefits.............................             200
    Travel & transportation of things.......................              67
    Other services..........................................              11
    Supplies and materials..................................               4
                                                             ---------------
          Total.............................................           1,070
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Office of the Deputy Secretary.
        Answer. The assumptions used to develop the Office of the Deputy
    Secretary's budget request for personnel compensation and benefits are
    computed as follows: (1) Salary and related benefits from the previous
    year (fiscal year 2004) are computed based on enacted levels; (2) The
    fiscal year 2004 enacted level is annualized to fund the full year cost
    of the fiscal year 2004 pay raise (4.1 percent for an additional one-
    fourth of a year) and to fully fund the cost of any other personnel
    actions that occurred in fiscal year 2004; (3) The fiscal year 2005
    base is inflated by the proposed fiscal year 2005 pay raise estimated
    at 1.5 percent (for three-fourths of a year). No new staff increases
    are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of the
    Deputy Secretary.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................               7               7
    Reimbursable............................               0               0
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Office of the Deputy Secretary compared to levels at the end of each
    quarter of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................               4
    FISCAL YEAR 2002 ACTUAL.................................               6
    FISCAL YEAR 2003 ACTUAL.................................               5
    FISCAL YEAR 2004 ENACTED................................               7
    FISCAL YEAR 2004 ON-BOARD...............................           \1\ 6
    FISCAL YEAR 2005 REQUEST................................               7
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract expenses
    in the Office of the Deputy Secretary.
        Answer. Anticipated contract expenses in the Office of the Deputy
    Secretary consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Subscriptions...........................................          $7,000
    ------------------------------------------------------------------------

                      OFFICE OF THE EXECUTIVE SECRETARIAT

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of the Executive Secretariat by
    object class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................           1,159
    Other than full-time permanent..........................              35
    Other personnel compensation............................              10
                                                             ---------------
          Total personnel compensation......................           1,204
    Civilian personnel benefits.............................             255
    Other services..........................................              39
    Supplies and materials..................................               2
                                                             ---------------
          Total.............................................           1,500
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Office of the Executive Secretariat.
        Answer. The assumptions used to develop the Office of the Executive
    Secretariat's budget request for personnel compensation and benefits
    are computed as follows: (1) Salary and related benefits from the
    previous year (fiscal year 2004) are computed based on enacted levels;
    (2) The fiscal year 2004 enacted level is annualized to fund the full
    year cost of the fiscal year 2004 pay raise (4.1 percent for an
    additional one-fourth of a year) and to fully fund the cost of any
    other personnel actions that occurred in fiscal year 2004; (3) The
    fiscal year 2005 base is inflated by the proposed fiscal year 2005 pay
    raise estimated at 1.5 percent (for three-fourths of a year). No new
    staff increases are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of the
    Executive Secretariat.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................              15              15
    Reimbursable............................               0               0
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Office of the Executive Secretariat compared to levels at the end of
    each quarter of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................              14
    FISCAL YEAR 2002 ACTUAL.................................              15
    FISCAL YEAR 2003 ACTUAL.................................              14
    FISCAL YEAR 2004 ENACTED................................              15
    FISCAL YEAR 2004 ON-BOARD...............................          \1\ 12
    FISCAL YEAR 2005 REQUEST................................              15
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract expenses
    in the Office of the Executive Secretariat.
        Answer. Anticipated contract expenses in the Office of the
    Executive Secretariat consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Enhancements & maintenance of scheduling system.........         $38,600
    ------------------------------------------------------------------------

            OFFICE OF THE UNDER SECRETARY FOR TRANSPORTATION POLICY

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of the Under Secretary for
    Transportation Policy by object class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................           9,779
    Other than full-time permanent..........................             666
    Other personnel compensation............................              56
                                                             ---------------
          Total personnel compensation......................          10,501
    Civilian personnel benefits.............................           2,102
    Travel & transportation of things.......................             207
    Other services..........................................             101
    Supplies and materials..................................               7
                                                             ---------------
          Total.............................................          12,918
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Office of the Under Secretary for Transportation
    Policy.
        Answer. The assumptions used to develop the Office of the Under
    Secretary for Transportation Policy's budget request for personnel
    compensation and benefits are computed as follows: (1) Salary and
    related benefits from the previous year (fiscal year 2004) are computed
    based on enacted levels; (2) The fiscal year 2004 enacted level is
    annualized to fund the full year cost of the fiscal year 2004 pay raise
    (4.1 percent for an additional one-fourth of a year) and to fully fund
    the cost of any other personnel actions that occurred in fiscal year
    2004; (3) The fiscal year 2005 base is inflated by the proposed fiscal
    year 2005 pay raise estimated at 1.5 percent (for three-fourths of a
    year). No new staff increases are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of the
    Under Secretary for Transportation Policy.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................             128             124
    Reimbursable............................               4               4
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Office of the Under Secretary for Transportation Policy compared to
    levels at the end of each quarter of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................             116
    FISCAL YEAR 2002 ACTUAL.................................             121
    FISCAL YEAR 2003 ACTUAL.................................             105
    FISCAL YEAR 2004 ENACTED................................             128
    FISCAL YEAR 2004 ON-BOARD...............................         \1\ 115
    FISCAL YEAR 2005 REQUEST................................             128
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract expenses
    in the Office of the Under Secretary for Transportation Policy.
        Answer. Anticipated contract expenses in the Office of the Under
    Secretary for Transportation Policy consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Translation services....................................         $19,200
    Interpreters............................................          41,000
    Embassy charges.........................................          41,000
    ------------------------------------------------------------------------

                           BOARD OF CONTRACT APPEALS

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Board of Contract Appeals by object class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................             660
    Other personnel compensation............................               1
                                                             ---------------
          Total personnel compensation......................             661
    Civilian personnel benefits.............................             112
    Travel & transportation of things.......................               6
    Other services..........................................              22
                                                             ---------------
          Total.............................................             801
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Board of Contract Appeals.
        Answer. The assumptions used to develop the Board of Contract
    Appeals' budget request for personnel compensation and benefits are
    computed as follows: (1) Salary and related benefits from the previous
    year (fiscal year 2004) are computed based on enacted levels; (2) The
    fiscal year 2004 enacted level is annualized to fund the full year cost
    of the fiscal year 2004 pay raise (4.1 percent for an additional one-
    fourth of a year) and to fully fund the cost of any other personnel
    actions that occurred in fiscal year 2004; (3) The fiscal year 2005
    base is inflated by the proposed fiscal year 2005 pay raise estimated
    at 1.5 percent (for three-fourths of a year). No new staff increases
    are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Board of
    Contract Appeals.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................               6               6
    Reimbursable............................               0               0
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Board of Contract Appeals compared to levels at the end of each quarter
    of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................               5
    FISCAL YEAR 2002 ACTUAL.................................               5
    FISCAL YEAR 2003 ACTUAL.................................               4
    FISCAL YEAR 2004 ENACTED................................               6
    FISCAL YEAR 2004 ON-BOARD...............................           \1\ 5
    FISCAL YEAR 2005 REQUEST................................               6
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract expenses
    in the Board of Contract Appeals.
        Answer. Anticipated contract expenses in the Board of Contract
    Appeals consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Court reporting services for trials.....................          $8,000
    Subscriptions to publications...........................          13,000
    Other small contracts...................................           1,000
    ------------------------------------------------------------------------

             OFFICE OF SMALL AND DISADVANTAGED BUSINESS UTILIZATION

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of Small & Disadvantaged Business
    Utilization by object class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................           1,087
    Civilian personnel benefits.............................             199
    Other services..........................................               4
    Supplies and materials..................................               5
                                                             ---------------
          Total.............................................           1,295
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Office of Small & Disadvantaged Business Utilization.
        Answer. The assumptions used to develop the Office of Small &
    Disadvantaged Business Utilization's budget request for personnel
    compensation and benefits are computed as follows: (1) Salary and
    related benefits from the previous year (fiscal year 2004) are computed
    based on enacted levels; (2) The fiscal year 2004 enacted level is
    annualized to fund the full year cost of the fiscal year 2004 pay raise
    (4.1 percent for an additional one-fourth of a year) and to fully fund
    the cost of any other personnel actions that occurred in fiscal year
    2004; (3) The fiscal year 2005 base is inflated by the proposed fiscal
    year 2005 pay raise estimated at 1.5 percent (for three-fourths of a
    year). No new staff increases are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of Small
    & Disadvantaged Business Utilization.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................              11              11
    Reimbursable............................               0               0
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Office of Small & Disadvantaged Business Utilization compared to levels
    at the end of each quarter of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................               9
    FISCAL YEAR 2002 ACTUAL.................................              10
    FISCAL YEAR 2003 ACTUAL.................................              10
    FISCAL YEAR 2004 ENACTED................................              11
    FISCAL YEAR 2004 ON-BOARD...............................           \1\ 9
    FISCAL YEAR 2005 REQUEST................................              11
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract expenses
    in the Office of Small & Disadvantaged Business Utilization.
        Answer. Anticipated contract expenses in the Office of Small &
    Disadvantaged Business Utilization are as follows:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Working Capital Fund Service Agreements.................          $3,000
    ------------------------------------------------------------------------

                      OFFICE OF INTELLIGENCE AND SECURITY

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of Intelligence and Security by
    object class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................           1,402
    Other than full-time permanent..........................               5
          Total personnel compensation......................           1,407
    Civilian personnel benefits.............................             394
    Travel & transportation of things.......................              72
    Other services..........................................             367
    Supplies and materials..................................              10
    Equipment...............................................              10
                                                             ---------------
          Total.............................................           2,260
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Office of Intelligence and Security.
        Answer. The assumptions used to develop the Office of Intelligence
    and Security's budget request for personnel compensation and benefits
    are computed as follows: (1) Salary and related benefits from the
    previous year (fiscal year 2004) are computed based on enacted levels;
    (2) The fiscal year 2004 enacted level is annualized to fund the full
    year cost of the fiscal year 2004 pay raise (4.1 percent for an
    additional one-fourth of a year) and to fully fund the cost of any
    other personnel actions that occurred in fiscal year 2004; (3) The
    fiscal year 2005 base is inflated by the proposed fiscal year 2005 pay
    raise estimated at 1.5 percent (for three-fourths of a year). No new
    staff increases are proposed for fiscal year 2005.
        Question. How many officials besides the Secretary does the Office
    of Intelligence and Security serve?
        Answer. S-60 provides day-to-day support to the Office of the
    Secretary and to the Operating Administrations by providing
    intelligence, security policy guidance and information. The office
    assures that security issues are identified and properly coordinated
    between the modes and the DHS, TSA and the HSC. The following
    individuals and their senior staffs are served by S-60:
      --Under Secretary of Transportation for Policy
      --General Counsel
      --Assistant Secretary for Transportation Policy
      --Assistant Secretary for Aviation and International Affairs
      --Assistant Secretary for Budget and Programs
      --Assistant Secretary for Administration
      --Assistant Secretary for Governmental Affairs
      --Assistant Secretary for Public Affairs
      --Inspector General
      --Federal Highway Administrator
      --Federal Railroad Administrator
      --Federal Transit Administrator
      --National Highway Traffic Safety Administrator
      --St. Lawrence Seaway Development Corporation Administrator
      --Maritime Administrator
      --Research and Special Programs Administrator
      --Federal Motor Carrier Safety Administrator.
        Question. Please provide a list of all performance measures related
    to the Office of Intelligence and Security.
        Answer. Department's Performance Goals:
      --Ensure the security of people and goods and advance our national
            security interests in support of the National Security
            Strategy; and
      --Rapid Recovery of Transportation in all modes from intentional harm
            and natural disasters.
        In support of these goals, S-60 provides timely intelligence
    briefings and products to senior DOT officials, prepares the Secretary
    and Deputy Secretary for Principals and Deputies meetings on Homeland
    Security, is responsible for all aspects of the Transportation Security
    Policy and is the DOT liaison to the Department of Homeland Security,
    as well as law enforcement and intelligence agencies.
        Question. Does DOT produce intelligence or is the Department only a
    consumer of intelligence?
        Answer. DOT is predominately an Intelligence consumer. However, our
    Intelligence Analysts have produced limited intelligence analytical
    produces directly related to transportation and hazardous materials
    issues. They also work with the Intelligence Community to assure that
    intelligence concerning threats to transportation are identified and
    communicated to those in DOT with a need to know.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of
    Intelligence and Security.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................              15              15
    Reimbursable............................               0               0
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Office of Intelligence and Security compared to levels at the end of
    each quarter of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................              11
    FISCAL YEAR 2002 ACTUAL.................................               8
    FISCAL YEAR 2003 ACTUAL.................................               7
    FISCAL YEAR 2004 ENACTED................................              15
    FISCAL YEAR 2004 ON-BOARD...............................          \1\ 11
    FISCAL YEAR 2005 REQUEST................................              15
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract expenses
    in the Office of Intelligence and Security.
        Answer. Anticipated contract expenses in the Office of Intelligence
    and Security consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Security Liaison........................................        $140,000
    Renovation of Secure Information Facility...............         200,000
    Secure communication at DOT alternate COOP site.........          26,600
    ------------------------------------------------------------------------

                    OFFICE OF THE CHIEF INFORMATION OFFICER

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of the Chief Information Officer by
    object class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................           2,691
    Other than full-time permanent..........................             146
    Other personnel compensation............................              22
                                                             ---------------
          Total personnel compensation......................           2,859
    Civilian personnel benefits.............................             551
    Travel & transportation of things.......................              34
    Other services..........................................          13,278
    Supplies and materials..................................              10
    Equipment...............................................              10
                                                             ---------------
          Total.............................................          16,742
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Office of the Chief Information Officer.
        Answer. The assumptions used to develop the Office of the Chief
    Information Officer's budget request for personnel compensation and
    benefits are computed as follows: (1) Salary and related benefits from
    the previous year (fiscal year 2004) are computed based on enacted
    levels; (2) The fiscal year 2004 enacted level is annualized to fund
    the full year cost of the fiscal year 2004 pay raise (4.1 percent for
    an additional one-fourth of a year) and to fully fund the cost of any
    other personnel actions that occurred in fiscal year 2004; (3) The
    fiscal year 2005 base is inflated by the proposed fiscal year 2005 pay
    raise estimated at 1.5 percent (for three-fourths of a year). No new
    staff increases are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of the
    Chief Information Officer.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................              25              25
    Reimbursable............................               0               0
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Office of the Chief Information Officer compared to levels at the end
    of each quarter of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................              21
    FISCAL YEAR 2002 ACTUAL.................................              22
    FISCAL YEAR 2003 ACTUAL.................................              21
    FISCAL YEAR 2004 ENACTED................................              25
    FISCAL YEAR 2004 ON-BOARD...............................          \1\ 20
    FISCAL YEAR 2005 REQUEST................................              25
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract expenses
    in the Office of the Chief Information Officer.
        Answer. Anticipated contract expenses in the Office of the Chief
    Information Officer consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Capital Planning Investment Control (CPIC) and                $1,900,000
     Enterprise Architecture (EA)...........................
    Local Area Network (LAN) support for the Office of the         1,700,000
     Secretary (OST)........................................
    IT services and user support designed to meet the IT           4,500,000
     requirements of the DOT................................
    Working Capital Fund service agreements.................       3,300,000
    E-gov Initiatives.......................................       1,500,000
    Other small contracts...................................         378,000
    ------------------------------------------------------------------------

           OFFICE OF THE ASSISTANT SECRETARY FOR GOVERNMENTAL AFFAIRS

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of the Assistant Secretary for
    Governmental Affairs by object class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................           1,156
    Other than full-time permanent..........................             860
    Other personnel compensation............................               7
                                                             ---------------
          Total personnel compensation......................           2,023
    Civilian personnel benefits.............................             502
    Travel & transportation of things.......................              36
    Other services..........................................              22
    Supplies and materials..................................               2
    Equipment...............................................               2
                                                             ---------------
          Total.............................................           2,587
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Office of the Assistant Secretary for Governmental
    Affairs.
        Answer. The assumptions used to develop the Office of the Assistant
    Secretary for Governmental Affairs' budget request for personnel
    compensation and benefits are computed as follows: (1) Salary and
    related benefits from the previous year (fiscal year 2004) are computed
    based on enacted levels; (2) The fiscal year 2004 enacted level is
    annualized to fund the full year cost of the fiscal year 2004 pay raise
    (4.1 percent for an additional one-fourth of a year) and to fully fund
    the cost of any other personnel actions that occurred in fiscal year
    2004; (3) The fiscal year 2005 base is inflated by the proposed fiscal
    year 2005 pay raise estimated at 1.5 percent (for three-fourths of a
    year). No new staff increases are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of the
    Assistant Secretary for Governmental Affairs.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................              24              24
    Reimbursable............................               0               0
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Office of the Assistant Secretary for Governmental Affairs compared to
    levels at the end of each quarter of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................              18
    FISCAL YEAR 2002 ACTUAL.................................              21
    FISCAL YEAR 2003 ACTUAL.................................              21
    FISCAL YEAR 2004 ENACTED................................              24
    FISCAL YEAR 2004 ON-BOARD...............................          \1\ 16
    FISCAL YEAR 2005 REQUEST................................              24
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract expenses
    in the Office of the Assistant Secretary for Governmental Affairs.
        Answer. Anticipated contract expenses in the Office of the
    Assistant Secretary for Governmental Affairs consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Gallery Watch Legislative Monitoring....................         $11,000
    Subscriptions...........................................           5,000
    Other small contracts...................................           6,000
    ------------------------------------------------------------------------

                         OFFICE OF THE GENERAL COUNSEL

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of the General Counsel by object
    class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................           9,417
    Other than full-time permanent..........................             596
    Other personnel compensation............................             105
                                                             ---------------
          Total personnel compensation......................          10,118
    Civilian personnel benefits.............................           2,123
    Travel & transportation of things.......................             246
    Printing and reproduction...............................             269
    Other services..........................................           4,143
    Supplies and materials..................................              21
                                                             ---------------
          Total.............................................          16,920
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Office of the General Counsel.
        Answer. The assumptions used to develop the Office of the General
    Counsel's budget request for personnel compensation and benefits are
    computed as follows: (1) Salary and related benefits from the previous
    year (fiscal year 2004) are computed based on enacted levels; (2) The
    fiscal year 2004 enacted level is annualized to fund the full year cost
    of the fiscal year 2004 pay raise (4.1 percent for an additional one-
    fourth of a year) and to fully fund the cost of any other personnel
    actions that occurred in fiscal year 2004; (3) The fiscal year 2005
    base is inflated by the proposed fiscal year 2005 pay raise estimated
    at 1.5 percent (for three-fourths of a year). No new staff increases
    are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of the
    General Counsel.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................             106             100
    Reimbursable............................               0               0
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Office of the General Counsel compared to levels at the end of each
    quarter of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................              81
    FISCAL YEAR 2002 ACTUAL.................................              92
    FISCAL YEAR 2003 ACTUAL.................................             100
    FISCAL YEAR 2004 ENACTED................................             100
    FISCAL YEAR 2004 ON-BOARD...............................         \1\ 102
    FISCAL YEAR 2005 REQUEST................................             100
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract expenses
    in the Office of the General Counsel.
        Answer. Anticipated contract expenses in the Office of the General
    Counsel consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Dockets Management System...............................      $1,035,000
    Integrated Disabilities Hotline Maintenance and                1,235,000
     Operations.............................................
    Technical Assistance Manual and Modal Training Program &         655,000
     Public & Industry Outreach to Assist in Ensuring the
     Air Travel Environment is Free of Discrimination.......
    Administrative Litigation Costs for Enforcement Aviation          50,000
     Economic and Civil Rights Matters......................
    Rulemaking Management System Support....................          97,000
    Regulatory Management System, List Serve & Automated             115,000
     Coordination Maintenance...............................
    E-gov Rulemaking Assessment.............................         800,000
    Other small contracts...................................         156,000
    ------------------------------------------------------------------------

           OFFICE OF THE ASSISTANT SECRETARY FOR BUDGET AND PROGRAMS

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of the Assistant Secretary for
    Budget and Programs by object class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................           5,039
    Other than full-time permanent..........................             285
    Other personnel compensation............................              44
                                                             ---------------
          Total personnel compensation......................           5,368
    Civilian personnel benefits.............................           1,539
    Travel & transportation of things.......................              14
    Other services..........................................           1,952
    Supplies and materials..................................               6
    Equipment...............................................              10
                                                             ---------------
          Total.............................................           8,889
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Office of the Assistant Secretary for Budget and
    Programs.
        Answer. The assumptions used to develop the Office of the Assistant
    Secretary for Budget and Programs' budget request for personnel
    compensation and benefits are computed as follows: (1) Salary and
    related benefits from the previous year (fiscal year 2004) are computed
    based on enacted levels; (2) The fiscal year 2004 enacted level is
    annualized to fund the full year cost of the fiscal year 2004 pay raise
    (4.1 percent for an additional one-fourth of a year) and to fully fund
    the cost of any other personnel actions that occurred in fiscal year
    2004; (3) The fiscal year 2005 base is inflated by the proposed fiscal
    year 2005 pay raise estimated at 1.5 percent (for three-fourths of a
    year). No new staff increases are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of the
    Assistant Secretary for Budget and Programs.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................              54              54
    Reimbursable............................               1               1
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Office of the Assistant Secretary for Budget and Programs compared to
    levels at the end of each quarter of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................              51
    FISCAL YEAR 2002 ACTUAL.................................              44
    FISCAL YEAR 2003 ACTUAL.................................              46
    FISCAL YEAR 2004 ENACTED................................              55
    FISCAL YEAR 2004 ON-BOARD...............................          \1\ 51
    FISCAL YEAR 2005 REQUEST................................              55
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract costs in
    the Office of the Assistant Secretary for Budget and Programs.
        Answer. Anticipated contract expenses in the Office of the
    Assistant Secretary for Budget and Programs consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Departmental Accounting and Financial Information System        $145,000
    Travel Management System................................          20,000
    Accounting Services.....................................         818,000
    CIO IT Support..........................................         365,000
    Payroll Reimbursement to FAA............................         147,000
    FTA Web Support for OST Payroll Reports.................          50,000
    CFO Web Support.........................................          50,000
    CRTS Database Support...................................          20,000
    Bearing Point...........................................         321,000
    Other small contracts...................................          16,000
    ------------------------------------------------------------------------

              OFFICE OF THE ASSISTANT SECRETARY FOR ADMINISTRATION

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of the Assistant Secretary for
    Administration by object class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................           5,825
    Other than full-time permanent..........................             102
    Other personnel compensation............................              67
                                                             ---------------
          Total personnel compensation......................           5,994
    Civilian personnel benefits.............................           1,438
    Travel & transportation of things.......................              35
    Rental payments to GSA..................................           9,147
    Other services..........................................          16,291
    Supplies and materials..................................              30
                                                             ---------------
          Total.............................................          32,935
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the fiscal year 2005 budget request for personnel compensation and
    benefits of the Office of the Assistant Secretary for Administration.
        Answer. The assumptions used to develop the Office of the Assistant
    Secretary for Administration's budget request for personnel
    compensation and benefits are computed as follows: (1) Salary and
    related benefits from the previous year (fiscal year 2004) are computed
    based on enacted levels; (2) The fiscal year 2004 enacted level is
    annualized to fund the full year cost of the fiscal year 2004 pay raise
    (4.1 percent for an additional one-fourth of a year) and to fully fund
    the cost of any other personnel actions that occurred in fiscal year
    2004; (3) The fiscal year 2005 base is inflated by the proposed fiscal
    year 2005 pay raise estimated at 1.5 percent (for three-fourths of a
    year). No new staff increases are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of the
    Assistant Secretary for Administration.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................              66              65
    Reimbursable............................              20              19
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Office of the Assistant Secretary for Administration compared to levels
    at the end of each quarter of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................              67
    FISCAL YEAR 2002 ACTUAL.................................              99
    FISCAL YEAR 2003 ACTUAL.................................              77
    FISCAL YEAR 2004 ENACTED................................              84
    FISCAL YEAR 2004 ON-BOARD...............................          \1\ 69
    FISCAL YEAR 2005 REQUEST................................              84
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract costs in
    the Office of the Assistant Secretary for Administration.
        Answer. Anticipated contract expenses in the Office of the
    Assistant Secretary for Administration consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    MSI Program.............................................        $130,000
    E-Grants................................................         350,000
    Electronic Business Process.............................         943,000
    Online Internet Research................................         110,000
    Security Investigations.................................          85,000
    New Headquarters Building Security......................         130,000
    Training................................................         183,000
    Corporate Recruitment...................................         500,000
    Consolidated Benefits Assistance........................         400,000
    Federal Personnel & Payroll System......................         846,800
    OST Cost to WCF.........................................      10,030,000
    Reimbursements to USCG Clinic...........................          37,000
    Workforce Improvements Initiative.......................         208,000
    DOT-wide Admin and Management Services..................         143,000
    Subscriptions...........................................          28,300
    Procurement Strategy Council............................          45,000
    Electronic Official Personnel Folders...................       1,000,000
    Centralized Workers' Compensation.......................         250,000
    E-training Initiative...................................         750,000
    CPMIS Charges...........................................          85,000
    Federal Employments Information Services................          36,700
    ------------------------------------------------------------------------

                            OFFICE OF PUBLIC AFFAIRS

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of Public Affairs by object class.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                          Object Class                            Amount
    ------------------------------------------------------------------------
    Full-time permanent.....................................           1,120
    Other than full-time permanent..........................             385
    Other personnel compensation............................               9
                                                             ---------------
          Total personnel compensation......................           1,514
    Civilian personnel benefits.............................             387
    Travel & transportation of things.......................              51
    Other services..........................................              69
    Supplies and materials..................................              11
    Equipment...............................................               2
                                                             ---------------
          Total.............................................           2,034
    ------------------------------------------------------------------------

        Question. Please explain in detail the assumptions used to develop
    the request for personnel compensation and benefits of the Office of
    Public Affairs.
        Answer. The assumptions used to develop the Office of Public
    Affairs' budget request for personnel compensation and benefits are
    computed as follows: (1) Salary and related benefits from the previous
    year (fiscal year 2004) are computed based on enacted levels; (2) The
    fiscal year 2004 enacted level is annualized to fund the full year cost
    of the fiscal year 2004 pay raise (4.1 percent for an additional one-
    fourth of a year) and to fully fund the cost of any other personnel
    actions that occurred in fiscal year 2004; (3) The fiscal year 2005
    base is inflated by the proposed fiscal year 2005 pay raise estimated
    at 1.5 percent (for three-fourths of a year). No new staff increases
    are proposed for fiscal year 2005.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of Public
    Affairs.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                 Positions          FTE
    ------------------------------------------------------------------------
    Direct..................................              19              19
    Reimbursable............................               2               2
    ------------------------------------------------------------------------

        Question. Please provide a table listing current staffing for the
    Office of Public Affairs compared to levels at the end of each quarter
    of past 5 fiscal years.
        Answer. The 5-year FTE history is as follows:

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

    ------------------------------------------------------------------------
    FISCAL YEAR 2001 ACTUAL.................................              18
    FISCAL YEAR 2002 ACTUAL.................................              19
    FISCAL YEAR 2003 ACTUAL.................................              16
    FISCAL YEAR 2004 ENACTED................................              21
    FISCAL YEAR 2004 ON-BOARD...............................          \1\ 16
    FISCAL YEAR 2005 REQUEST................................              21
    ------------------------------------------------------------------------
    \1\ As of March 30, 2004.

        Question. Please provide details on anticipated contract costs in
    the Office of Public Affairs.
        Answer. Anticipated contract expenses in the Office of the Public
    Affairs consist of:

    ------------------------------------------------------------------------
                     Description of Services                      Amount
    ------------------------------------------------------------------------
    Associated Press Service................................         $16,000
    News Wire Service.......................................          12,500
    Subscriptions...........................................          10,000
    Transcription Service...................................           5,000
    Bacon's Media Service and Publications..................           6,000
    Video Monitoring Service................................           8,000
    Other small contracts...................................          11,200
    ------------------------------------------------------------------------

                          OST SAFETY PERFORMANCE GOALS

        Question. Why is reducing train accidents and highway-rail
    incidents the only safety area that OST is requesting funds under the
    safety performance goal?
        Answer. The Office of the Secretary addresses all aspects of
    transportation safety through its management of the DOT Operating
    Administrations. The funds requested in the OST budget are for cross-
    cutting programs or specific issues led by OST program offices. DOT's
    ten Operating Administrations address mode-specific safety issues in
    their individual budgets.
        The programs attributed to this objective support the Department's
    overall goal to ``enhance public health and safety by working toward
    the elimination of transportation-related deaths and injuries.'' The
    programs planned for fiscal year 2006 and included in OST's submission
    address two areas of concern. The first is the issue of safe pedestrian
    right-of-way access at rail crossings and the second is improved GPS
    performance for improved transportation safety across all modes,
    including rail. Breaking down this second study across all safety
    performance measures may have diminished its importance and provided a
    presentation that was difficult to follow; therefore, these two areas
    were both attributed to rail safety targets.

               TRANSPORTATION PLANNING, RESEARCH AND DEVELOPMENT

        Question. How much is the Department requesting for PC&B and other
    administrative costs of the Transportation Planning, Research, and
    Development appropriation? Please explain in detail. How does this
    compare to fiscal years 2002, 2003, and 2004?
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                    Fiscal     Fiscal     Fiscal     Fiscal
            Object Class          Year 2002  Year 2003  Year 2004  Year 2005
                                    Actual     Actual     Enacted    Request
    ------------------------------------------------------------------------
    Full-time permanent.........      1,640      1,814      3,202      3,267
    Other than full-time                497        593        147        150
     permanent..................
    Other personnel compensation         29         27          9          9
                                 -------------------------------------------
          Total personnel             2,167      2,434      3,358      3,426
           compensation.........
    Civilian personnel benefits.        388        498        456        499
    Travel & transportation of          219        234         53         54
     things.....................
    Other services..............      8,704     13,158     16,824      6,802
    Supplies and materials/             191        164         19         20
     Equipment..................
                                 -------------------------------------------
          Total.................     11,669     16,489     20,709     10,800
    ------------------------------------------------------------------------

        Question. Administrative costs for studies funded with the
    Transportation Planning, Research, and Development appropriation
    generally account for 35 to 39 percent of the requested amount. Why is
    this much necessary for administration? How does this compare to the
    past 3 fiscal years?
        Answer. The administrative costs in the TPR&D budget consist of
    Personnel Costs and Benefits for 31 FTE. These individuals monitor the
    contract studies and actually do the studies as in-house expertise
    allows. In addition, it provides for payment to the Working Capital
    Fund for TPR&D support services such as the printing and distribution
    of reports and studies and other research related activities. Lastly,
    it provides for other administrative such as travel, office supplies,
    subscriptions, and equipment.
        Question. Please indicate which office of the Office of the
    Secretary will be charged with administration and development of each
    study that is funded by the Transportation Planning, Research, and
    Development (TPR&D) appropriation.
        Answer. The information follows.
    Office of the Assistant Secretary for Transportation Policy
      --Safe and Accessible Transportation for Older and Disabled Americans
      --Safety and Human Factors
      --Navigation Systems (GPS) Protection, Coordination and Policy
            Development
      --Spectrum Protection, Coordination and Policy Development
      --Examination of Policy Instruments to Encourage Sustainability
      --DOT National Freight Action Plan
      --Non-Work Trips and Congestion
      --DOT-HUD Joint Research on Transportation and Regional Development
      --Alternatives for Financing Surface Transportation Improvements
      --Passenger Rail Demand
      --Value Pricing
      --Implementing Successful Intermodal Passenger Terminal Projects
      --Energy, Environment and Climate
      --DOT Long Range Policy Analysis--Phase III
    Assistant Secretary for Aviation and International Affairs
      --Modernization of Aviation Data Systems
      --Study to Determine the Demand for Scheduled Air Transportation
            Carrier Impact of the North American Free Trade Agreement
      --Aviation Economic Model
      --Analysis of Changes in Airline Cost Structures
      --Comprehensive Study on the Role of International Airline Alliance
            in a Potential U.S.-European Union Aviation Area
      --Longer-term Implications of Large-scale Implementation of Regional
            Jet Service
      --Analysis of Small Community Air Service
      --Impact of Taxes and Fees on Demand for Air Services and the
            Financial Condition of the Airline Industry
        Question. Please provide administrative costs of TPR&D in detail.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                    Fiscal     Fiscal     Fiscal     Fiscal
            Object Class          Year 2002  Year 2003  Year 2004  Year 2005
                                    Actual     Actual     Enacted    Request
    ------------------------------------------------------------------------
    Full-time permanent.........      1,640      1,814      3,202      3,267
    Other than full-time                497        593        147        150
     permanent..................
    Other personnel compensation         29         27          9          9
                                 -------------------------------------------
          Total personnel             2,167      2,434      3,358      3,426
           compensation.........
    Civilian personnel benefits.        388        498        456        499
    Travel & transportation of          219        234         53         54
     things.....................
    Other services..............      8,704     13,158     16,824      6,802
    Supplies and materials/             191        164         19         20
     Equipment..................
                                 -------------------------------------------
          Total.................     11,669     16,489     20,709     10,800
    ------------------------------------------------------------------------

        Question. Please indicate which TPR&D studies are new initiatives
    for fiscal year 2005 and which have received previous funding. Also,
    please provide a schedule and cost profile for each study that is
    proposed to be conducted and funded for more than 1 year.
        Answer. The information follows.

    ------------------------------------------------------------------------
                TPR&D Studies                    New            Previous
    ------------------------------------------------------------------------
    Safe and Accessible Transportation     X
     for Older and Disabled Americans.
    Safety and Human Factors.............                   X
    Navigation Systems (GPS) Protection,                    X
     Coordination and Policy Development.
    Spectrum Protection, Coordination and  X
     Policy Development.
    Examination of Policy Instruments to   X
     Encourage Sustainability.
    DOT National Freight Action Plan.....                   X
    Non-Work Trips and Congestion........  X
    DOT-HUD Joint Research on              X
     Transportation and Regional
     Development.
    Alternatives for Financing Surface                      X
     Transportation Improvements.
    Passenger Rail Demand................  X
    Value Pricing........................  X
    Implementing Successful Intermodal     X
     Passenger Terminal Projects.
    Energy, Environment and Climate......                   X
    DOT Long Range Policy Analysis--Phase  X
     III.
    Modernization of Aviation Data                          X
     Systems.
    Study to Determine the Demand for      X
     Scheduled Air Transportation.
    Carrier Impact of the North American   X
     Free Trade Agreement.
    Aviation Economic Model..............                   X
    Analysis of Changes In Airline Cost                     X
     Structures.
    Comprehensive Study on the Role of     X
     International Airline Alliance in a
     Potential U.S.-European Union
     Aviation Area.
    Longer-term Implications of Large-     X
     scale Implementation of Regional Jet
     Service.
    Analysis of Small Community Air        X
     Service.
    Impact of Taxes and Fees on Demand                      X
     for Air Services and the Financial
     Condition of the Airline Industry.
    ------------------------------------------------------------------------

        Each proposed study is to be conducted and funded in 1 year. Only
    factors beyond our control would force a multiyear contract. However,
    as is the nature of research, unexpected or unusual result may suggest
    a follow up contract.
        Question. Please list all TPR&D studies that are included in the
    fiscal year 2005 congressional justification in order of priority or
    importance to OST.
        Answer. This account includes funding for a variety of program
    areas and strategic goals, each of which is a priority for the
    Department. Studies and activities funded by this account provide the
    basis for policy and program decisions that are vital to the mobility
    and security of our Nation.

                                OVERFLIGHT FEES

        Question. Please provide a history of administrative or regulatory
    actions and litigation involving overflight fees since authorized by
    Congress in 1996.
        Answer. The Federal Aviation Reauthorization Act of 1996 directed
    the FAA to establish a fee schedule to recover the costs it incurs in
    providing air traffic control and related services to overflights, that
    is, flights that pass through United States-controlled airspace without
    taking off or landing. See 49 U.S.C.  45301(b)(1). Overflight fees are
    imposed by other countries and are generally collected at higher rates
    than those rates imposed under the FAA's rule, that is, $33.72 per 100
    nautical miles for flights conducted within the Enroute air traffic
    environment and $15.94 per 100 nautical miles for flights conducted
    within the Oceanic air traffic environment. At the direction of
    Congress, revenue secured from overflight fees is to be used to fund
    the Department's Essential Air Service program which, pursuant to
    statutory provisions set forth at 49 U.S.C.  41734(a), subsidizes
    commercial air service to communities in the United States in
    circumstances where without such subsidies no commercial air service
    would exist.
        The FAA's Final Rule, and each of its previous Interim Final Rules,
    has been challenged in judicial proceedings brought by a number of
    foreign air carriers. The D.C. Circuit's April 8, 2003 decision was the
    third time that the Court has reviewed FAA's attempt to implement
    Congress' direction to establish an overflight rule and the third time
    that the Court has found FAA's efforts wanting. See Asiana Airlines v.
    FAA, 134 F.3d 393 (D.C. Cir. 1998) (vacating FAA's original rule
    because it depended, in part, on the use of a Ramsey Pricing model);
    Air Transport Ass'n of Canada v. FAA, 254 F.3d 271 (D.C. Cir.),
    rehearing granted and amended 276 F.3d 599 (D.C. Cir. 2001) (remanding
    FAA's second interim rule for further analysis of whether the FAA's
    costs of providing air traffic control and related services in Enroute
    and Oceanic airspace were the same for overflights and for aircraft
    that take off and land within the United States).
        In response to these judicial decisions, Congress amended section
    45301(b)(1) in 2001 to provide that overflight fees had only to be
    ``reasonably related,'' not ``directly related,'' to the FAA's cost of
    providing air traffic control and related services, that the
    determination of actual costs was committed to the discretion of the
    FAA Administrator, and that the Administrator's cost determination
    could not be subject to judicial review. See Aviation and
    Transportation Security Act, Public Law 107-71, 115 Stat. 597 (November
    19, 2001) (``ATSA'').
        While we believe that Congress intended these provisions to apply
    to the then-current rule, it nevertheless also adopted a general
    savings provision in the ATSA, section 141(d), which provides as
    follows:

        ``This Act shall not affect suits commenced before the date of the
    enactment of this Act . . . In all such suits, proceedings shall be
    had, appeals taken, and judgments rendered in the same manner and with
    the same effect as if this Act had not been enacted.''

        The focus of the savings provision was intended to be ongoing suits
    involving activities that were transferred from the FAA to the
    Transportation Security Administration, and the provision was never
    intended to ``save'' ongoing overflight challenges from application of
    the new standards. But having said this, the plain language of the
    section had, in the Court's view, precisely that effect, and the most
    recent challenge to the overflight rule was ``commenced before the date
    of the enactment'' of ATSA. On that basis the Court found the amendment
    to section 45301 and ATSA, section 141(d) to be inapplicable to the
    current litigation.
        Finding that the more lenient provisions of section 45301(b)(1) as
    amended by ATSA were inapplicable as a result of the savings provision,
    the D.C. Circuit applied the stricter ``directly related'' standard of
    the prior version of the statute and determined that under that
    standard the FAA had not fully supported certain of its conclusions
    concerning the labor costs it incurred in providing air traffic control
    services to overflights. Noting that this was ``the third time . . . we
    find that the FAA disregarded its statutory mandate,'' Slip op. at 2,
    the Court vacated the rule and remanded the matter to the FAA.
        FAA sought panel rehearing in order to clarify the scope of the
    Court's mandate that had set aside the entire rule. After that request
    was summarily rejected, FAA later obtained a 30-day extension of the
    time within which to file a certiorari request. A second 30-day request
    was denied by Chief Justice Rehnquist, thereby rendering the Court of
    Appeals' April 8, 2003 decision final for all purposes, including the
    application of Plaut v. Spendthrift Farms, Inc., 514 U.S. 211 (1995),
    which in certain circumstances bars retroactive application of statutes
    affecting prior judicial decisions.
        In November, 2003 Congress passed the Vision 100--Century of
    Aviation Reauthorization Act, Public Law 108-176, Section 229 of which
    directly addresses the issue of Overflight Fees. The Act was signed
    into law by the President on December 12, 2003. Section 229
    accomplished a number of things.
        First, it provides in subparagraph (a)(1) that Congress
    specifically intended that the more flexible ``reasonably related''
    standard imposed by the Aviation and Transportation Security Act, 49
    U.S.C.  44901, did apply to pending litigation and that that test
    should have been used by the D.C. Circuit in evaluating whether the
    Overflight Fees imposed under the Interim Rule and the Final Rule were
    properly based upon the FAA's costs in providing air traffic control
    services to overflights. Subparagraph (a)(1) also clarifies that
    Congress intended that even in pending litigation the Administrator's
    determination of the FAA's costs for purposes of computing Overflight
    Fees is conclusive and not subject to judicial review. The D.C.
    Circuit's April 8 decision had held these standards to be inapplicable
    to the Interim Final Rule and the Final Rule, which were pending when
    the new standards were enacted.
        Second, subsection (a)(2) specifically provides that ``[t]he
    interim and final rule [adopted by the FAA], including the fees issued
    pursuant to those rules, are adopted, legalized, and confirmed as fully
    to all intents and purposes as if the same had, by prior Act of
    Congress, been specifically adopted, authorized, and directed as of the
    date those rules were originally issued.'' Thus, section 229
    establishes legislatively imposed Overflight Rules and fees that, in
    effect, retroactively and prospectively mirror the rules and fees
    vacated by the D.C. Circuit in its April 8 decision. However,
    notwithstanding the fact that subsection (a)(2) adopts the FAA's
    Interim Rule and Final Rule ``as of the date those rules were
    originally issued, [i.e., May 30, 2000 and August 13, 2001,
    respectively]'' subsection (a)(3) states that all of subsection (a)
    ``applies to fees assessed after November 19, 2001 [i.e. the date on
    which the Aviation and Transportation Security Act was enacted] and
    before April 8, 2003 [i.e. the date of the D.C. Circuit's most recent
    decision on this matter] . . .''.
        The United States is still evaluating the effect of section 229 of
    Vision 100 on the D.C. Circuit's April 8, 2003 decision. Section 229
    also requires that FAA hold consultations with overflight operators
    concerning international aspects of the overflight rule and report to
    Congress on issues raised by the D.C. Circuit's April 8, 2003 decision.
    FAA is pursuing these matters.
        Question. What is the current status of litigation related to
    overflight fees?
        Answer. Section 45301 of title 49, United States Code (as amended
    by section 273 of the Federal Aviation Reauthorization Act of 1996
    (Public Law 104-264)) authorizes the collection of user fees for
    services provided by the FAA to aircraft that neither take off nor land
    in the United States, known as overflight fees. The FAA's regulations
    implementing 49 U.S.C. 45301 have been in litigation since 1997.
        Following the court's decision in Air Transport Association of
    Canada v. Federal Aviation Administration, 323 F.3d 1093, (April 8,
    2003), Congress, in Section 229 of the Vision 100--Century of Aviation
    Reauthorization Act, (Public Law 108-176), legislatively adopted the
    FAA's final rule relating to overflight fees as of the date on which
    each rule was initially issued. Congress directed the FAA's
    Administrator to defer collecting new overflight fees until the
    Administrator has reported to Congress responding to the issues raised
    by the court in Air Transport Association of Canada v. Federal Aviation
    Administration, and consults with users and other interested parties
    regarding the consistency of the overflight fees with the international
    obligations of the United States. Vision 100 was signed into law by the
    President on December 12, 2003.
        While negotiations and consultations concerning the FAA's
    overflight fees regulations are ongoing, it is reasonable for the
    Department to rely on such funds for the Essential Air Service program
    in fiscal year 2005 because the Department will have addressed the
    requirements in Sec. 229(b) before the start of fiscal year 2005. With
    such requirements met, the Department will be authorized to collect
    overflight fees, and funding for the EAS program will be available.
        Question. Have the overflight fees that were collected but were
    tied up in litigation been spent?
        Answer. No. Because of the litigation these fees have been held in
    a special account by the FAA in case they need to be refunded.
        Question. Are there any legal or other restrictions to prevent the
    funds that were collected previously from overflight fees from being
    spent?
        Answer. Yes. Although at present there is no legal prohibition
    precluding the use of these funds, the Administrator's Order, which
    releases these funds, will not be final until October 4, 2004, assuming
    no appeal is filed.
        Question. Are there any legal or other restrictions to prevent the
    funds that were collected previously from overflight fees from being
    spent?
        Answer. Yes. There is a significant degree of uncertainty at the
    present time as to how much of the currently collected overflight fees
    will ultimately remain available for spending.

                             ESSENTIAL AIR SERVICE

        Question. How much funding in the EAS program was carried over at
    the end of fiscal years 2002 and 2003?
        Answer. The total funds carried over for fiscal year 2002 and
    fiscal year 2003 were $12.4 million and $7.5 million, respectively.
        Question. Based on current obligation rate for the Essential Air
    Service program, what will the unobligated balance of funds be at the
    end of fiscal year 2004?
        Answer. We anticipate that we will have obligated all funding
    available by the end of fiscal year 2004, leaving no unobligated
    balance.
        Question. Please explain in detail the proposal to restructure the
    Essential Air Service program.
        Answer. We are proposing a fundamental change in the way that the
    government supports transportation services to rural America. As you
    may know, the EAS program subsidizes scheduled air services to
    communities that received scheduled service at the time of
    deregulation--25 years ago. Although there have been tremendous changes
    in the industry since then, the program has remained static. For too
    long, many communities--there are a few exceptions--have taken air
    service for granted as an entitlement and done little or nothing to
    help make the service successful. Requiring a modest contribution
    should energize civic officials and business leaders at the local and
    State levels to encourage use of the service, and, as stakeholders in
    their service, the communities will become key architects in designing
    their specific transportation package.
        Accordingly, the President's Budget proposes some reforms. For the
    most isolated communities, we would continue to subsidize air service
    to the extent of 90 percent of the total subsidy required. Communities
    that are within a close drive of major airports would qualify for
    subsidies constituting 50 percent of the total costs for providing
    surface transportation. Specifically, communities within: (a) 100
    driving miles of a large or medium hub airport, (b) 75 miles of a small
    hub, or (c) 50 miles of a non-hub with jet service would not qualify
    for subsidy for air service. (Some EAS communities are very close to
    small hubs but maintain their standing in the program because the
    nearby airport does not meet the medium-hub threshold.)
        At all other subsidized EAS communities, we would offer an array of
    options, including paying for 75 percent of the cost of the traditional
    EAS-type scheduled service. In addition, we would work with the
    communities and State DOT's to procure charter service, single-engine,
    single-pilot service, regionalized service or ground transportation in
    cases where they seem to be more responsive to communities' needs.
        All service would be subject to budget limitations ($50 million).
        Question. If any communities would no longer be eligible for
    Essential Air Service funding if the Department's proposal is enacted
    into law, please identify those communities for the record.
        Answer. There is no way of knowing if, and if so how many,
    communities would not be eligible for EAS funding. The reason is that
    we do not know how many communities will be unwilling to contribute to
    the costs of providing their air service. While we believe that $50
    million would be sufficient to provide air service to all communities
    that are willing to contribute, in the highly unlikely event that all
    communities were willing to contribute, some of the lesser-isolated
    communities would not receive funding. Table I attached shows all of
    the communities and their required contribution levels assuming that
    every community contributes its required share.
        Question. The Congressional Justification indicates that $1,300,000
    will be used to pay salaries and administrative costs for staff to
    administer the Essential Air Service program. Please breakdown in
    greater detail and compare to the past 3 fiscal years.
        Answer. The information follows.

                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                                            Fiscal Year  Fiscal Year
                            Object Class                          Fiscal Year  Fiscal Year      2004         2005
                                                                  2002 Actual  2003 Actual    Enacted      Request
    ----------------------------------------------------------------------------------------------------------------
    Full-time permanent.........................................          871          920          947          958
    Other personnel compensation................................            4            5            0            0
                                                                 ---------------------------------------------------
          Total personnel compensation..........................          876          925          947          958
    Civilian personnel benefits.................................          169          173          180          183
    Travel & transportation of things...........................            1            0           15           16
    Other services..............................................          240          121          121          124
    Supplies and materials/Equipment............................           10            4           20           21
    Grants, subsidies, & contributions..........................       99,470      105,726      100,717       48,699
                                                                 ---------------------------------------------------
          Total.................................................      100,765      106,949      102,000       50,000
    ----------------------------------------------------------------------------------------------------------------

        Question. Please provide the number of on-board staff and FTE
    requested, indicating direct and reimbursable, for staff who administer
    the EAS program compared to fiscal years 2003 and 2004.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                               Fiscal
                                             Year 2005    Fiscal     Fiscal
                                                        Year 2004  Year 2003
                                             Requested    Enacted    Actual
    ------------------------------------------------------------------------
    Direct.................................         10  .........  .........
    Reimbursable...........................  .........         10         10
    ------------------------------------------------------------------------

        Question. What office or operating administration is responsible
    for writing and implementing and collecting the overflight fees?
        Answer. The Federal Aviation Administration.
        Question. Are any of the legislative changes proposed to the EAS
    program in the budget request authorized by Public Law 108-176?
        Answer. The legislative changes proposed in the fiscal year 2005
    Budget Request for the Essential Air Service (EAS) program do not rely
    on the EAS amendments made to chapter 417 of title 49, United States
    Code (Transportation), by Public Law 108-176 (December 12, 2003).
        Question. If Congress does not enact the legislative changes to the
    EAS program, what is the full cost to continue the program to all
    current communities in fiscal year 2005?
        Answer. The EAS budget is driven by a number of exogenous factors,
    such as fuel prices, the health and structure of the major carriers,
    and aircraft fleet decisions made by regional carriers generally to
    upsize to larger aircraft. The single biggest uncertainty is how many
    last carriers serving an EAS community will file a notice to suspend
    service, thus triggering a hold-in and first-time subsidy. Our best
    estimate is that $120 million would be required for fiscal year 2005 if
    no changes are made.

                             AVIATION DATA SYSTEMS

        Question. Does the request for $800,000 complete the third phase of
    the modernization of Aviation Data Systems?
        Answer. The $800,000 will be used to begin the process of designing
    and building the new data system which will collect, validate, and
    disseminate the re-designed airline traffic data to reduce the
    reporting burden on the airlines and increase the timeliness, accuracy,
    and utility of the data which is mission-critical for government
    agencies, airlines, airports, and other commercial aviation
    stakeholders. The construction and implementation of this system will
    complete the modernization of the airline traffic data.
        Question. What specific aviation data is being updated? What new
    data will be collected? Will any data that had been collected no longer
    be collected?
        Answer. The traffic data modernization changes the reporting
    carrier, reporting frequency, and a number of reported data elements
    for the Origin-Destination Survey of Airline Passenger Traffic (14 CFR
    Part 241 Section 19-7). It also changes some reported data elements for
    the Schedule T-100 Air Carrier Traffic and Capacity Data by Nonstop
    Segment and On-Flight Market Segment (14 CFR Part 217 and 14 CFR Part
    241) to ensure greater statistical correlation between the revised
    Origin-Destination Survey and the revised Schedule T-100. Current
    traffic statistics no longer adequately measure the size, scope, and
    operating and competitive structures of the scheduled passenger airline
    industry. The changes will eliminate ambiguity, reduce manual data
    collection by reporting carriers, minimize reporting exemptions, expand
    the breadth and scope of information collected, and modernize the
    methods of data submission and dissemination to capture fundamental
    industry changes.
        Question. Who will have access to the Aviation Data Systems?
        Answer. All aviation stakeholders inside and outside the government
    will have access to the data. These data are particularly important to
    airlines who use it in planning their businesses and to all government
    agencies responsible for making policy decisions which affect this
    critical industry.
        Question. Do any non-governmental entities have to pay for access
    to the aviation data systems?
        Answer. Currently, some data is made available free over the
    Internet, while more granular data is sold on tapes for a very nominal
    fee to cover the costs of production. The new system will make the data
    much more accessible to a broad range of non-governmental users using
    web-based technologies. In its Notice of Proposed Rulemaking, the
    Department will solicit comments from all stakeholders on the data
    products they would like to see produced from the raw data collected
    under the new system.
        Question. What are the benefits of the new system?
        Answer. The traffic data modernization will support the Secretary's
    obligation to be responsive to the needs of the public and disseminate
    information to make it easier to adapt the air transportation system to
    the present and future needs of the commerce of the United States.
    These data are fundamentally important for both public policy and
    airline business planning. The proposed changes to the Origin-
    Destination Survey will eliminate ambiguity, reduce manual data
    collection by reporting carriers, minimize reporting exemptions, expand
    the breadth and scope of information collected, and modernize the
    methods of data submission and dissemination to capture fundamental
    industry changes. Data enhancements will enable the Department and
    other stakeholders to better assess changes in traffic flows due to
    seasonality, carrier route changes, and carrier preference as well as
    aid the Department in international negotiations. Flight-stage data
    assists carriers in business planning, demand forecasting, and new
    service impact analyses.

     OFFICE OF THE ASSISTANT GENERAL COUNSEL FOR AVIATION ENFORCEMENT AND
                                  PROCEEDINGS

       Question. Please breakdown the request for the Office of the
    Assistant General Counsel for Aviation Enforcement and Proceedings in
    greater detail.
        Answer. Our fiscal year 2005 request can be found in Organizational
    Excellence and Global Connectivity goals. See page 1 of Organizational
    Excellence and pp. 12 and 21 of Global Connectivity goals of the
    submission.
        In addition to personnel cost and benefits needed, funding in
    fiscal year 2005 is requested to operate and maintain the
    Congressionally-mandated disabilities hotline ($1,235,000), to continue
    a cell phone contract to ensure the appropriate individuals can be
    reached to assist hotline operators address time-sensitive disability
    related air travel complaints ($15,000), to complete the technical
    assistance manual and model training program and to conduct outreach to
    assist in ensuring the air travel environment is free of discrimination
    ($655,000), and to protect air travelers through enforcement of
    aviation economic and civil rights matters in administrative hearings
    ($50,000).
        Question. Please describe any new initiatives and the corresponding
    costs that are requested for the Office of the Assistant General
    Counsel for Aviation Enforcement.
        Answer. The Office of the Assistant General Counsel for Aviation
    Enforcement (Aviation Enforcement Office) is not requesting any funds
    for new initiatives. All of the funds being requested for fiscal year
    2005 will be used to continue work that began in prior years.

                       EMPLOYEE TRAINING AND DEVELOPMENT

        Question. Please compare the request for employee training and
    development for OST and each operating administration to the past 4
    fiscal years.
        Answer. The information follows.

                                            EMPLOYEE TRAINING AND DEVELOPMENT
                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                        Fiscal Year     Fiscal Year     Fiscal Year     Fiscal Year
                                                        2002 Actual     2003 Actual    2004 Estimate   2005 Estimate
    ----------------------------------------------------------------------------------------------------------------
    Office of the Secretary.........................  ..............           1,892             256             198
    Federal Aviation Administration.................         144,806         157,477         153,929         158,398
    Federal Highway Administration..................           3,898           3,985           4,579           4,579
    Federal Motor Carrier Safety Administration.....           5,518           3,903           5,486           4,223
    National Highway Traffic Safety Admininistration             223             227             227             275
    Federal Railroad Administration.................             909           1,086           1,513           2,216
    Federal Transit Administration..................             460             475             485             505
    St. Lawrence Seaway Development Corp............              51              55              56              90
    Research and Special Programs Admin.............             173             190             190             237
    Office of the Inspector General.................             425             389             447             447
    Surface Transportation Board....................              41              41              28              28
    Bureau of Transportation Statistics.............             237             148             341             200
    Maritime Administration.........................             373             238             350             350
                                                     ---------------------------------------------------------------
          Total.....................................         157,114         170,106         167,887         171,746
    ----------------------------------------------------------------------------------------------------------------
    NOTE.--Excludes Working Capital Fund.

                                ATTORNEYS IN DOT

        Question. Please provide a table displaying the number of attorneys
    in the Office of General Counsel and in each modal administration
    compared to the last 3 fiscal years.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                               Fiscal     Fiscal     Fiscal
                                             Year 2004  Year 2003  Year 2002
    ------------------------------------------------------------------------
    Federal Aviation Administration........        184        195        188
    General Counsel, Office of the                  64         68         69
     Secretary.............................
    Federal Highway Administration.........         45         47         46
    Federal Railroad Administration........         31         30         30
    Federal Transit Administration.........         25         25         27
    Maritime Administration................         25         23         22
    National Highway Traffic Safety Admin..         22         26         24
    Federal Motor Carrier Safety Admin.....         33         25         29
    Research & Special Programs Admin......         19         17         18
    Inspector General......................          5          4          4
    St. Lawrence Seaway Development Corp...          1          1          1
    Bureau of Transportation Statistics....          1          1          1
    ------------------------------------------------------------------------

        Question. How many attorneys in the Office of General Counsel work
    primarily on aviation-related issues?
        Answer. There are 34 attorneys who work primarily on aviation-
    related issues.
        Question. Do the all the attorneys in the operating administrations
    report to the modal administrator or to the Department's General
    Counsel?
        Answer. The attorneys in the operating administrations do not
    report to the Department's General Counsel. However, the General
    Counsel exercises professional supervision, including coordination and
    review, over the legal work of the legal offices of the Department.
        Question. Who approves the performance appraisals for attorneys
    paid by the operating administrations?
        Answer. The performance appraisals are approved by each operating
    administration.
        Question. Please provide the number of attorneys on staff for each
    operating administration and Office of the Secretary.
        Answer. The information follows.

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

    ------------------------------------------------------------------------
    Federal Aviation Administration.........................             184
    Federal Highway Administration..........................              45
    Federal Railroad Administration.........................              31
    Federal Transit Administration..........................              25
    Maritime Administration.................................              25
    National Highway Traffic Safety Admin...................              22
    Federal Motor Carrier Safety Admin......................              33
    Research & Special Programs Admin.......................              19
    Inspector General.......................................               5
    St. Lawrence Seaway Development Corp....................               1
    Bureau of Transportation Statistics.....................               1
    General Counsel, Office of the Secretary................              64
    ------------------------------------------------------------------------

        Question. For the attorneys involved in aviation issues, how is
    their workload related to the Office of the Assistant Secretary for
    Aviation and International Affairs?
        Answer. Attorneys in the Office of the Assistant General Counsel
    for Environmental, Civil Rights, and General Law (``General Law'')
    provide services on aviation-related issues generally do so for clients
    in the Office of the Assistant Secretary for Aviation and International
    Affairs. Primary clients are those in the immediate Office of the
    Assistant Secretary, and the Offices of Aviation Analysis and Planning
    and Special Projects. The advice and services provided by these
    attorneys related most routinely to the Essential Air Service Program;
    to Small Community air Service grants; on competition plans, congestion
    management, and other aviation policy matters; and on slot exemption
    and air carrier compensation issues. However, there can be a myriad of
    other circumstances on which an ``aviation-related'' issue may arise in
    the Office of the Assistant Secretary for Aviation and International
    Affairs on which assistance is sought from the attorneys in General
    Law. These include matters involving appropriations, finance, national
    security, Freedom on Information matters, statutory interpretation,
    bankruptcy, intellectual property, and environmental law.
        Under a long-standing understanding with the Department of Justice,
    litigation attorneys defend, with little or no DOJ assistance, aviation
    decisions of the Department when they are challenged in judicial
    proceedings. We also work with the Office of the Assistant Secretary
    for Aviation and International Affairs by providing policy guidance on
    legal matters and drafting assistance, particularly in areas of
    antitrust issues and computer reservation system and travel agent
    matters.
        The attorneys in the Office of the Assistant General Counsel for
    Regulation and Enforcement coordinate the Office of the Secretary's
    review of modal proposed and final regulations, including aviation
    regulations. Accordingly, they work closely with the Office of the
    Assistant Secretary for Aviation and International Affairs to ensure
    full review of aviation regulatory documents. Frequently, the attorneys
    in this office will meet with personnel from Aviation and International
    Affairs about any regulatory questions or issues that arise, and it is
    their job to try to resolve outstanding issues before a document is
    submitted for Secretarial review. In addition, the Office of the
    Assistant Secretary for Aviation and International Affairs generates
    its own rules, on matters such as computer reservations systems and
    access for disabled travelers. When it does so, our office provides
    drafting assistance as well as coordination and review. More broadly,
    the attorneys in this office provide legal advice as necessary on
    regulatory matters to the Office of the Assistant Secretary for
    Aviation and International Affairs.
        The Legislative Office provides support for the Assistant Secretary
    for Aviation and International Affairs through the preparation and
    clearance through DOT and OMB of all Departmental legislative proposals
    intended to carry out the Department's initiatives and programs related
    to aviation activities. It also administers DOT/OMB clearance of the
    Assistant Secretary's testimony before Congress on aviation issues.
    Finally, they provide DOT/OMB clearance of comments or revisions
    originating with the Assistant Secretary's office on all draft
    legislation, draft testimony and draft reports to Congress that may
    originate within other Departments but are related to aviation issues.
        Attorneys in the Aviation Enforcement Office work in close
    consultation with staff in the Office of the Assistant Secretary for
    Aviation and International Affairs to develop policies to improve air
    service and/or access to the commercial aviation system as well as
    policies on anticompetitive practices in the airline industry. The
    Aviation Enforcement Office also assists the Office of the Assistant
    Secretary for Aviation and International Affairs in its review of U.S.
    air carrier requests for economic authority, and provides assistance on
    public charter and fitness issues.
        Attorneys provide legal support and facilitation of the
    Department's international aviation program goals implemented by the
    Assistant Secretary for Aviation and International Affairs, including
    transportation negotiations with foreign countries, international
    aviation trade matters, international transportation safety and
    security, international trade, international aviation pricing, Alaska
    and international mail rates, aviation licensing and regulatory matters
    involving international transportation, aviation war risk insurance
    issues, international aviation sanctions, and interdiction of illegal
    drugs and other contraband. At international transportation
    negotiations, the Office provides legal support as a member of the U.S.
    Delegation, legal advisor and chief drafter of all documents.

                     ACCESSIBILITY FOR ALL AMERICA PROGRAM

        Question. Please compare the request for the Accessibility for All
    America program to the past 3 fiscal years.
        Answer. The Department's request for Accessibility for All America
    the past 3 fiscal years is as follows:

    ----------------------------------------------------------------------------------------------------------------
                                                                        Fiscal Year     Fiscal Year     Fiscal Year
                                                                           2002            2003            2004
    ----------------------------------------------------------------------------------------------------------------
    Accessibility for All America...................................      $2,494,000      $2,101,000      $2,533,000
    ----------------------------------------------------------------------------------------------------------------

        Question. Please breakdown the request for the Accessibility for
    All America program in greater detail.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                                Fiscal Year
                                                               2005 Request
    ------------------------------------------------------------------------
    Disabilities Hotline including cell phone contract......      $1,250,000
    Tech Assist. Manual, Outreach & Translations............         655,000
                                                             ---------------
          TOTAL.............................................       1,905,000
    ------------------------------------------------------------------------

        In fiscal year 2005, the office is requesting funding to continue
    operating and maintaining the congressionally mandated toll-free
    hotline to educate and assist individuals in resolving disability-
    related air travel problems. Funding is also requested to complete work
    on the statutorily-required ACAA technical assistance manual (including
    a model training program), to continue ensuring that a wider audience
    can use the materials DOT's Aviation Enforcement Office issues (e.g.,
    translating documents into Braille and Spanish) and to encourage
    collaborative policymaking and enhanced cooperation between carriers,
    airport, and civil rights organizations by convening air travel civil
    rights forums.
        Question. Please identify which initiatives under the accessibility
    program are new, which continue efforts started in previous years, and
    what the base funding is for each on-going effort.
        Answer. The Office of the General Counsel is not requesting any
    funds for new initiatives related to the accessibility program. All of
    the funds being requested for fiscal year 2005 are necessary to
    continue the ongoing work set out below.

    ----------------------------------------------------------------------------------------------------------------
                                                        Fiscal Year     Fiscal Year     Fiscal Year     Fiscal Year
                                                           2002            2003            2004       2005 (Request)
    ----------------------------------------------------------------------------------------------------------------
    Integrated Disabilities Hotline.................        $870,000        $870,015      $1,239,807      $1,250,000
    Technical Assistance Outreach and Translations..  ..............         669,366  ..............         655,000
    ----------------------------------------------------------------------------------------------------------------

        Base funding of $870,000 was provided in fiscal year 2002 to
    develop and implement a congressionally-mandated toll-free hotline,
    staffed 7 days per week from 7 a.m. until 11 p.m. to answer questions
    from disabled air travelers and assist such persons in resolving
    disability-related air travel problems in ``real time.'' Implementation
    occurred in December 2003 which allowed the program to remain funded at
    the same level through the remaining three quarters of fiscal year
    2003. The $1,239,807 enacted for fiscal year 2004 and the $1,235,000
    requested for fiscal year 2005 are necessary to maintain the hotline
    for each full fiscal year.
        Base funding of $669,366 was provided in fiscal year 2003 to: (1)
    begin work on a comprehensive technical assistance manual as well as a
    model training program to guide airlines in assisting air travelers
    with disabilities and to educate airlines about the proscription
    against discrimination based on race, national origin, ethnicity, or
    religion in air travel; (2) translate civil rights-related publications
    into different languages; and (3) encourage collaborative policymaking
    between carriers and civil rights organizations by convening air travel
    civil rights forums. These developmental efforts continued in fiscal
    year 2004 but a reduced funding level for the office forced a
    redirection of base funds elsewhere. Now implemented, the program needs
    base funding of $655,000 in fiscal year 2005 to maintain these
    essential elements of the program.

                           BOARD OF CONTRACT APPEALS

        Question. In fiscal year 2004, the Board of Contract Appeals
    continued to hear Coast Guard appeals pursuant to a Memorandum of
    Understanding between DOT and the Department of Homeland Security. Will
    the board continue to hear Coast Guard appeals in fiscal year 2005?
        Answer. Yes, the Board of Contract Appeals will continue to hear
    Coast Guard appeals in fiscal year 2005 pursuant to a Memorandum of
    Understanding between DOT and the Department of Homeland Security, in
    addition to other new appeals from the Department of Homeland Security.
        Question. Has DHS established its own board of contract appeals?
        Answer. No, the Department of Homeland Security has not established
    its own board of contract appeals. The Memorandum of Understanding
    between the Department of Transportation and the Department of Homeland
    Security provides for the DOT Board of Contract Appeals to hear and
    decide all appeals arising out of DHS contracts.
        Question. Does DHS reimburse DOT for hearing DHS appeals?
        Answer. Yes, DHS reimburses DOT for hearing DHS appeals.
        Question. Please breakdown in greater detail the Board's workload
    that is projected for fiscal year 2005 compared to the past 4 fiscal
    years.
        Answer. The information follows.

                      STATISTICAL BREAKDOWN OF BOARD'S WORKLOAD--FISCAL YEAR 2001-FISCAL YEAR 2004
    ----------------------------------------------------------------------------------------------------------------
                                                                          Appeals                      On Docket End
                               Fiscal Year                               Received     Appeals Closed  of Fiscal Year
    ----------------------------------------------------------------------------------------------------------------
    2001............................................................              29              50              66
    2002............................................................              21              32              55
    2003............................................................              29              36              48
    2004............................................................         \1\ 277         \2\ 120  ..............
    ----------------------------------------------------------------------------------------------------------------
    \1\ Total appeals received in fiscal year 2004 to 6/18/04.
    \2\ Total appeals closed in fiscal year 2004 to 6/18/04.

        The Board anticipates approximately 25 percent more appeals in
    fiscal year 2005 as a result of hearing and deciding Department of
    Homeland Security appeals.

                      OFFICE OF INTELLIGENCE AND SECURITY

        Question. Please compare the budget request for the Office of
    Intelligence and Security with the past 5 fiscal years.
        Answer. The information follows.

                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                                                  Amount
    ------------------------------------------------------------------------
    Fiscal Year 2000.......................................          $1,574
    Fiscal Year 2001.......................................           3,494
    Fiscal Year 2002.......................................           1,321
    Fiscal Year 2003.......................................      \1\ [2,100]
    Fiscal Year 2004.......................................           2,225
    Fiscal Year 2005.......................................           2,260
    ------------------------------------------------------------------------
    \1\ The Office was funded through a reimbursable agreement with DHS/TSA.

        Question. Are any of the funds requested for the Office of
    Intelligence and Security to provide for the physical security of the
    Secretary or DOT building?
        Answer. No, both the physical security of the Secretary and the
    security of the DOT buildings are budgeted under the Office of the
    Assistant Secretary for Administration.
        Question. Please list the positions that are vacant in the Office
    of Intelligence and Security and provide the grade, title, and PC&B
    cost for each position.
        Answer. The SES position of Director of the Office and Intelligence
    and Security has been filled with a temporary assignment of a Senior
    Executive within the department.
        There are currently two specialist vacancies in the Office (see
    below). The duties of these positions are currently being discharged by
    details of employees from the Operating Administrations while
    recruitment actions are underway.

    ------------------------------------------------------------------------
              Position Title                    Grade            PC&B Cost
    ------------------------------------------------------------------------
    National Security Specialist......  GS-14...............        $132,000
    Border Security Specialist........  GS-14...............         132,000
    ------------------------------------------------------------------------

        Question. The Congressional Justification states that DOT was the
    lead Federal agency for 7 of 17 transportation security tasks outlined
    by DHS and HSC for Operation Liberty Shield. What tasks did DOT lead?
    What were the other tasks and what agency was directed to lead them?
    Did DOT have a role on the tasks that it did not lead?
        Answer. Operation Liberty Shield and the specific agency tasks were
    classified at the Secret level. The seven transportation security tasks
    that DOT was the lead Federal agency on related to rail security,
    hazardous materials (3 tasks), pipeline security, trucking and highway
    security and aviation.
        DOT's support role in the other tasks was limited primarily to
    information dissemination and communications. However, the Homeland
    Security Advisory System (HSAS) was raised to ``Orange'' in conjunction
    with Liberty Shield. This required DOT to complete dozens of additional
    tasks to implement the heightened posture.
        Question. The report to the Committee regarding the Office of
    Intelligence and Security states that DOT has explicit statutory
    security responsibilities in the areas of HAZMAT, national airspace,
    and rail transportation. What specific statutory security
    responsibilities in aviation were not transferred to the Transportation
    Security Administration?
        Answer. FAA has responsibility under 49 U.S.C., Transportation,
    Subtitle VII, Aviation Programs, for the security of its own
    operations, including the National Airspace System; briefly, FAA is
    responsible for ensuring that its personnel, its air navigation
    facilities, and other parts of its integrated system of air traffic
    control are protected from unlawful interference.
        Question. Does DOT have any explicit statutory security
    responsibilities in the area of transit?
        Answer. No.
        Question. What was the Department's role in the TOPOFF exercises?
        Answer. Since transportation has been identified as a key target
    for terrorists, DOT has played a key role in the TOPOFF exercises, all
    of which had transportation events as part of their transportation
    scenarios. The Department's authority to restrict or close airspace,
    redirect rail, vehicle and motor carrier traffic and coordinate with
    mass transit authorities, have been exercised in all TOPOFF scenarios.
        In addition, the DOT is a permanent member of the Homeland Security
    Interagency Incident Management Group (IIMG). The IIMG is the body
    which is responsible for providing recommendations to the Secretary of
    DHS for: the threat countermeasure needed, response to an attack, and
    recovery measures in the event of an attack or natural disaster.

                        FEDERAL PERSONNEL PAYROLL SYSTEM

        Question. Has the Department completed the migration to the Federal
    Personnel Payroll System (FPPS)?
        Answer. No. The non-FAA components of DOT are scheduled to migrate
    to FPPS in April 2005 and the FAA is scheduled to migrate in October
    2005.
        Question. Are any funds requested in the fiscal year 2005 budget
    request for development, implementation, integration, or other costs
    associated with FPPS?
        Answer. No funds are currently in the fiscal year 2005 budget
    request because the migration to FPPS was originally scheduled to be
    completed in fiscal year 2004. Due to greater than anticipated FPPS
    system changes to meet DOT requirements, the schedule, with OMB
    approval, was adjusted to implement the non-FAA components of DOT in
    April 2005 and the FAA in October 2005. The system changes and schedule
    shift resulted in an unfunded requirement of $9.4 million for fiscal
    year 2005.
        Question. Can any savings be identified with the deployment of
    FPPS?
        Answer. No specific savings have been identified at this time.

       OFFICE OF THE ASSISTANT SECRETARY FOR AVIATION AND INTERNATIONAL
                                    AFFAIRS

        Question. What percentage of the workforce and budget request for
    the Assistant Secretary for Aviation and International Affairs is
    related to international aviation activities? How much of the workload
    is related to aviation economic issues and regulations? What work in
    each area is expected in fiscal year 2005? How does this compare to
    fiscal year 2003 and fiscal year 2004?
        Answer. Approximately 15 percent of the work of the Office of
    Aviation Analysis is devoted to international aviation activities, with
    all of the work performed in the Economic and Policy Analysis Division.
    The international aviation activities performed by this Division are
    all related to aviation economic issues and regulations. Work expected
    in fiscal year 2005 depends largely on changes and developments in the
    airline industry which is undergoing its most fundamental restructuring
    since airline deregulation. Similar to work completed in fiscal year
    2003 and fiscal year 2004, it will likely include a variety of in-depth
    analysis of emerging industry issues to ensure that DOT policy remains
    consistent with commercial developments in such areas as congestion,
    competition policy, airport access and business practices, mergers,
    international alliances, and applications for antitrust immunity for
    joint ventures between United States and foreign carriers. As the
    United States moves toward a multilateral approach to air service
    agreements, an understanding of long-term trends in the airline
    industry's operating and competitive structures will be required to
    formulate effective negotiating strategies to ensure pro-competitive
    liberalization. The Office of Aviation Analysis within the Office of
    Aviation and International Affairs performs all domestic and
    international aviation analysis for the Department's aviation economic
    policies.
        Under the Emergency Support Function No. 1 (ESF-1) of the National
    Response Plan, the Department is the lead agency in mobilizing
    transportation in order to respond to and/or assist in recovery from a
    terrorist attack or natural disaster.

                    OFFICE OF THE CHIEF INFORMATION OFFICER

        Question. Please provide a table to breakout projects funded under
    the object class ``other costs'' in the Office of the CIO and compare
    to the fiscal year 2004 enacted level after the across the board
    rescission. Also, please include the amount that was rescinded pursuant
    to Division H, sec. 168(b) of Public Law 108-199.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                Fiscal Year     Fiscal Year
                      Other                        2004            2005
    ------------------------------------------------------------------------
    Office of the Chief Information Officer         $500,728      $1,000,360
     (OCIO) pay, benefits, unfilled
     positions..............................
    Gartner Group memberships...............          56,525         200,000
    Information Technology (IT) Services             400,000          50,000
     Assessment.............................
    Travel/Training/Supplies................          90,000          90,000
    ------------------------------------------------------------------------
    The OCIO Fiscal Year 2004 rescission was 0.59 percent=$44,250.

        Question. Please provide a table of all charge backs to the modes
    to supplement the CIO budget.
        Answer. The Chief Information Officer's (CIO's) budget is not
    supplemented through charge backs to the modes. In fiscal year 2004,
    reprogramming authority was requested to cover a funding shortfall in
    the enterprise IT security program area that affected security coverage
    across DOT Operating Administrations. The table below reflects that
    reprogramming allocation.

                          IT SECURITY FISCAL YEAR 2004 CHARGES FOR TCI RESPONSE CENTER AND C&A
    ----------------------------------------------------------------------------------------------------------------
                                                                TCI
                                          Email    Percent    Response    No. of   Percent      C&A        OA TOTAL
                                          Count                Center    Systems
    ----------------------------------------------------------------------------------------------------------------
    Reprogram Summary:
        BTS............................      286      0.49       $6,281  .......      0.00  ...........       $6,281
        FAA............................   45,046     77.47     $989,247       69     55.65     $556,452   $1,545,699
        FHWA...........................    4,826      8.30     $105,983        3      2.42      $24,194     $130,176
        FMCSA..........................    1,465      2.52      $32,173        1      0.81       $8,065      $40,237
        FRA............................    1,041      1.79      $22,861  .......      0.00  ...........      $22,861
        FTA............................      691      1.19      $15,175       18     14.52     $145,161     $160,336
        MARAD..........................      648      1.11      $14,231        7      5.65      $56,452      $70,682
        NHTSA..........................    1,524      2.62      $33,468        3      2.42      $24,194      $57,662
        OIG............................      471      0.81      $10,344  .......      0.00  ...........      $10,344
        RSPA...........................      654      1.12      $14,362        1      0.81       $8,065      $22,427
        SLSDC..........................       88      0.15       $1,933  .......      0.00  ...........       $1,933
        VOLPE..........................    1,409      2.42      $30,943       22     17.74     $177,419     $208,362
                                        ----------------------------------------------------------------------------
          Reprogram Subtotal...........   58,149    100.00   $1,277,000      124    100.00   $1,000,000   $2,277,000
    OST Additional Contribution........  .......  ........  ...........  .......  ........  ...........     $200,000
          Total Reprogramming and OST    .......  ........  ...........  .......  ........  ...........   $2,477,000
           Contribution................
    ----------------------------------------------------------------------------------------------------------------

                                  IT SECURITY

        Question. The Office of the Chief Information Officer is requesting
    funds to implement a proactive cyber threat intelligence capability.
    Will this be accomplished by contracting for such services?
        Answer. The Transportation Cyber Incident Response Center (TCIRC),
    which serves as DOT's proactive cyber threat intelligence capability,
    is staffed by contractor personnel and managed by a Federal security
    specialist. The TCIRC is a 24/7/365 capability required by OMB Circular
    A-130, Appendix III and is designed to detect, react and respond to
    cyber security incidents that may occur throughout the Department's
    critical IT infrastructure and systems.
        Question. How much of the $5,227,000 that has been requested for
    information technology security is for program administration?
        Answer. For fiscal year 2005, $428,556 has been budgeted for IT
    Security program administration.
        Question. Please provide a detailed breakdown of the scope of work
    and budget for each program that the CIO has planned or executed for
    fiscal year 2003, 2004, and 2005 in the area of IT security.
        Answer. The following table presents the fiscal year 2003, fiscal
    year 2004, and fiscal year 2005 IT Security Budget by program, scope
    and funding.

                         FISCAL YEAR 2003-FISCAL YEAR 2005 IT SECURITY BUDGET & FUNDING REQUEST
    ----------------------------------------------------------------------------------------------------------------
                                                                                                         Fiscal Year
                      Program                               Scope              Fiscal Year  Fiscal Year      2005
                                                                               2003 Budget  2004 Budget    Request
    ----------------------------------------------------------------------------------------------------------------
    Federal Information Management Security     Information Technology (IT)     $1,131,266  ...........  ...........
     Act (FISMA).                                security reviews, reporting
                                                 and remediation planning as
                                                 required by the 2002
                                                 Electronic Government Act,
                                                 Title Ill.
    Transportation Cyber Incident Response      Provides 24-7-365 cyber           $793,360   $1,630,675   $3,727,000
     Center (TCIRC).                             security incident response
                                                 to prevent, detect, and
                                                 respond to incident within
                                                 the DOT IT infrastructure as
                                                 required by OMB Circular A-
                                                 130, Appendix III.
    Certification and Accreditation (C&A).....  C&A provides an acceptable      $1,213,905   $1,391,325  ...........
                                                 level of assurance that
                                                 security controls are
                                                 implemented and functioning
                                                 properly to ensure that IT
                                                 systems and infrastructure
                                                 operate appropriately. The
                                                 authorization (accreditation
                                                 is required by OMB Circular
                                                 A-130,.
    Common Access Architecture (CAA)..........  To define DOT requirements        $549,832      $25,000   $1,000,000
                                                 for an enterprise-wide CAA
                                                 that includes physical and
                                                 logical access, smart cards,
                                                 public key infrastructure
                                                 (PKI)--digital signature and
                                                 e-Authentication in order to
                                                 meet Federal standards and
                                                 to ensure a more secure DOT.
    Enterprise Security Project  (ESP)........  Contractor support for         ...........  ...........     $500,000
                                                 security compliance reviews,
                                                 training and awareness,
                                                 security assessments.
                                                                              --------------------------------------
          Total...............................  .............................   $3,688,363   $3,047,000   $5,227,000
    ----------------------------------------------------------------------------------------------------------------

        Question. What is the projected out-year funding requirement by
    fiscal year for IT security?
        Answer. Out-year security funding requirements are: fiscal year
    2006--$5,354,000; fiscal year 2007--$17,344,000; fiscal year 2008--
    $9,942,000; and fiscal year 2009--$12,348,000.
        The spike in fiscal year 2007 funding requirements is due to the
    full implementation of the Common Access Architecture in the new DOT
    headquarters building.
        Question. Please provide a list of major contractors supporting the
    CIO's IT security program, including consulting services, the project
    they are supporting, and the value of each contract.
        Answer. The following is a list of the current major contractors
    supporting the CIO's IT security program.

                  MAJOR CONTRACTOR SUPPORTING OCIO IT SECURITY
    ------------------------------------------------------------------------
                Contractor                     Program             Value
    ------------------------------------------------------------------------
    SAIC..............................  Certification &             $958,322
                                         Accreditation (C&A).
    Mainstay..........................  C&A.................        $347,000
    Breakwater........................  Transportation Cyber        $190,000
                                         Incident Response
                                         Center (TCIRC).
    Indus.............................  TCIRC...............        $164,000
    Foundstone........................  TCIRC...............         $85,000
    Working Capital Fund..............  TCIRC...............      $1,302,678
                                                             ---------------
          Total.......................  ....................      $3,047,000
    ------------------------------------------------------------------------

        Question. The Congressional Justifications state that the IT
    security program will result in savings of more than $5 million per
    year. When will the savings materialize and are the savings recurring?
    Will the savings occur at the Departmental level or will they be spread
    among the operating administrations? If these cost-avoidance measures
    are realized by the modes, how much will each one save?
        Answer. DOT will recognize savings through cost avoidance in
    several areas, through: (1) centralized purchasing and implementation
    of enterprise-wide hardware/software; and (2) the provision of
    scaleable security services. In terms of hardware/software, the DOT
    OCIO has already made a one-time purchase of a security tool that has
    resulted in a savings of $140,768 in software licensing costs for the
    Department's modes. These types of cost avoidance are expected to
    continue and grow as more enterprise-wide license agreements are
    initiated for security software and tools. The DOT OCIO is also
    implementing DOT-wide TCIRC operations. If these TCIRC functions were
    to be performed centrally, it is estimated that each mode would avoid
    approximately $774,076 per year in recurring software and contract
    labor costs beginning with full implementation of a centralized IT
    security program.
        Question. What is the CIO doing to protect critical IT systems from
    attack and what contingency planning is occurring to ensure business
    continuity in an emergency?
        Answer. The CIO protects critical systems through a multi-faceted
    security program. DOT OCIO has implemented an enterprise wide
    vulnerability remediation program to ensure that all critical systems
    are protected from cyber attack. Weekly vulnerability scans are
    performed using an automated vulnerability scanner. The results of
    these scans are reviewed monthly by the Chief Information Security
    Officer. Currently, staff provides follow-up on patch installation as
    well as other remediation efforts. Follow-up consists of assisting
    modal IT staff with the patch installations and remediation steps. The
    OCIO has established a compliance review program to ensure that
    implementation of security controls, including business continuity
    plans, for mission critical systems is in accordance with Federal and
    departmental regulations. The OCIO has established a disaster recovery
    site to support communications capabilities for all modes in the event
    of emergency situations.

                           COMMON ACCESS ARCHITECTURE

        Question. Is the $1,000,000 that the CIO is requesting for the
    Common Access Architecture being augmented by funding requests in the
    operating administrations for fiscal year 2005? If so, please provide a
    table indicating how much each operating administration is requesting?
        Answer. The CIO is not requesting augmentation of funding for the
    Common Access Architecture from the Operating Administrations.
        Question. Please provide a detailed profile, including past and
    current efforts, of the scope of work, milestone schedule, and
    anticipated costs for the Common Access Architecture project.
        Answer. The scope of the Common Access Architecture (CAA) project
    is to define Department of Transportation (DOT) requirements for an
    enterprise-wide CAA that includes physical and logical access, smart
    cards, public key infrastructure (PKI)-digital signature and e-
    Authentication in order to meet Federal standards and to ensure a more
    secure DOT environment. With $574,832 funding to date, DOT has
    completed a CAA requirements analysis, a detailed business case, a
    communication plan, architecture, an implementation approach document,
    and is implementing two proof of concept projects for the CAA. The
    fiscal year 2005 budget request of $1 million will integrate several
    applications into CAA authentication in order to provide proof of
    concept for application authentication and to refine integration
    support procedures so that other DOT applications encounter as smooth a
    transition as possible as the application owners begin to migrate their
    applications to CAA authentication. Once the proof of concept is
    established from the controlled pilots, the project will result in a
    common access architecture that: (1) improves physical access control;
    (2) improves logical access control; and (3) interoperates with the
    federated identify authentication services. DOT's strategy for this
    program is to fund the program from the DOT OCIO budget through fiscal
    year 2009, and then to collaborate with operating administrations to
    establish fiscal year 2010 and beyond requirements. The following
    project plan highlights CAA milestones and schedule.

        Question. What is the projected out-year funding requirement by
    fiscal year for the Common Access Architecture project?
        Answer. The information follows.

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

    ------------------------------------------------------------------------
    Fiscal year 2006........................................      $2,530,000
    Fiscal year 2007........................................      11,590,000
    Fiscal year 2008........................................       2,980,000
    Fiscal year 2009........................................       4,690,000
    ------------------------------------------------------------------------

        Fiscal year 2007 includes costs for full implementation of CAA
    infrastructure within the Department.
        Question. How much of the requested amount will be allocated to
    studies of biometrics and other technologies?
        Answer. In fiscal year 2005, $25,000 is allocated for studies of
    biometrics and other technologies. DOT expects to minimize the cost of
    studies based on the previous work that has been accomplished in these
    areas by government and industry and to adopt existing Federal
    standards where practical.
        Question. How much of the request for Common Access Architecture is
    for program administration?
        Answer. The fiscal year 2005 Common Access Architecture request for
    program administration is $400,000.

                            ENTERPRISE ARCHITECTURE

        Question. Please provide a list of major contractors and consulting
    services supporting the CIO's Enterprise Architecture Implementation
    project and the value of each contract.
        Answer. The information follows:
      --Contractor.--Bowhead Transportation Company, Inc.
      --Services.--Enterprise Architecture Sustainment and Expert Support.
      --Contract Value (Fiscal Year 2004 Funds).--$544,552.
        DOT's current EA support task order with Bowhead Transportation
    Company concludes on September 30, 2004. A new contract has not been
    awarded. The fiscal year 2004 contract value was $544,552 for
    Enterprise Architecture sustainment and expert support. And while
    fiscal year 2005 work will be similar, the proposed contract dollar
    value will be for full effort funding at $1,933,918, rather than the
    significantly reduced amount required by the fiscal year 2004 funding
    level.
        Question. How much of the request for Enterprise Architecture
    Implementation is for program administration?
        Answer. In fiscal year 2004, $306,082 has been requested for
    Enterprise Architecture (EA) Implementation program administration.
        Question. Please provide a schedule and funding profile for each
    project identified under Enterprise Architecture Implementation.
        Answer. The Enterprise Architecture implementation activities are
    all interrelated and do not lend themselves to being broken out as
    discrete projects. The DOT Enterprise Architecture Program Management
    Office (EAPMO), supported by contracted expert consultants, will be
    evaluating numerous business needs/requirements of the Department in
    support of the IT infrastructure consolidation efforts for the move to
    the new DOT Headquarters Building, as well as the attainment of the
    goals set forth in our EA Modernization Blueprint. These project
    activities are scheduled to run throughout fiscal year 2005. Estimated
    funding to provide support for these activities in fiscal year 2005 is
    $2,515,000. For individual project and scheduling details for the
    Enterprise Architecture Implementation for fiscal year 2005, please see
    the proposed DOT fiscal year 2004 IT Roadmap v.8 below.

    ------------------------------------------------------------------------
                 Activity                     Start              Finish
    ------------------------------------------------------------------------
    IT GOVERNANCE....................  10/1/04...........  9/1/05
    Develop Fiscal Year 2006           10/1/04...........  11/11/04
     Implementation Plan.
    Departmental IRB--Investments....  10/15/04..........  10/15/04
    Conduct Fiscal Year 2004           10/20/04..........  11/26/04
     Implementation Plan Outreach
     Mtgs with OA's.
    Departmental IRB--Control........  11/12/04..........  11/12/04
    Departmental IRB--Investments....  1/14/05...........  1/14/05
    ARB..............................  1/11/05...........  1/11/05
    Departmental IRB--Control Review.  2/11/05...........  2/11/05
    ARB..............................  2/8/05............  2/8/05
    CIO Council......................  2/3/05............  2/3/05
    Initial Fiscal Year 2006 IT        3/1/05............  3/31/05
     Budget Guidance.
    ARB..............................  3/8/05............  3/8/05
    CIO Council......................  3/10/05...........  3/10/05
    ARB..............................  4/12/05...........  4/12/05
    CIO Council......................  4/7/05............  4/7/05
    Departmental IRB--Investments....  4/15/05...........  4/15/05
    Revised Fiscal Year 2006 IT        5/3/05............  5/3/05
     Budget Guidance.
    ARB..............................  5/10/05...........  5/10/05
    CIO Council......................  5/5/05............  5/5/05
    Departmental IRB--Control........  5/13/05...........  5/13/05
    ARB..............................  6/14/05...........  6/14/05
    CIO Council......................  6/2/05............  6/2/05
    Departmental IRB--Control........  7/15/05...........  7/15/05
    ARB..............................  7/12/05...........  7/12/05
    CIO Council......................  7/7/05............  7/7/05
    ARB..............................  8/9/05............  8/9/05
    CIO Council......................  8/4/05............  8/4/05
    Departmental IRB--Investments....  8/26/05...........  8/26/05
    CIO Council......................  9/1/05............  9/1/05
    IT CPIC--SELECT..................  10/27/04..........  9/6/05
    Update Screening and Scoring       10/27/04..........  11/30/04
     Criteria.
    Update Prioritization Process....  11/3/04...........  12/3/04
    Update IT Portfolio Management     11/3/04...........  12/31/04
     Process and Analysis.
    Conduct Fiscal Year 2006 Passback  11/26/04..........  2/1/05
     and Revised Exhibit 53 Support.
    Provide Preliminary Fiscal Year    4/5/05............  5/30/05
     2007 Portfolio Support.
    Present Proposed Fiscal Year 2007  5/16/05...........  5/20/05
     Portfolio to OA IRB.
    OA's Submit Exhibit 300s to OST/   6/1/05............  6/1/05
     OCIO.
    Present Proposed Fiscal Year 2006  6/13/05...........  6/17/05
     Portfolio Development &
     Prioritization to ARB/CIO
     Council.
    Conduct Capital Planning Working   6/1/05............  6/30/05
     Group (CPWG) Internal Reviews of
     Fiscal Year 2007 Exhibit 300s.
    OA's Submit Exhibit 53's to OST/   7/29/05...........  7/29/05
     OCIO.
    Submit Final Exhibit 300's to OST/ 8/12/05...........  8/12/05
     OCIO.
    Present Final Fiscal Year 2007     8/26/05...........  8/26/05
     Portfolio to Departmental IRB
     for Approval Prior to OMB
     Submission.
    Submit Final Exhibit 300's and     9/6/05............  9/6/05
     53's to OMB.
    IT CPIC--CONTROL.................  10/18/04..........  7/15/05
    OA Initiative Owners Submit        10/18/04..........  10/22/04
     Control Data.
    Departmental IRB/Control Review..  11/12/04..........  11/12/04
    Quarterly Portfolio Assessment...  12/31/04..........  1/13/05
    OA Initiative Owners Submit        1/24/05...........  1/28/05
     Control Data.
    Departmental IRB/Control Review..  2/11/05...........  2/11/05
    Quarterly Portfolio Assessment...  3/31/05...........  4/13/05
    OA Initiative Owners Submit        4/25/05...........  4/29/05
     Control Data.
    Departmental IRB/Control Review..  5/13/05...........  5/13/05
    Quarterly Portfolio Assessment...  7/1/05............  7/7/05
    OA Initiative Owners Submit        7/1/05............  7/7/05
     Control Data.
    Departmental IRB/Control Review..  7/15/05...........  7/15/05
    IT CPIC--EVALUATE................  2/1/05............  7/6/05
    Revise PIR Methodology Based on    2/1/05............  2/28/05
     Pilot Results.
    Conduct PIR for Major System.....  4/4/05............  5/17/05
    Conduct PIR for Major System.....  6/2/05............  7/6/05
    eCPIC............................  4/4/05............  4/15/05
    Conduct Refresher User Training..  4/4/05............  4/15/05
    OST/OCIO TRAINING................  11/26/04..........  7/11/05
    Supplemental OA Budget Support     11/26/04..........  1/31/05
     for OMB Passback Issues, as
     needed.
    Enterprise Architecture (BRM,      2/25/05...........  2/25/05
     PRM, TRM, DRM, SRM).
    Earned Value Analysis............  2/21/05...........  2/23/05
    Risk Management..................  4/4/05............  4/4/05
    IT Security, Cost Estimating       4/18/05...........  4/18/05
     Tool, Privacy Impact Assessments.
    Lifecycle Costs/Alternative        2/14/05...........  2/14/05
     Analysis.
    Performance Measurement..........  3/7/05............  3/11/05
    OMB Update Training--Revisions to  7/11/05...........  7/11/05
     A-11.
    ENTERPRISE ARCHITECTURE (EA).....  10/1/04...........  9/30/05
    Update 2005 Communications Plan..  10/1/04...........  11/1/04
    Update Technical Reference Model.  10/1/04...........  11/18/04
    Update DOT EA Methodology........  10/1/04...........  11/16/04
    Provide Guidance to OA's on EA     12/2/04...........  2/1/05
     Baseline, Target, and
     Implementation Plan Development.
    Update EA Repository.............  1/3/05............  1/31/05
    Identify Fiscal Year 2007          1/3/05............  1/31/05
     Enterprise Initiatives.
    Provide Input for OMB Exhibit      2/1/05............  6/16/05
     300s.
    Develop Baseline/Target for all    3/1/05............  6/29/05
     Cross Cutting LOB Identified as
     Priority.
    Provide Guidance to OA's to        3/1/05............  6/29/05
     Develop Their Baseline/All
     Mission LOBs.
    OA's Deliver Mission Baselines &   6/30/05...........  6/30/05
     Targets.
    Develop High Level Implementation  4/4/05............  9/2/05
     Timelines for Cross-Cutting LOBs.
    OA's Deliver High Level            6/1/05............  9/2/05
     Implementation Timelines.
    Executive Briefing Highlighting    8/1/05............  9/30/05
     EA Plans Developed.
    ------------------------------------------------------------------------

                          DOT INVESTMENT REVIEW BOARD

        Question. How does the Department Investment Review Board (IRB)
    decide which topics or issues to focus on?
        Answer. The DOT Office of the CIO (OCIO) maintains a system
    inventory database containing current performance, schedule, cost,
    measurement, risk and other information for all major IT projects.
    Also, basic information on non-major IT projects for which the
    Operating Administrations (OA) have primary responsibility is
    maintained in the database. The investment system information is the
    same as required by Federal Information Security Management Act
    (FISMA). The Departmental IRB conducts control reviews on at risk IT
    projects at least on a quarterly basis throughout the year. Projects
    are selected for review based upon one or more of the following
    factors:
      --Criticality to achieving Presidential Management Agenda goals.
      --Criticality to achieving DOT strategic goals and objectives.
      --High dollar value.
      --High risks.
      --Significant performance variances, and schedule or cost variances
            exceeding 10 percent.
      --Overall need for executive level management attention to ensure
            project success.
      --Need for information to support planned project funding requests.
        On an annual basis, the Departmental IRB and its staff performs a
    comprehensive select review of all IT projects in support of the budget
    process. This ensures that the DOT-wide portfolio of IT projects meet
    modernization goals and contains an appropriate and affordable mix of
    projects that will assure accomplishment of DOT missions. The DOT CIO
    makes recommendations to the IRB to consolidate redundant IT spending
    amongst the Operating Administrations and to establish cross-cutting
    initiatives that will benefit multiple agencies.
        Question. Please provide a list of projects that the IRB reviewed
    during fiscal year 2003 and to date in fiscal year 2004.
        Answer. The DOT IRB reviewed the following projects in fiscal year
    2003:
      --Artemis (Tread Act Implementation)--NHTSA
      --Delphi (Departmental Financial System)--OST
      --Federal Personnel and Payroll System (FPPS)--OST
      --Geospatial--BTS
      --Safety Monitoring and Reporting Tool (SMART)--RSPA
      --Intermodal Transportation Data Base (ITD)--BTS
      --National Transit Database (NTD)--FTA
        The DOT IRB reviewed the following projects as of the second
    quarter of fiscal year 2004:
      --Artemis (Tread Act Implementation)--NHTSA
      --Financial Management Information System (FMIS)--FHWA
      --Motor Carrier Management Information System (MCMIS)--FMCSA
      --ASDE-X (Surface Surveillance)--FAA
      --Operational and Supportability Implementation System (OASIS)--FAA
      --Wide Area Augmentation System (WAAS)--FAA
        Question. In the last fiscal year, what percentage of the overall
    IT projects did the IRB actively review?
        Answer. In fiscal year 2003, the Departmental IRB reviewed 2
    percent ($34.2 million) of the Department's Major IT Projects ($1,715.5
    million). In fiscal year 2004 to date, the Departmental IRB reviewed
    6.4 percent ($105.2 million) of the Department's Major IT Projects
    ($1,642.1 million).
        Question. What are the costs of the IT projects that the IRB
    reviewed? What are the total costs by operating administration of all
    IT modernization occurring in the department?
        Answer. In fiscal year 2003, the Departmental IRB reviewed 2
    percent ($34.2 million) of the Department's Major IT Projects ($1,715.5
    million). In fiscal year 2004 to date, the Departmental IRB reviewed
    6.4 percent ($105.2 million) of the Department's Major IT Projects
    ($1,642.1 million). The following table identifies the total cost by
    Operating Administration (OA) for all IT modernization occurring in the
    Department for fiscal year 2004 and fiscal year 2005 as reported by the
    OAs in their OMB exhibit 53 submissions.

                     DEVELOPMENT/MODERNIZATION/ENHANCEMENT (DME) BY OA FROM EXHIBIT 53 IT PORTFOLIO
                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                               Fiscal Year                 Fiscal Year
                          Organization                           2004 IT      DME 2004       2005 IT      DME 2005
    ----------------------------------------------------------------------------------------------------------------
    BTS.....................................................          5.6           0.8           7.1           2
    FAA.....................................................      2,459.70      1,512.20      2,298.70      1,315.50
    FHWA....................................................         42.3           3.7          63.5           2.2
    FMCSA...................................................         24.3          15            25.9          13.3
    FRA.....................................................         19.1           3.5          12.3           1.9
    FTA.....................................................         12.9   ............         15.6   ............
    MARAD...................................................          9.8           6.5          11.3           7.5
    NHTSA...................................................         23             3.3          20.4           3
    OIG.....................................................          1     ............          0.9   ............
    OST.....................................................        216.8          80.5         300.8         136.7
    RSPA....................................................         19.1           1.7          18.8           1.2
    SLSDC...................................................          0.1   ............          0.1   ............
    STB.....................................................          1.5   ............          1.6   ............
    WCF.....................................................          2     ............          2     ............
                                                             -------------------------------------------------------
          TOTAL.............................................      2,837.2       1,627.2       2,779         1,483.3
    ----------------------------------------------------------------------------------------------------------------

        Question. How many IT investment projects did the IRB terminate or
    seriously modify through a corrective action plan?
        Answer. To date, the Departmental IRB has not terminated any
    projects. However, in fiscal year 2003 seven investments (total value
    $37.5 million) were required to take corrective actions based on the
    IRB review. In fiscal year 2004 five (total value $96.8 million) were
    required to take corrective actions. All of these projects have
    accomplished, or are on schedule, with regard to required corrective
    actions.
        Question. In the past, operating administrations have contracted
    with the Volpe Center to develop and define requirements for IT
    systems. What is the assessment of the CIO of Volpe's capability in
    this regard?
        Answer. Volpe performance has been varied. Volpe has had both
    successful and marginal engagements and is changing its contracting and
    management practices to achieve better consistency.
        Question. What guidance, support, or oversight does the CIO provide
    to FAA for facility and equipment acquisition?
        Answer. The CIO performs Exhibit 300 (business Case) review and
    training.
        Question. Do the CIO or the IRB review all of the IT requests
    throughout the Department before the budget is submitted to OMB?
        Answer. Yes. The CIO office conducts reviews of IT requests
    delineated in the budget process. The IRB reviews the final DOT IT
    portfolio and the recommendations made by the CIO each August prior to
    budget submission.
        Question. Does the CIO oversee the IT acquisitions made in the
    Office of Intelligence and Security?
        Answer. No. The CIO's office does not oversee the IT acquisitions
    made in the Office of Intelligence and Security.

                              IT CAPITAL PLANNING

        Question. Are contractors or consulting services used to support
    the CIO's capital planning and investment control (CPIC) process? If
    they are, please provide a list of major contractors, the services
    provided, and the value of each contract.
        Answer. The CIO employs one contractor performing two tasks in
    support of the Departmental CPIC process.
      --Contractor.--Booz-Allen & Hamilton
      --Services Provided.--IT CPIC Process Development and Implementation
      --Contract Value (Fiscal year 2004 funds).--$358,000
      --Contract Value (Fiscal year 2005 planned).--$539,689 (Contract Face
            Amount)
      --Contractor.--Booz-Allen & Hamilton
      --Services Provided.--e-CPIC Software and Database Support
      --Contract Value (Fiscal year 2004 funds).--$63,938
      --Contract Value (Fiscal year 2005 planned).--$75,000 (Planned
            Contract Amount)

                             SECTION 508 COMPLIANCE

        Question. What percentage of DOT websites comply with section 508
    of the Rehabilitation Act?
        Answer. DOT has more than a thousand websites hosting over 2
    million web pages. In 2004, DOT conducted an evaluation on whether its
    most frequently accessed web pages were accessible to people with
    disabilities. Across the Department, the OCIO evaluated the 259 web
    pages most visited by DOT stakeholders. Of the pages tested, 79 percent
    were in compliance. The remaining 21 percent are being remediated by
    webmasters/page owners. DOT plans to expand its Section 508 website
    evaluation program over the next 2 years to determine DOT-wide 508
    compliance as part of the CIO's fiscal year 2005 budget request.

                                  IT SECURITY

        Question. Is the DOT computer system a secure system?
        Answer. DOT has a complex array of integrated and independent
    computer systems in its inventory, many shared within individual
    agencies, and some shared across Operating Administrations. DOT also
    has a complex IT infrastructure supporting the communications
    requirements of its headquarters campus and support for remote
    locations. The DOT computer system and infrastructure environment is
    secure.
        Question. If it is secure, who certifies that it is secure?
        Answer. DOT computer systems go through a formal certification and
    accreditation (C&A) process. Numerous qualified C&A vendors conduct C&A
    review and documentation processes using recognized and approved
    criteria, standards and processes. C&A results are reviewed and signed
    off on by the Government's system owners. The DOT CIO, in compliance
    with Clinger-Cohen, reviews and signs off on the systems' security for
    FISMA.
        Question. What is the annual cost to maintain the system?
        Answer. DOT computer systems maintenance costs vary by system, type
    of maintenance, service provider, software and other attributes,
    including discounts. The fiscal year 2005 budget proposes $1,298.4
    million for the maintenance of all DOT computer systems, with $166.1
    million of that for maintenance of IT Infrastructure. A key benefit of
    the OCIO driven consolidation is to reduce the number of systems,
    components, and thus their maintenance overhead, as well as reduce the
    annual cost to maintain the Departments vast inventory of computer
    systems.
        Question. How many users have access to the system?
        Answer. Nearly 60,000 users have access to DOT systems. Users have
    access based on need and privilege, and include Government and contract
    employees. Some portions of the DOT network are accessed by several
    tens of thousands of users daily, typically for email and data entry
    and retrieval. OCIO security and common access architecture initiatives
    are key components in maintaining the integrity of DOT systems through
    standardized user access and security requirements and access
    monitoring.
        Question. Please describe in detail any contract or consulting
    expenses anticipated under the CIO's strategic management effort.
        Answer. The following table describes detail concerning the CIO's
    fiscal year 2005 strategic management effort spend plan estimates
    regarding contractor support:

                     DEVELOPMENT/MODERNIZATION/ENHANCEMENT (DME) BY OA FROM EXHIBIT 53 IT PORTFOLIO
                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                               Fiscal Year                 Fiscal Year
                          Organization                           2004 IT      DME 2004       2005 IT      DME 2005
    ----------------------------------------------------------------------------------------------------------------
    BTS.....................................................          5.6           0.8           7.1           2
    FAA.....................................................      2,459.70      1,512.20      2,298.70      1,315.50
    FHWA....................................................         42.3           3.7          63.5           2.2
    FMCSA...................................................         24.3          15            25.9          13.3
    FRA.....................................................         19.1           3.5          12.3           1.9
    FTA.....................................................         12.9   ............         15.6   ............
    MARAD...................................................          9.8           6.5          11.3           7.5
    NHTSA...................................................         23             3.3          20.4           3
    OIG.....................................................          1     ............          0.9   ............
    OST.....................................................        216.8          80.5         300.8         136.7
    RSPA....................................................         19.1           1.7          18.8           1.2
    SLSDC...................................................          0.1   ............          0.1   ............
    STB.....................................................          1.5   ............          1.6   ............
    WCF.....................................................          2     ............          2     ............
                                                             -------------------------------------------------------
          TOTAL.............................................      2,837.2       1,627.2       2,779         1,483.3
    ----------------------------------------------------------------------------------------------------------------

        In fiscal year 2003, the Departmental IRB reviewed 2 percent ($34.2
    million) of the Department's Major IT Projects ($1,715.5 million). In
    fiscal year 2004 to date, the Departmental IRB reviewed 6.4 percent
    ($105.2 million) of the Department's Major IT Projects ($1,642.1
    million). The following table identifies the total cost by Operating
    Administration (OA) for all IT modernization occurring in the
    Department for fiscal year 2004 and fiscal year 2005 as reported by the
    OAs in their OMB exhibit 53 submissions.

                                IT CONSOLIDATION

        Question. Please breakdown in greater detail the request for the
    CIO's IT consolidation and operations support.
        Answer. The following provides a work breakdown structure (WBS) for
    the $4,200,000 budget request.

    ------------------------------------------------------------------------
                                                                   Funds
                            WBS Item                             Requested
    ------------------------------------------------------------------------
    Network/Server Co-Location..............................      $1,500,000
    Storage Consolidation...................................       1,000,000
    Digital Document Management.............................         500,000
    Contract/Support Consolidation..........................         300,000
    Centralized Call Center/Full Remedy Implementation......         300,000
    Standard Desktop Image Implementation...................         300,000
    Centralized Help Desk...................................         300,000
    ------------------------------------------------------------------------

        Question. There appears to be a considerable amount of duplication
    in the justifications for IT consolidation and operations support with
    other projects in the CIO's request--for example, ``updated and new IT
    Security Policies,'' ``user identification and password
    administration,'' and IT improvements related to the planned move to
    the new DOT headquarters building. Are these examples and others in the
    justification distinct from similar projects in IT security, Enterprise
    Architecture Implementation, and other activities?
        Answer. The Office of the CIO (OCIO) performs two distinct
    missions. One is policy and compliance and the other is operational.
    The specific missions are: (1) providing department-wide IT program
    strategy, policy, direction and compliance/oversight; and (2)
    delivering IT services to DOT customers that conform to departmental
    policies (i.e. IT security policies). Both missions are complementary
    but have different scopes and investment requirements. Both require
    funding as included in our fiscal year 2005 request.
        In the OCIO fiscal year 2005 justification, any apparent
    duplication of efforts between these two missions results when
    performance outputs are defined for: (1) the development of strategies
    and policies for a particular activity (e.g., update IT security
    policies, IT consolidation), and (2) for the operational implementation
    of the same activity. Each phase of the activity is categorized and
    managed separately within the OCIO's office depending on if it is in
    the development stage or the implementation/operational stage. None of
    these activities are duplicative; rather, they are distinct phases of
    the same activity. The OCIO's office recognizes the importance of
    managing these phases separately to ensure the most efficient use of
    its resources.
        In providing IT program leadership, the OCIO oversees the
    development of an enterprise architecture or blueprint for future IT
    investments and ensures compliance department-wide. It also provides
    departmental policies and guidance for securing IT systems, monitors
    departmental and operating administration compliance and leads
    strategic projects to improve enterprise security (e.g. the Common
    Access Architecture). Specifically, to ensure compliance with statutory
    requirements for the security of critical networks and systems across
    DOT, the OCIO manages the Transportation Cyber Incident Response Center
    (TCIRC) and department-wide testing of systems. In this enterprise
    security role, the DOT OCIO monitors approximately 500 operational
    networks and systems throughout DOT, to include those within the FAA
    and the CIO-operated infrastructure. Funding has been requested for
    this policy/compliance mission in areas of Enterprise Architecture and
    Enterprise Security.
        In its role as an IT service provider to customers within DOT, the
    OCIO is directly responsible for running approximately 50 systems and
    one backbone network, and makes investments that improve service
    delivery and comply with the enterprise architecture. It also ensures
    that specific OST infrastructure and operational systems are secure
    based on departmental guidelines. Day-to-day operations include such
    diverse activities as implementing network controls, implementing
    software patches, the administration of passwords, installing virus
    software on servers and maintaining disaster recovery capabilities.
        The operational role of the CIO is expanding through the
    consolidation of multiple infrastructures within the DOT headquarters
    building. This effort offers a significant opportunity to improve
    infrastructure security, reduce service costs and facilitate the move
    to a new headquarters building. The Department's Enterprise
    Architecture is providing a basis for building a common operating
    environment (COE) of desktops, servers, and telecommunications. The COE
    will become a one of over 25 components of the Department's enterprise
    architecture. Additionally, the common operating environment will
    improve security through investments in hardware and software to
    centralized security management of the entire infrastructure. Funding
    has be requested for IT operations and consolidation that includes
    investments to improve security of the infrastructure and to align with
    the DOT enterprise architecture.

                                  E-GOVERNMENT

        Question. How much of the funding requested for e-government will
    be transferred to the President's Management Council, Federal CIO, CFO
    and Procurement Executive Councils? How does this compare to fiscal
    year 2002 and fiscal year 2003?
        Answer. In fiscal year 2004, DOT transferred $492,020 to the GSA
    Interagency Council ``Pass-the-Hat'' initiative which supports
    Government-wide financial, information technology, procurement and
    other management innovations, initiatives, and activities as approved
    by the Director of OMB. The councils covered under this initiative for
    fiscal year 2004 are: the CFO Council, the CIO Council, the Federal
    Acquisition Council (FAC) and the Chief Human Capital Officers Council.
        In 2003, DOT paid $690,265 to GSA for this Pass-the-Hat initiative.
        In 2002, DOT also paid $690,265 to GSA for this initiative.

        STRATEGIC MANAGEMENT FISCAL YEAR 2005 CONTRACT SUPPORT ESTIMATES
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------
    GPEA/Forms/Digital Signatures/Records Management........        $115,000
    Privacy Program Contract Services.......................         100,000
    Section 508 Software maintenance/program implementation.          82,000
    Information Collection Burden program support...........          80,000
    Performance Measurement/IT Workforce Planning...........          60,000
                                                             ---------------
          Total.............................................         437,000
    ------------------------------------------------------------------------

        Question. Please breakdown the request for e-government by planned
    activity.
        Answer. DOT continues to use technology to save taxpayer dollars
    and to improve how the Department provides services and information to
    citizens, business and other government agencies. The fiscal year 2005
    funding request is for FTE and contractor staff to improve project
    management skills within DOT and to lead e-government initiatives to
    improve service delivery, manage risks and keep projects on schedule
    and within budget.
        The specific planned activities include:
      --Creating processes, standards, guidelines and a project life cycle
            framework to guide all DOT project managers;
      --Ensuring that 100 percent of all major new IT investments are
            managed by a qualified project manager;
      --Improving access to and quality of information internally and to
            citizens and business through enterprise content management
            capabilities;
      --Migrating DOT to a governmental personnel and payroll system;
      --Improving mission performance through web portals like Geospatial
            One-Stop, Grants.gov and Business Gateway; and
      --Improving the quality and consistency of human resource data by
            integrating multiple data bases and sharing information among
            multiple systems and processes.
        Question. Is funding requested for development of the Department's
    internet home page?
        Answer. Yes. In fiscal year 2005 the CIO will invest $175,000 in
    improvements to the Department's internet home page, including content
    management.
        Question. What is the funding request for development of an
    intranet? Would the modes have access to the intranet? Have any of the
    modes already developed intranets? If they do, how does the CIO plan to
    make them interoperable or compatible with a department-wide intranet?
    What capability does an intranet provided that does not exist
    currently?
        Answer. The CIO's fiscal year 2005 funding request includes $50,000
    for the DOT intranet. Modes have access to the current DOT intranet,
    and will have access to future DOT sponsored intranet services. The
    Federal Highway Administration, the Federal Aviation Administration,
    Federal Motor Carrier Safety Administration, National Highway Traffic
    Safety Administration, and the Federal Transit Administration have
    developed certain intranet capabilities accessible internally by their
    employees. Through the commonality of format and best practices content
    management and portal implementations, the CIO will drive intranet
    consistency across a department-wide intranet environment, improving
    such aspects as ease of use, information availability, and remote
    access.
        Question. What is your plan to get from ``red'' to ``green'' in the
    President's management agenda? What progress does the Department expect
    to make in fiscal year 2004? Since the fiscal year 2005 budget request
    was transmitted in February, what specific steps has CIO taken to work
    with OMB to get to ``green''?
        Answer. Through the Office of the Chief Information Officer, DOT
    has instituted three department-wide processes to get from red to green
    in the President's Management Agenda. First, DOT has established a
    Department Wide Capital Planning and Investment Control Process, led by
    a Departmental Investment Review Board (IRB). This group, chaired by
    the DOT Deputy Secretary and comprised of the DOT Assistant Secretary
    for Budget and Programs, the Assistant Secretary for Administration,
    the General Counsel, four Operating Administrations executives; and the
    Chief Information Officer, meet quarterly, with reviews and approval
    oversight for all initiatives and business cases in DOT's IT Portfolio.
    The IRB also provides control reviews of DOT IT programs to ensure they
    stay within 10 percent of cost, schedule, and performance goals.
        Second, the DOT has established an enterprise architecture and
    modernization blueprint that identifies DOT's cross-cutting business
    processes, the IT initiatives supporting these processes, and outlines
    an implementation plan to eliminate redundant systems while
    strategically investing in programs that better support safety,
    mobility, and organizational excellence goals.
        Third, the DOT has implemented an Enterprise IT Security Program
    which has completed certification/accreditation of more than 90 percent
    of all DOT systems, and has implemented an Inspector General-verified
    Plan of Action and Milestone (POA&M) Remediation Process to resolve any
    remaining system weaknesses identified in the certification/
    accreditation process.
        Fourth, the DOT is currently supporting e-government initiatives
    that improve how DOT provides information and services to American
    citizens, businesses, other government entities and internally, and a
    Program Management Office to oversee these initiatives.
        In fiscal year 2004, DOT instituted the processes outlined above,
    resulting in the following accomplishments as of June 30, 2004:
      --All business cases have received a passing score from OMB;
      --All major IT initiatives programs are within 10 percent cost,
            schedule, performance variance or have a corrective action plan
            that will be tracked by the Departmental IRB on a quarterly
            basis;
      --A Modernization Blueprint that outlines DOT's IT investment
            priorities and strategies has been completed;
      --Over 90 percent of all DOT systems have had certification/
            accreditation or have implemented an IG-verified POA&M process;
            and,
      --Active participation in e-government initiatives has been positive.

                                IT MODERNIZATION

        Question. What are the Department's goals for modernization in
    fiscal year 2005?
        Answer. The DOT CIO's mission is to support the Secretary's vision
    of a safer, simpler, smarter transportation system. DOT has published
    the DOT Modernization Blueprint V.2. that outlines DOT's specific
    modernization goals to accomplish this vision. DOT began implementing
    this modernization strategy in fiscal year 2004 and will continue
    implementing the strategy in fiscal year 2005 and beyond through the
    accomplishment of three primary goals: modernize cross-cutting systems
    as a means of eliminating redundant IT systems and services and
    reinvest those savings into mission support initiatives; consolidate
    redundant infrastructure operations into a common operating
    environment; and improve the security of critical DOT networks and
    systems.
        In terms of cross-cutting systems, as a first goal the DOT
    Investment Review Board (IRB) has established ten system modernization
    priorities:
      --Financial Management;
      --Grants Management;
      --Recruitment;
      --Personal/Payroll Systems;
      --Internal Rulemaking Tracking;
      --Procurement Management;
      --Enterprise Document Management;
      --Training;
      --Intermodal Transportation Data System (ITDS); and
      --Hazmat Data Sharing.
        Inter-modal teams have been established to create business cases
    and associated timeframes and to execute agreed upon strategies. In
    several cases, planning is being done with Federal e-government
    programs, such as the ITDS and Personal/Payroll initiatives. In
    conjunction with this goal, the DOT is establishing a Program
    Management Office (PMO) to oversee these initiatives, and to ensure
    that Project Managers are qualified.
        The second modernization goal is to consolidate redundant IT
    infrastructure operations. DOT's consolidation strategy consists of
    three major phases:
        Phase 1 (fiscal year 2004-fiscal year 2005).--Establish common
    network, server, and desktop standards and consolidate redundant
    infrastructures for all organizations (OST staff offices and Operating
    Administrations) moving to the new DOT Headquarters building into a
    Common Operating Environment (COE) based on these standards.
        Phase 2 (fiscal year 2006-fiscal year 2008).--Expand the COE to
    include DOT field offices and components of FAA where practical.
        Phase 3 (fiscal year 2008 and beyond).--Continue to modernize the
    DOT infrastructure to improve service and provide enhanced services to
    DOT stakeholders through the use of technology.
        The third modernization goal is to improve the security of DOT's
    networks and systems. This goal will be accomplished through the CIO's
    requested funding for the Enterprise IT Security Program, and will
    include: contractor staffing to operate a 24/7 monitoring and incident
    detection/response center; improved and updated enterprise-wide
    policies, procedures, hardware and software to monitor and protect all
    systems within the Common Operating Environment; and through the
    execution of the Common Access Architecture Project, described later in
    this document.

                                 IT PROCUREMENT

        Question. Does all centralized IT purchasing come through the CIO's
    office? For all modes or just OST? What centralized purchases are made
    now that were not made in fiscal year 2003?
        Answer. The DOT does not have centralized IT purchasing. Each mode
    and OST has its own acquisition office to make IT purchases. However,
    to ensure that the department is making the right investments, the
    department uses its Enterprise Architecture processes to establish
    standards and establish enterprise licenses and the Capital Planning
    and Investment Control process to review proposed IT investments as a
    part of the budget process. Starting in fiscal year 2005, the
    department's efforts to reduce redundant IT investments through the
    consolidation of IT infrastructures will lead to more centralized
    purchasing as the Department moves to a shared infrastructure among the
    modes. Also in fiscal year 2005 the DOT CIO will concur with all
    significant DOT IT procurement requests to ensure consistency with IT
    budget plans.
        Question. Breakout the FTEs by function in the CIO's office.
        Answer. The following table shows the FTEs in the CIO's office by
    function.

          OFFICE OF THE CHIEF INFORMATION OFFICER--STAFFING BY FUNCTION
    ------------------------------------------------------------------------
                   Function                              Title
    ------------------------------------------------------------------------
    Executive Management.................  CIO
    Executive Management.................  Deputy CIO
    Executive Administration.............  Prog Anal
    Executive Administration.............  Staff Asst
    Staff Administrative Support.........  Admin Asst
    Budget and Administration............  Sup Prog Anal
    S&E Budget...........................  Prog Anal
    S&E Projects.........................  Prog Anal
    Internet/DOT Web.....................  Prog Anal
    Enterprise Architecture/Capital        Assoc CIO IT Prog
     Planning; Strategic Integration; IT
     Security.
    IT Security..........................  Comp Spec.
    IT Security..........................  Prog Anal
    Personnel/Systems Security...........  Prog Anal
    Enterprise Architecture/Capital        Comp Spec.
     Planning.
    Enterprise Architecture/Capital        Comp Spec.
     Planning.
    Enterprise Architecture/Capital        Comp Spec.
     Planning.
    Enterprise Architecture/Capital        Prog Anal
     Planning.
    Enterprise Architecture/Capital        Sup Prog Anal
     Planning.
    Strategic Integration................  Prog Anal
    Strategic Integration................  Prog Anal
    Strategic Integration................  Prog Anal
    IT Consolidation Program Office......  Doc Sys Prog Mgr
    IT Implementations...................  Comp Spec.
    Enterprise Projects..................  Sup Prog Anal
    Enterprise Projects..................  Comp Spec.
    ------------------------------------------------------------------------

                                     DELPHI

        Question. Please provide the cost and justification data for
    Delphi. Is this system complete? If not, what is the estimated cost to
    complete? If it is complete, what is the cost to maintain the system?
        Answer. Delphi, DOT's new financial management system, is a state-
    of-the-art, single-instance, non-customized, commercial off-the-shelf
    (COTS) accounting and financial management system. Delphi offers
    flexibility and maintainability at the functional user level; modular,
    tight integration of functional components; single source data capture;
    electronic routing and approval; web-enabled processes and report
    accessibility; electronic commerce capabilities; and, FFMIA compliance.
        Delphi uses release 11.5.9 of Oracle Federal Financials, which is
    COTS software from Oracle Corporation that has been certified by the
    Joint Financial Management Improvement Program as meeting all Federal
    accounting requirements. Delphi has replaced DOT's outdated, non-
    compliant legacy accounting system, which was sunset in March 2004 and
    is no longer in production.
        Benefits of Delphi include:
      --Complies with Standard General Ledger.
      --Provides a single Accounting Classification Structure throughout
            DOT.
      --Provides Financial Statements from its core system, not external
            spreadsheets.
      --Enables DOT to meet OMB's accelerated schedule for year-end closing
            and Financial Statements.
      --Provides the basis for Managerial Cost Accounting through the
            Project Accounting module.
      --Incorporates best business accounting practices.
      --Provides advanced security through audit trails and Roles and
            Responsibilities.
      --Offers simplified upgrading to take advantage of evolving
            capabilities.
      --Eliminates paper, makes documents immediately available to all, and
            provides sophisticated tracking through the integrated Invoice
            Imaging & Workflow System.
        Delphi is considered fully implemented and is a steady-state
    system. No funds are needed to complete Delphi. Delphi implementation
    costs from fiscal year 1998 through fiscal year 2003 totaled $125
    million. The cost to maintain Delphi in fiscal year 2004 is $22.05
    million.

                              TCI RESPONSE CENTER

        Question. Please breakout the response center costs.
        Answer. The following table breaks out the ``TCI Response Center
    Budget--Fiscal Year 2005.''

                  TCI RESPONSE CENTER BUDGET--FISCAL YEAR 2005
    ------------------------------------------------------------------------
                                                                Enterprise
                                                                 TCIRC/IT
                          Cost Category                          Security
                                                                 Advice &
                                                                Assistance
    ------------------------------------------------------------------------
    Personnel & Benefits:
        Manager.............................................        $114,505
        Vacant assistant position...........................         114,505
                                                             ---------------
          Subtotal..........................................         229,010
                                                             ===============
    Travel..................................................               0
    Contract Services:
        Senior Analyst......................................         163,637
        Senior Analyst......................................         195,000
        Mid-level analyst...................................         120,000
        Mid-level analyst...................................         115,000
        Senior level analyst................................         190,000
        TCIRC Staff Training................................         100,000
                                                             ---------------
          Subtotal Labor....................................         883,637
                                                             ===============
    Supplies................................................          15,000
    Equipment, Non-Capital (software, scanning, patch mgmt,        1,632,144
     Security portal development, etc.).....................
                                                             ---------------
          Subtotal Other Costs..............................       1,647,144
                                                             ===============
    WCF Intrafund:
        Rent Intrafund......................................          77,427
        Other (computers, supplies).........................         215,055
        Contract costs......................................          61,136
                                                             ---------------
          Subtotal..........................................         353,618
                                                             ===============
    Overhead:
        IT Admin & Special Projects.........................          36,902
        Financial Mgt Group.................................          44,302
        WCF Overhead........................................          10,388
        Enterprise Network Operations Center (7/24                   522,000
         monitoring)........................................
                                                             ---------------
          Subtotal..........................................         613,591
                                                             ===============
          Grand Total TCIRC.................................       3,727,000
    ------------------------------------------------------------------------

                              CRITICAL IT SYSTEMS

        Question. What progress has the Department made in protecting
    critical IT systems at OST and the modes?
        Answer. In fiscal year 2003, the DOT OCIO initiated two major
    programs to protect OST and Operating Administration critical IT
    systems: (1) a program to certify and accredit all of the Department's
    IT systems; and (2) implementation of the Transportation Cyber Incident
    Response Center (TCIRC).
        In terms of certification/accreditation, the DOT OCIO established a
    specialized team and standard methodology, worked with OST and the OAs
    to establish a schedule, and executed a plan completing certification/
    accreditation for over 90 percent of the DOT computer systems by June
    2004. As of September 30, 2003, approximately 40 percent of DOT's IT
    systems were certified and accredited in accordance with statutory,
    OMB, and NIST guidance. As of June 15, 2004, DOT has certified and
    accredited 95.6 percent of all IT systems. Efforts to now correct
    weaknesses identified through this process, and to test contingency
    planning efforts, will continue under this program in fiscal year 2005
    and the DOT OCIO will also perform compliance reviews of modal IT
    systems to ensure that the certification and accreditations remain
    valid and all security controls are being implemented properly.
        In terms of the TCIRC, DOT implemented this capability in fiscal
    year 2003. Today, the TCIRC monitors all DOT network access points, web
    sites, and other critical systems on a 24/7 basis, operates a
    vulnerability remediation management program that includes weekly
    vulnerability scanning and analysis, installs and configures intrusion
    detection at key network entry points, and provides critical system
    patch installation assistance to protect DOT IT systems from hackers
    and other threats. Based on the successful performance of the TCIRC,
    DOT has had no downtime of mission critical system networks or systems
    over the past year.
        Additionally, the TCIRC monitors all DOT IT systems across the
    country to determine if illegal software is installed on DOT computer
    systems, such as peer-to-peer software, which places networks at risk
    to intrusions or other illegal file sharing activities (such as sharing
    illegal music). Based on the successful efforts of the TCIRC to
    identify and eliminate the use of this software, DOT has decreased
    instances of this software from an average of 25 a month to 1 a month.
    By providing the TCIRC at the Department-level, DOT is able to
    capitalize on economies of scale in terms of contracting for
    specialized contract support, and purchasing hardware and software once
    to service the entire Department, and is also able to quarantine any
    potential problems found in one OA immediately so other OAs are not
    impacted.

                            CIO CHARGES TO THE MODES

        Question. Please provide a detailed break out of all CIO costs
    charged to the operating administrations, including what these costs
    are and how the cost was determined for fiscal years 2002, 2003, and
    2004 to date.
        Answer. There are no CIO costs charged to the Operating
    Administrations in fiscal years 2002 or 2003. In fiscal year 2004,
    reprogramming authority was requested to cover a funding shortfall in
    the enterprise IT security program area that affected security coverage
    across DOT Operating Administrations. The table below reflects that
    reprogramming allocation.

                          IT SECURITY FISCAL YEAR 2004 CHARGES FOR TCI RESPONSE CENTER AND C&A
    ----------------------------------------------------------------------------------------------------------------
                                                                TCI
                                          Email    Percent    Response    No. of   Percent      C&A        OA TOTAL
                                          Count                Center    Systems
    ----------------------------------------------------------------------------------------------------------------
    Reprogram Summary:
        BTS............................      286      0.49       $6,281  .......      0.00  ...........       $6,281
        FAA............................   45,046     77.47     $989,247       69     55.65     $556,452   $1,545,699
        FHWA...........................    4,826      8.30     $105,983        3      2.42      $24,194     $130,176
        FMCSA..........................    1,465      2.52      $32,173        1      0.81       $8,065      $40,237
        FRA............................    1,041      1.79      $22,861  .......      0.00  ...........      $22,861
        FTA............................      691      1.19      $15,175       18     14.52     $145,161     $160,336
        MARAD..........................      648      1.11      $14,231        7      5.65      $56,452      $70,682
        NHTSA..........................    1,524      2.62      $33,468        3      2.42      $24,194      $57,662
        OIG............................      471      0.81      $10,344  .......      0.00  ...........      $10,344
        RSPA...........................      654      1.12      $14,362        1      0.81       $8,065      $22,427
        SLSDC..........................       88      0.15       $1,933  .......      0.00  ...........       $1,933
        VOLPE..........................    1,409      2.42      $30,943       22     17.74     $177,419     $208,362
                                        ----------------------------------------------------------------------------
          Reprogram Subtotal...........   58,149    100.00   $1,277,000      124    100.00   $1,000,000   $2,277,000
    OST Additional Contribution........  .......  ........  ...........  .......  ........  ...........     $200,000
                                        ----------------------------------------------------------------------------
          Total Reprogramming and OST    .......  ........  ...........  .......  ........  ...........   $2,477,000
           Contribution................
    ----------------------------------------------------------------------------------------------------------------

                       DISADVANTAGED BUSINESS ENTERPRISE

        Question. Please provide an update on the work of the Secretary's
    senior level task force on Disadvantaged Business Enterprise fraud. How
    often has this task force met? What recommendations, if any, have the
    task force produced? Have they met with the staff of the DOT IG to
    build on that office's recommendations?
        Answer. The Task Force was established to examine the DBE Program
    and to develop recommendations on improving the ability of the program
    to meet its objectives. The Task Force was charged with reviewing the
    findings of the OIG on a number of fraud incidents as well as reviewing
    the findings of the report initiated at the request of the House
    Appropriations Committee. The DBE Task Force meets once bi-monthly and
    has regular meetings with the Department's IG Office to discuss that
    office's ongoing DBE recommendations.
        We expect to be able to implement a series of reforms which will
    have the effect of improving the management of the program, clarify its
    purpose, simplify its procedures and insure those who would misuse the
    DBE program are held to account. The Secretary charged the Task Force
    with developing recommendations on ways that the DOT can most
    efficiently and cost effectively increase oversight of the DBE Program,
    in order to reduce incidents of fraud.
        Additionally, the administration's SAFETEA proposal contained a
    provision in Section 1802(d) which would mandate debarment of
    contractors who have been convicted of fraud related to Federal-aid
    highway or transit programs, and mandate the suspension of contractors
    who have been indicted for offenses relating to fraud. This would
    codify the debarment of convicted contractors, which under current DOT
    regulations is a discretionary measure. Under this provision, the
    Secretary would have the authority to waive suspension and debarment
    actions to address circumstances relating to non-affiliated
    subsidiaries of an indicted contractor, and national security concerns.

                             WORKFORCE RECRUITMENT

        Question. Please provide an update on what the Department is doing
    to recruit and retain the best talent available. The IG has identified
    that the Department of Homeland Security and the Department of Defense
    have personnel rules and pay flexibility to assist with retention and
    recruitment. What is the Department doing to ensure the same benefits
    for its workforce?
        Answer. In our quest to recruit and retain the best talent, DOT has
    obtained a synergy of effort through intermodal cooperation in
    implementing a corporate recruitment approach. In particular, during
    the last year, DOT convened an intermodal Corporate Recruitment
    Workgroup, consisting of 16 representatives from the different
    components and offices within DOT. It meets on a bi-monthly basis to
    collaboratively address ongoing DOT recruitment initiatives in support
    of closing the DOT skills gaps identified by our ONE DOT Workforce
    Plan; to identify those strategies that can assist Departmental efforts
    to develop the next generation of DOT employees; and to look for ways
    to present a corporate DOT image to the applicants we are trying to
    attract.
        One key activity of the Corporate Recruitment Workgroup is to
    identify redundancies in recruitment efforts across the Department. As
    a result, the modes saved money by sharing costs, and DOT jobs have
    greater visibility by reaching and attracting a wider diverse audience.
    We outreach to specific groups to recruit a high quality, diverse
    applicant pool, in cooperation with Selective Placement Coordinators.
    We continue to evaluate and refine our efforts through quarterly hiring
    reports (fiscal year 2004 will be our baseline for future outyear
    comparisons).
        We strongly encourage our components to use all of the
    flexibilities available to them whenever possible, including pay and
    bonus-related flexibilities (e.g., superior qualifications appointments
    and recruitment, retention, and relocation bonuses), scheduling
    flexibilities (e.g., telework and alternative work schedules), and the
    various special appointing authorities (e.g., the Federal Career Intern
    Program). Our largest component, the Federal Aviation Administration
    (FAA), has a number of unique statutory flexibilities that FAA uses to
    attract and retain a quality workforce. Once the results of the
    implementation of the Departments of Homeland Security and Defense
    flexibilities are apparent, we will be in a better position to know how
    we compete with them for a high quality, diverse workforce and whether
    similar statutory changes for DOT will be necessary to ensure
    successful recruitment and retention of the best talent available.

                                     DELPHI

        Question. What is the status of the implementation of Delphi by the
    modal administrations?
        Answer. All DOT modal operating administrations (OAs) have
    implemented Delphi and are using it for accounting operations and
    financial management. The first OA to covert was the Federal Railroad
    Administration in April 2000 and the last was the Federal Aviation
    Administration on November 10, 2003.
        DOT is the first cabinet level agency to completely convert all its
    operating units to a single instance, state-of-the-art, fully compliant
    COTS financial software package.
        The Transportation Security Administration (TSA) was also set up on
    Delphi when TSA was created in DOT in February 2002. TSA has continued
    to use Delphi as its accounting system since being transferred to the
    new Department of Homeland Security (DHS) in March 2003.
        Question. Are any of the development costs or operating costs of
    Delphi expected to be paid by the modal administrations?
        Answer. Through fiscal year 2004, all of the development and
    operating costs for Delphi and for the legacy accounting system that it
    replaced have been shared by the DOT modal administrations and TSA
    under an annual reimbursable agreement with the Federal Aviation
    Administration's Mike Monroney Aeronautical Center in Oklahoma City,
    where Delphi is hosted, operated and maintained.
        The distribution of Delphi development and operating costs is
    reviewed annually and agreed to by the Delphi Management Committee
    (DMC). The DMC is composed of representatives from all Delphi
    customers, currently all DOT modal administrations and the
    Transportation Security Administration (TSA). TSA has informed DOT that
    they plan to convert from Delphi to the U.S. Coast Guard's Oracle
    Federal Financials system in fiscal year 2005.

                              COMPETITIVE SOURCING

        Question. Please describe in greater detail the training proposal
    related to competitive sourcing. How many employees are expected to
    receive such training?
        Answer. OMB Circular A-76 requires the use of the Win.COMPARE
    software tool to accomplish competitions. The $15,000 training estimate
    was based on a contractor providing two Win.COMPARE courses that will
    allow us up to 20 students per class on site. The training is required
    to provide instruction for multiple study participants across the
    Department in the use of this mandated tool to accomplish both Standard
    and Streamlined competitions during the execution of the Department's
    Competitive Sourcing ``Green'' Plan for the upcoming year and beyond.
    The Department will identify the exact number of employees that will
    benefit from this training once OMB has approved DOT's ``Green'' Plan.

                               ELECTRONIC GRANTS

        Question. Which DOT grant making agencies are currently capable of
    processing grant applications and grant awards through electronic
    means?
        Answer. DOT's E-Grant Task Group is currently in the process of
    conducting a comprehensive inventory of all electronic methods used in
    each one of the Department's 59 grant programs. In conjunction with the
    inventory, they are also performing an analysis of the various system
    functionalities and the technologies used. This effort is expected to
    be completed within the next 90 days (September 2004) in concert with
    the Department's initial e-grant plan.
        For purposes of clarification, the Department generally associates
    the terminology, ``. . . grant applications and grant awards . . .'',
    with competitive discretionary type programs. Approximately 99 percent
    of DOT programs are Mandatory type programs where funds are
    congressionally apportioned for each State, or based on Formula. DOT
    Mandatory/Formula programs require States to submit comprehensive State
    plans versus an ``application'', inasmuch as recipients are already
    determined along with funding apportionments, unlike discretionary
    programs that must undergo a ``competitive'' application process.
    However, for both mandatory and discretionary programs within the
    Department we expect the results of our inventory to show that several
    programs, use electronic methods to perform some function of their
    grants life cycle process.
        Question. What are the out-year cost estimates for the DOT
    contribution to the e-grant portal/system?
        Answer. The out-year cost estimates are as follows: fiscal year
    2005--$754,467; fiscal year 2006--$754,467 to maintain, support and
    enhance the Grants.gov ``find'' and ``apply'' functionality that
    currently exists. In addition, OMB is sponsoring the Grants Line of
    Business initiative which is attempting to identify common internal
    grant processes. This initiative, for which a business case has not yet
    been developed (and for which agency contributions have not yet been
    determined), will be the follow-on to the Grants.gov initiative,
    enabling certain internal functions to be performed using shared
    technology services/tools.
        Question. How much has DOT obligated to date, by year, in support
    of this effort?
        Answer. DOT has obligated a total of $2,735,410 (fiscal year 2002--
    $88,590; fiscal year 2003--$1,411,410; fiscal year 2004--$1,235,410).
    There is also one DOT employee detailed for a period of 6 months to
    work in the Grants.gov Program Management Office.
        Question. Are the other partnering agencies making the same
    contribution?
        Answer. There are 26 grant making agencies in total. Currently 11
    Partner agencies, including DOT, serve as part of the Grants.gov
    Executive Board and contribute both fiscal and personnel resources. In
    August 2002, a funding algorithm and payment schedule was approved by
    the Executive Board to allocate the funding requirements across the 11
    Partner agencies. The specific amount of the contribution is determined
    by the agency's designation as a ``large'', ``medium'' or ``small''
    agency, based on the total grant dollars awarded. DOT is categorized as
    a ``large'' grant making agency; and is contributing the same amount as
    HHS, HUD and others in the same category. OMB has directed the
    Grants.gov PMO to move to a usage-based model in fiscal year 2005 that
    will require contributions by all grant making agencies.

                             ELECTRONIC RULEMAKING

        Question. What is the schedule and funding profile for the DOT
    contribution to the E-Rulemaking initiative?
        Answer. As the managing partner for this initiative, EPA
    established the following plan for implementing the Federal Dockets
    Management System (FDMS), the second phase of the E-Rulemaking
    initiative:
      --Develop agency implementation plans and dates.--July-August 2004;
      --Test the FDMS.--October-December 2004;
      --Migrate agencies to the FDMS.--January-October 2005.
        The DOT funding profile for this effort is: fiscal year 2004--
    $775,000; fiscal year 2005--$885,000; fiscal year 2006--$955,000
    (estimated).
        All rulemaking documents published in the Federal Register by any
    DOT agency since the site was established are/were accessible via
    Regulations.gov, an internet portal (the first phase of the
    initiative). To date DOT has received 74 comments submitted from the
    site. Sixty-five were docketed and nine were rejected because they were
    either test entries, irrelevant, or blank.
        Question. How much has DOT obligated to date, by year in support of
    this effort?
        Answer. To date, DOT has obligated the following:
      --Fiscal year 2003.--$4,547,500;
      --Fiscal year 2004.--$544,208; \1\
    ---------------------------------------------------------------------------
        \1\ Funding for the remaining $230,792 to meet the fiscal year 2004
    DOT commitment of $775,000 has been requested from the U.S. Coast Guard
    and the Transportation Security Administration, who are users of the
    DOT dockets system.
    ---------------------------------------------------------------------------
        Question. Please list the other partnering agencies in the E-
    Rulemaking initiative and provide the contribution each is expected to
    make.
        Answer. EPA is the managing partner for this initiative and led the
    effort to define required contribution levels. Expected contributions
    for fiscal year 2005 for their partner agencies are:

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

    ------------------------------------------------------------------------
    Department of Transportation............................        $885,000
    Department of Labor.....................................         885,000
    Department of Agriculture...............................         885,000
    Health and Human Services...............................         885,000
    Federal Communications Commission.......................         355,000
    Department of Justice...................................         355,000
    Housing and Urban Development...........................         355,000
    General Services Administration.........................         180,000
    National Archives and Records Administration............         100,000
    ------------------------------------------------------------------------

        Question. Are any other funds requested for E-Rulemaking besides
    the $800,000 in the Office of General Counsel?
        Answer. No, this is the only amount being requested in the
    Department's budget.

                         ELECTRONIC BUSINESS PRACTICES

        Question. Please compare the fiscal year 2005 budget request for
    electronic business practices with fiscal years 2003 and 2004.
        Answer. DOT's funding requests for ``Electronic Business
    Practices'' for fiscal year 2003 through fiscal year 2005 include
    different initiatives. In fiscal year 2003 ($125,000) and fiscal year
    2004 ($176,000), for example, this request was primarily to cover the
    cost of DOT's contribution to participate in government-wide electronic
    acquisition initiatives. In fiscal year 2005 ($875,000), however, the
    request significantly increased to reflect the estimated cost of
    procuring software licenses for a department-wide acquisition business
    system (i.e., a contract writing and management system), as mandated by
    the DOT Investment Review Board.
        Question. Please breakdown the request for consolidated HR benefits
    assistance by specific efforts and also provide a projection of the
    future developmental requirements under this program.
        Answer. The information follows.

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

    ------------------------------------------------------------------------
    ESI integrated solution procurement......  $250,000
    ESI payroll data download................  $25,000
    Estimated DOI/FPPS programming start-up    $30,000-$50,000
     costs.
    Retirement and related benefits training   $75,000
     (10-12 sessions including contractor
     time & travel) \1\.
    ------------------------------------------------------------------------
    \1\ With the increasing number of employees who are becoming eligible
      for retirement, the demand for retirement and benefit counseling and
      information is increasing substantially. Contractor resources are
      necessary in order to deliver this service nationwide to DOT
      employees.

        The future developmental requirement under this program is the
    development and implementation of an electronic record keeping system
    that will replace the current official personnel file (OPF).

                       HUMAN RESOURCES INFORMATION SYSTEM

        Question. Please provide a schedule and funding history and plan of
    the Enterprise Human Resources Information System (EHRIS). Please
    include a breakdown of each modal administration's anticipated share of
    the costs of development.
        Answer. The Enterprise Human Resources Information System (EHRIS)
    project was intended to implement an ORACLE enterprise application to
    meet the human resources, training administration, and time collection
    requirements of the Department of Transportation (DOT), excluding the
    Federal Aviation Administration (FAA). A companion project, the
    Corporate Human Resource Information System (CHRIS) was underway in the
    FAA, with the same goal. The projects were merged with the ORACLE
    Financial Management implementation within DOT in July, 2002, but never
    got beyond the planning stage when the project was superseded by the e-
    Payroll initiative in December of 2002. EHRIS was projected to have
    been implemented by the end of fiscal year 2004. Approximately $10
    million was included in the budget requests between fiscal year 2003
    and 2004, of the total projected cost of $14.175 million. The cost
    distribution to the modal administrations is reflected below:

    ------------------------------------------------------------------------
                                       As of  9/
              Administration             30/01      Percent    Dollar Amount
    ------------------------------------------------------------------------
    OST..............................        539        3.59        $509,253
    USCG.............................      6,121       40.80      $5,783,188
    FHWA.............................      2,934       19.56      $2,772,076
    FMCSA............................        787        5.25        $743,566
    FRA..............................        776        5.17        $733,173
    SLSDC............................        152        1.01        $143,611
    FTA..............................        500        3.33        $472,406
    NHTSA............................        660        4.40        $623,575
    RSPA.............................        964        6.43        $910,798
    OIG..............................        455        3.03        $429,889
    MARAD............................        869        5.79        $821,041
    STB..............................        142        0.95        $134,163
    BTS..............................        104        0.69         $98,260
                                      --------------------------------------
          Total......................     15,003      100.00     $14,175,000
    ------------------------------------------------------------------------

        The funds requested for EHRIS for fiscal year 2003 and fiscal year
    2004 were redirected to fund the Departmental migration to the e-
    Payroll initiative and no funds were requested in fiscal year 2005.
        Question. What is the status of the EHRIS contracts?
        Answer. The EHRIS contracts were for program management and systems
    integration support; the work orders issued on behalf of EHRIS have
    expired.
        Question. Please compare the projected requirements or capabilities
    of the Enterprise Human Resources Information System (EHRIS) to the
    Federal Personnel and Payroll System (FPPS).
        Answer. At a high level, EHRIS was projected to use Commercial Off
    the Shelf (COTS) software in an enterprise model to support human
    resources, training administration, and time collection requirements.
    EHRIS was not slated to replace the legacy DOT payroll system. The
    Federal Personnel and Payroll System, implemented in 1997, is an
    integrated human resources and payroll system. It does not support
    training administration or meet DOT requirements for time collection.
        Question. The justification states FPPS does not address training.
    Would EHRIS have addressed this? If this is a necessary requirement
    primarily because of FAA's needs, then should FAA cover those costs?
        Answer. EHRIS was slated to address the DOT requirements for
    training administration, through the use of the ORACLE application
    software.
        With the discontinuation of the EHRIS project in fiscal year 2002,
    the eLMS system, implemented under the auspices of the e-Training
    initiative as part of--and funded by--the DOT FPPS migration project,
    is intended to meet the training administration requirements of all of
    DOT. Although the training needs of the FAA are highly visible, other
    modal administrations, such as the Federal Highways Administration,
    have vigorous training programs which require automated support. The
    operating costs of the training system will be shared proportionately,
    in relation to the size of workforce, among DOT's Operating
    Administrations.
        Question. What are the out-year funding requirements for converting
    to FPPS?
        Answer. The funding for FPPS was based on the EHRIS budget which
    did not include the FAA requirements. There were no funds requested in
    the fiscal year 2005 budget for EHRIS, subsequently there are none
    identified for FPPS. There currently is an estimated shortfall of $9.4
    million in fiscal year 2005. It is currently anticipated that
    approximately $858,000 will be requested in fiscal year 2006 to support
    costs incurred in that year.

              OFFICE OF THE ASSISTANT SECRETARY FOR ADMINISTRATION

        Question. Please provide a table to breakdown the object class
    ``other costs'' in the Office of Administration and compare the request
    to the fiscal year 2004 enacted level after the across the board
    rescission. Also, please include the amount that was rescinded pursuant
    to Division H, sec. 168(b) of Public Law 108-199.
        Answer. The information follows.

    ------------------------------------------------------------------------
    Object                                    Fiscal Year      Fiscal Year
     Class                                    2004 Enacted    2005 Estimate
    ------------------------------------------------------------------------
         Recission pursuant to Division            $145.0  ...............
          H, Sec 168(b) Public Law 108-
          199
         Across the board reduction per           1,482.0  ...............
          Title 5, Sec 517 of Public Law
          108-199
     1XXXPC&B                                     6,265.0         $7,535.2
       21Travel                                      53.0             70.0
       23Rental payments to GSA                   7,836.0          9,014.0

       25          OTHER COSTS
         MSI Program                                  0.0            130.0
         E-Grants                                     4.0            350.0
         Electronic Business Process                126.0            943.0
         Online Internet Research Svcs               68.0            110.0
         Security Investigations                     80.0             85.0
         New Hqs Building Security                    0.0            130.0
         Training                                    25.0            183.0
         Corporate Recruitment                        0.0            500.0
         Consolidated Benefits                        0.0            400.0
          Assistance
         Federal Personnel and Payroll              153.0            846.8
          System
         OST Cost to WCF                          7,856.0         10,030.0
         Reimbursement to USCG Clinic                42.0             37.0
         Workforce Improvements                      66.0            208.0
          Initiative
         DOT-wide Admin and Mgmt                    277.0            143.2
          Services
         Subscriptions                               19.0             28.3
         Procurement Strategy Council                 0.0             45.0
         Electronic Official Personnel                0.0          1,000.0
          Folders
         Centralized Workers'                         0.0            250.0
          Compensation
         E-Training Initiative                        0.0            750.0
         CPMIS Charges                               65.0             85.0
         Federal Employment Information              23.0             36.7
          Svcs
       26Supplies & Materials                        27.0             24.8
                                         -----------------------------------
               Total                             24,612.0         32,935.0
    ------------------------------------------------------------------------

                             OFFICE OF CIVIL RIGHTS

        Question. Please provide detailed justification for the fiscal year
    2005 budget request for the Office of Civil Rights by object class.
        Answer. 11 and 12.1 PC&B (Includes Transit Benefits and Workmen's
    Comp).--DOCR's PC&B request in fiscal year 2005, $9,382, is based on
    the assumption that DOCR will maintain current fiscal year 2004
    staffing levels. This relatively small increase is due to mandatory
    increases such as pay raises, within-grade-raises and inflation.
        21.1 Travel and Transportation of Things ($210).--DOCR staff
    travels to conduct EEO compliance reviews, participate in panels at
    conferences and workshops giving presentations and speeches, and to
    obtain training associated with carrying out the organization's
    mission. DOCR's IT Division provides IT infrastructure,
    telecommunication, application and database services to Departmental
    Office of Civil Rights (DOCR) employees located in Cambridge, MA,
    Atlanta, GA, Chicago, IL, Dallas, TX, and San Francisco, CA. Periodic
    inspections and routine modifications must be performed at each
    location to ensure adequacy, accuracy and timeliness of the delivery of
    many of the Departmental Office of Civil Rights (DOCR) mission products
    and services.
        25.2 Other Services ($2,686).--Other Services include:
      --Alternative Dispute Resolution.--DOCR has administrative
            responsibility for providing mediation services to DOT's 10
            operating administrations (OAs). DOCR ensures the program has
            skilled mediators and coordinates annual training to meet
            programmatic and EEOC requirements. DOCR also coordinates
            assignment of mediators and schedules mediation sessions,
            ensures that evaluations are completed, and tracks data
            relating to mediated cases. Finally, DOCR is available to
            assist OAs with training of EEO Counselors relative to the ADR
            program. While each OA has responsibility for training its
            managers and overall workforce, DOCR has increased its
            assistance for ADR training in order to promote and market the
            ADR program.
      --EEO Training and Other Training.--DOCR will conduct program
            reviews; and direct, administer, and manage DOT's EEO and
            affirmative employment programs for managers, employees and
            applicants for employment.
      --Automated Case Tracking Systems (COS).--DOCR's automated tracking
            systems--Web Case Management System (WebCMS), Disadvantage
            Business Enterprise (DBE) Appeals System, and the External Case
            Tracking System (XTRAK)--serve as the official Departmental
            repository for maintaining accurate complaint and appeals
            information. These critical systems ensure that DOCR meets
            Secretarial, statutory, regulatory and other reporting
            requirements.
      --Section 504 Studies & Evaluations.--Funding will be used to
            implement recommendations derived from the Department's ongoing
            Section 504 Self Evaluation and Transition Plan for the
            accessibility of its facilities and programs to people with
            disabilities.
      --Final Agency Decision (FADs) Writing.--Funds will be used to fund
            preparation of FADs associated with equal employment
            opportunity (EEO) complaints filed against DOT, including
            decisions on the merits, compensatory damages assessments,
            sexual orientation complaint requests for reconsideration, and
            attorney's fees.
      --Contractual Support.--DOCR utilizes contractual services to augment
            in-house EEO investigations. In addition, contractual EEO
            services are required for situations where a regional office
            may temporarily be short-staffed, or an urgent timeframe is
            ordered by EEOC or a Court Judge. DOCR also requires funding
            for contractual administrative and clerical support functions
            in order for organizational components to meet its critical
            mission needs in the most efficient manner possible.
      --Working Capital Fund.--Pays for administrative support services.
            These services include building security, copy centers,
            Departmental programs, the Disability Resource Center, DOT's
            Worklife initiatives, and other proportional charges that are
            expended for common services.
      --Reimbursable Service Agreements (Regional Offices).--Provide for
            telecommunication resources, information technology support,
            administrative support, including mail service and employee
            transit benefits.
      --Relocation Expenses (San Francisco Regional Office).--DOCR prepared
            an Occupancy Agreement managed by General Services
            Administration (GSA) to relocate from San Francisco to Los
            Angeles, CA. DOCR expects to occupy new office space by
            December 2004.
      --Continuity of Operations.--The Federal Preparedness Circular,
            Number 65, dated July 6, 1999, issued by the Federal Emergency
            Management Agency, requires all agencies to have a facility
            from which continued essential agency functions remain
            operational should the primary facility be rendered unusable
            during an emergency. DOCR has met this requirement and must
            provide oversight, which requires site visits, for
            organizations contracted to provide these services on its
            behalf.
      --Program Evaluation.--Funds will be used to assess the manner and
            extent to which DOT civil rights programs achieve intended
            objectives. In addition, the President's Management Agenda
            (2002) further identifies the need for devising aggressive
            strategies for improving the management of the Federal
            Government.
      --Telecommuting/Telework Program.--Funds are required to provide
            technological support for DOCR's participation in DOT's
            telecommuting/telework program. Information resources include
            hardware, software, data and records, and telecommunications
            connectivity.
      --Information Technology Services.--Funding will support one of the
            strategic goals outlined in the President's Management Agenda--
            reducing the barriers of information and communication within
            DOT by implementing a new Civil Rights Case Management System.
        26.0 Supplies and Materials.--Supplies and materials are required
    to support daily operations, i.e. paper, writing utensils, ink
    cartridges, research manuals, periodicals, and subscription services.
    Supplies and materials are also needed to support staff participation
    at conferences and workshops. Funds are also used to support
    Presidential interagency efforts and other efforts such as the
    interagency Holocaust Remembrance event.
        31.0 Equipment.--The funding will be used to replace obsolete
    equipment and computers in DOCR. The Office of Information Technology
    (IT) and Program Evaluation division integrates equipment that can
    enhance DOT's Civil Right's business processes. The equipment supports
    testing and implementation of telecommuting, backup and recovery,
    presentations, document production and other functions. DOCR's IT
    Division is responsible for procuring and maintaining all information
    technology equipment and hardware purchased with Federal funding in
    support of DOCR's mission. Within the infrastructure, approximately 70
    workstations, desktop and network printers, fax machines, digital
    senders, and scanners are used to provide an effective and efficient
    business environment to employees. This hardware requires periodic
    maintenance, upgrades or replacement. During fiscal year 2004 and
    fiscal year 2005, DOCR's infrastructure must be prepared to support DOT
    security, telecommuting, human capital, and electronic initiatives.
        Question. Please explain in detail the assumptions used to develop
    the request for personnel compensation and benefits of the Office of
    Civil Rights.
        Answer. DOCR's PC&B request in fiscal year 2005, $9,382, is based
    on the assumption that DOCR will maintain current fiscal year 2004
    staffing levels. This relatively small increase is due to mandatory
    increases such as pay raises, within-grade-raises and inflation.
        Question. Please provide the number of staffing positions and FTE
    requested, indicating direct and reimbursable, for the Office of Civil
    Rights.
        Answer. In its fiscal year 2005 budget, DOCR requested 64 direct
    staffing positions and FTE. There are no reimbursable FTE.
        Question. Please provide a table listing current staffing for the
    Office of Civil Rights compared to levels at the end of each quarter of
    past 5 fiscal years.
        Answer. The information follows.

                                                                DEPARTMENT OF TRANSPORTATION DEPARTMENTAL OFFICE OF CIVIL RIGHTS STAFFING
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                              12/31/   3/31/   6/18/  12/31/   3/31/   6/30/   9/30/  12/31/   3/31/   6/30/   9/30/  12/31/   3/31/   6/30/   9/30/  12/31/   3/31/   6/30/   9/30/
                                               2003    2004    2004    2002    2003    2003    2003    2001    2002    2002    2002    2000    2001    2001    2001    1999    2000    2000    2000
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Fiscal Year 2004:
        1st Quarter.........................      55  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......
        2nd Quarter.........................  ......      58  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......
        3rd Quarter.........................  ......  ......      57  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......
    Fiscal Year 2003:
        1st Quarter.........................  ......  ......  ......      52  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......
        2nd Quarter.........................  ......  ......  ......  ......      52  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......
        3rd Quarter.........................  ......  ......  ......  ......  ......      52  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......
        4th Quarter.........................  ......  ......  ......  ......  ......  ......      53  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......
    Fiscal Year 2002:
        1st Quarter.........................  ......  ......  ......  ......  ......  ......  ......      47  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......
        2nd Quarter.........................  ......  ......  ......  ......  ......  ......  ......  ......      48  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......
        3rd Quarter.........................  ......  ......  ......  ......  ......  ......  ......  ......  ......      51  ......  ......  ......  ......  ......  ......  ......  ......  ......
        4th Quarter.........................  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......      52  ......  ......  ......  ......  ......  ......  ......  ......
    Fiscal Year 2001:
        1st Quarter.........................  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......      44  ......  ......  ......  ......  ......  ......  ......
        2nd Quarter.........................  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......      45  ......  ......  ......  ......  ......  ......
        3rd Quarter.........................  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......      44  ......  ......  ......  ......  ......
        4th Quarter.........................  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......      44  ......  ......  ......  ......
    Fiscal Year 2000:
        1st Quarter.........................  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......      38  ......  ......  ......
        2nd Quarter.........................  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......      39  ......  ......
        3rd Quarter.........................  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......      43  ......
        4th Quarter.........................  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......      43
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

        Question. Please provide details on anticipated contract expenses
    in the Office of Civil Rights.
        Answer. Final Agency Decisions (FADs).--Transfer of U.S. Coast
    Guard to the Department of Homeland Security on September 30, 2003,
    decreased the workload, but the projected increase in cost per FAD
    estimated at 5 percent resulted in no change in the total contract
    amount requested, $250,000.
        Administrative and Clerical Support.--DOCR provides administrative
    and clerical support functions to organizational components to meet
    critical mission needs in the most efficient and effective manner
    possible. Clerical support is critical to accomplishing the workload in
    several of DOCR's divisional offices, $225,000.
        EEO Investigations.--DOCR utilizes contractual services to augment
    in-house EEO investigations. During fiscal year 2004, many internal
    complaints of employment discrimination were outsourced for
    investigation to eliminate DOCR's backlog of overage cases. While the
    goal of a zero-backlog was realized by September 30, 2000, it is
    necessary to maintain funding for contractual services to prevent
    future backlogs. In addition, contractual EEO services are required for
    situations where a regional office may temporarily be short-staffed, or
    an urgent timeframe is ordered by EEOC or a district court judge,
    $250,000.
        Reimbursable Services.--In addition, DOCR obtains contractual
    support from DOT's OAs for its regional offices that are located in
    DOT-owned facilities. The services provided include telecommunication
    resources, information technology, email, and lease charges, $220,000.
        Information Technology Support and Tracking Systems.--DOCR employs
    the services of IMSG Inc., Actionet, Inc., and Micropact, Inc., to
    support the products and services required by DOT's internal and
    external customers. The services supplied by these contractors support
    the DOCR mission through software development, website and database
    hosting, software upgrades, and commercial off the shelf license
    renewal. In addition, DOCR utilizes IT contracts to support
    requirements outlined in the President's Management Agenda, which
    include enterprise architecture administration, capital planning
    support, and security requirements. Finally, DOCR utilizes IT contract
    support to supply information to complex civil rights queries
    supporting the Equal Employment Opportunity Commission (EEOC), the
    Department of Justice, and many freedom of information requests,
    $300,000.
        Question. What is the current backlog of complaints at the Office
    of Civil Rights? Please compare to last 5 years.
        Answer. Currently, and over the past 5 years, DOCR has experienced
    no backlog of complaints.
        Question. What is the status of the relocation of the San Francisco
    Regional Office?
        Answer. DOCR conducted a site search in the Los Angeles area,
    identified a location, and prepared an occupancy agreement. The new
    leased site will be managed by the General Services Administration
    (GSA). DOCR expects to occupy the new location by December 2004. Thus,
    DOCR plans to close the San Francisco office and relocate to the new
    site in the Los Angeles area. GSA will assist in all aspects of the
    move. All employees in the San Francisco office have been notified of
    the pending move to the new location. DOT's Human Resources office will
    issue a final letter to all employees. Following receipt of the letter,
    each employee will designate his or her intention to relocate to the
    new location or separate from Federal service.
        Question. Are the costs requested for the San Francisco Regional
    Office relocation one-time expenses?
        Answer. In fiscal year 2004, the cost of the initial relocation of
    SFRO employees to Los Angeles, CA, is estimated to cost $370,000. In
    order to obtain new office space (2,000 sq. ft.) and effect a
    reimbursable agreement with the Federal Aviation Administration's
    Western Region located in Los Angeles, CA, DOCR requested start-up
    funds of approximately $100,000. Other costs associated with the
    relocation include shipping furniture and equipment and the cost of
    relocating current employees. Miscellaneous costs, i.e., printing of
    stationery, is an example of a one-time expense. DOCR's fiscal year
    2005 budget request reflects an additional $250,000. This estimate is
    based on the more generous relocation allowance for real estate costs
    authorized in 2005 by the General Services Administration. As actual
    moves occur, some of these funds may be reallocated to personal
    services to support relocation costs properly reflected as benefits. It
    also reflects a small budget for shipping charges for supplies,
    subscriptions and equipment.

                           MINORITY BUSINESS OUTREACH

        Question. How much of the $3,000,000 fiscal year 2005 budget
    request for Minority Business Outreach funds PC&B?
        Answer. The $3,000,000 request for the Minority Business Outreach
    fund does not include PC&B cost. The Office of the Secretary's Office
    of Small and Disadvantaged Business Utilization (OSDBU) provides
    oversight for this program; PC&B are included in the S&E fund.
        The Minority Business Outreach fund is used to support partnership
    agreements with chambers of commerce and trade associations which offer
    a comprehensive delivery system that targets services towards small
    Disadvantaged Business Enterprises (DBEs) by: (1) Increasing the number
    of disadvantaged businesses that enter into transportation-related
    contracts; (2) Increasing the number of DBE firms that receive surety
    bonds and working capital through DOT's financial assistance Short Term
    Lending program and the Bonding Assistance Program; (3) Increasing the
    number of DBE businesses participating in hands-on-training that is
    related to specific disciplines required for obtaining transportation
    related contracts; and, (4) Operating the National Information
    Clearinghouse (NIC) which provides outreach and contract information to
    DBE firms.
        The Minority Business Outreach fund also supports the
    Entrepreneurial Training and Technical Assistance Program (ETTAP)
    through Partnership Agreements with Minority Educational Institutions
    (MEIs) including Historically Black Colleges and Universities, Hispanic
    Serving Institutions and Tribal Colleges. This program combines the
    efforts of MEIs, government, and the private sector to focus on
    providing transportation-related assistance and procurement information
    to women-owned and disadvantaged business enterprises (DBEs).
        Question. Please provide the number of requested staffing positions
    and FTE, indicating direct and reimbursable, under the Minority
    Business Outreach appropriation.
        Answer. FTE were not requested under the Minority Business Outreach
    appropriation.
        Question. Please provide a table listing current staffing under
    Minority Business Outreach compared to levels at the end of each
    quarter of past 5 fiscal years.
        Answer. There are no current or past staffing levels under the
    Minority Business Outreach fund.
        Question. Please describe efforts of the Minority Business Outreach
    program to encourage and assist Alaska Native Corporations to
    participate in DOT contracts and grants.
        Answer. The U.S. Department of Transportation (DOT) Short Term
    Lending Program (STLP) provides revolving lines of credit to finance
    accounts receivable arising from transportation-related contracts. The
    primary collateral consists of the proceeds of the contracts. One of
    our Bank Lenders is the Native American Bank, National Association
    (``NAB'') which is a federally-chartered bank that is owned by Native
    American Bank Corporation, a bank holding company that has been
    organized by a group of Tribal Nations and Alaska Native Corporations.
        Through this resource partner, we have established a significant
    Indian presence for our outreach efforts. We will continue to seek out
    opportunities to increase DOT contracting with Native Corporations and
    to increase the number of DBE Alaska Native Corporations who
    participate in transportation related contracts. Most of our DOT funds
    are administered by our contract and grant recipients, through the
    Federal Highway Administration (FHWA), the Federal Transit
    Administration (FTA), and the Federal Aviation Administration (FAA).
    All recipients are required to have a DBE program. Under the provisions
    of 49 CFR parts 23 and 26, Alaska Native Corporations are presumed to
    be qualified eligible for DBE program participation.
        Additionally, we assist Alaska Native Corporations in participating
    in DOT contracts. Bowhead, a Native Alaskan Corporation currently
    provides Information Technology services to the DOT Chief Information
    office under contract.
        During fiscal year 2004, the USDOT Northwest TEAM and the DOT Bond
    Agent from Seattle, Washington traveled to Anchorage, Alaska to
    participate in an outreach event, hosted by the Port of Anchorage to
    support the efforts of the Port of Anchorage International Expansion
    Project. The event was entitled ``Industry Day''. The Maritime
    Administration (MARAD) made a request of the OSDBU Minority Resource
    Center to send representatives to seek out Alaska firms who could bid
    on contracts with the Intermodal Expansion Project. This is a $260
    million project funded through the Maritime Administration. Our TEAM
    service provider, accompanied by a staff member from HCDI, the Minority
    Resource Center/OSDBU's contractor for the Marketplace Conferences
    project participated in this outreach event.
        The purpose of the ``Industry Day'' outreach event was to help
    inform local ANC and DBE firms about potential opportunities from the
    Port Expansion Project. Topics ranged from the specifics of the
    project, the project schedule and contract and subcontracting upcoming
    opportunities.
        Koniag Services, Inc. (KSI) a Native American 8(a) firm, was
    awarded the contract for project management for the ``Industry Day''
    event and was responsible for hosting the meeting.

                         NEW DOT HEADQUARTERS BUILDING

        Question. What is the unobligated balance of funds made available
    for the DOT headquarters building?
        Answer. The $42 million was apportioned by March 2004, and we are
    working with GSA to ensure obligation of the full amount by the end of
    the fiscal year. One-third of the funds are being obligated by the end
    of June with the balance by the end of September 2004.
        Question. Please compare the projected lease rates of the new
    headquarters building with the terms of the lease of the Nassif
    building?
        Answer. The following chart compares the projected lease rates of
    the new headquarters building with the lease terms of Nassif building
    for the period of fiscal year 2004 through fiscal year 2007. The
    current Nassif lease expires March 2006, and DOT's projected move to
    the new facility will be completed in November 2006. It is anticipated
    DOT and GSA will request authority to exercise a short-term lease
    extension for approximately 10 months.

    ----------------------------------------------------------------------------------------------------------------
                                                        Fiscal Year     Fiscal Year     Fiscal Year     Fiscal Year
                          Rent                             2004            2005            2006            2007
    ----------------------------------------------------------------------------------------------------------------
    New HQ Bldg.....................................  ..............  ..............     $32,928,750     $40,435,470
    Nassif Building.................................     $37,000,000     $37,740,000      43,500,000      48,500,000
    ----------------------------------------------------------------------------------------------------------------

        Question. Please provide a comprehensive list of projects and
    associated funding amounts for improvements to the Nassif building?
        Answer. The Nassif building has been occupied for almost 30 years.
    There are no comprehensive records going back that far to draw upon to
    provide the requested information. However, through anecdotal
    information, the following projects and funding for the Nassif building
    capital improvements was compiled.

    ------------------------------------------------------------------------
                  Project                       Dates              Cost
    ------------------------------------------------------------------------
    Replacement of auxiliary cooling    1995-1996...........        $452,335
     equipment.
    Conversion of below ground space    1995-1996...........         700,000
     from parking space to office
     space.
    Fitness Center Renovation.........  1997................         482,000
    500 KW Emergency Generator (This    1999................         500,000
     item will be relocated to new
     headquarters building.).
    Emergency Command Center Expansion/ 2001-2002...........         804,938
     Renovation.
    Installation of Loading Dock Doors  2001-2002...........          34,464
    ------------------------------------------------------------------------

        Question. Please breakdown in greater detail the fiscal year 2005
    request for the new headquarters building.
        Answer. The information follows.

    ------------------------------------------------------------------------
                                                                Fiscal Year
                     Description Soft Costs                     2005 Funds
    ------------------------------------------------------------------------
    GSA Managed Contracts:
        Ai:
            Acoustical/Audio Visual Engineer................  ..............
            Engineering (MEP) DIDs..........................  ..............
            Structural Engineering..........................  ..............
            Architectural/Construction Admin................  ..............
            Disaster Planning...............................        $101,115
            Fitness Center Consultant.......................  ..............
            Food Service Consultant.........................  ..............
            Health Unit Consultant..........................  ..............
            Signage Consultant..............................  ..............
            Commissioning...................................         200,000
            LEEDS Certification.............................         450,000
            Building Automation System......................          40,000
            Financial Consultant............................  ..............
            GSA advanced funds..............................  ..............
        ARA: Security DIDs..................................          50,000
        CQM Awardee:
            Project Administration for Estimating,                   400,000
             Scheduling & Inspections for Customization
             Compo-  nents).................................
            Other...........................................          19,847
            IT/Telecom Design...............................  ..............
            Guard Service (Site Access/Dock/Floor)..........       1,300,000
            Move Consultant.................................  ..............
            Moves (Box, Telecommunications, Furn.)..........       1,350,000
            Occupant Emergency Plan (OEP) Consultant........         135,000
            Systems Furniture Consultant....................         125,000
            Interior Design Consultant......................         100,000
            MEP Consultant..................................  ..............
            Document Repository.............................         100,000
            Employee Handbook...............................         325,000
    JBG: CDs--Developer's A/E (26 Design Action Item).......  ..............
                                                             ---------------
          Subtotal..........................................       4,895,962
                                                             ---------------
    GSA (WCF): Telecommunications Design....................               0
    DOT Contracts: Security Consultant......................         100,000
                                                             ---------------
          TOTAL.............................................       4,995,962
                                                             ===============
    Hard Costs:
        GSA:
            Furniture.......................................      21,100,000
            Security Equipment..............................       8,265,000
        JBG:
            Base Building Enhancements......................       7,973,000
            Interior Fitout.................................      30,000,000
            Building Automation System......................       2,500,000
                                                             ---------------
              Subtotal......................................      69,838,000
                                                             ---------------
    GSA (WCF): Telecommunications Hardware..................      81,639,600
    DOT.....................................................  ..............
                                                             ---------------
          TOTAL.............................................     151,477,600
                                                             ===============
    Other Costs:
        GSA FEE (PBS PM Fee)................................         526,438
        GSA FEE (FSS Fee)...................................       3,000,000
                                                             ---------------
          TOTAL.............................................       3,526,438
                                                             ===============
          TOTAL.............................................     160,000,000
    ------------------------------------------------------------------------

        Question. How much is the new building expected to cost?
        Answer. As identified in the lease agreement negotiated by the
    General Services Administration, the new facility direct base building
    construction cost is estimated to be $206 million. In addition, the
    land and tenant improvement allowance costs are $40.5 million and $23.8
    million respectively. DOT's estimated multi-year appropriated funding
    request for personal property, tenant fit-out and relocation expenses
    is estimated at $314.2 million.
        Question. Please define in detail what customization will be
    necessary and what the costs of each project are projected to be.
        Answer. Customization (tenant fit-out) costs are estimated at $40
    million and are comprised of the following specific items:
        Interior Tenant Fit Out.--$40,000,000.00:
      --Carpet (150,000 SF@$35/SF=$5.25 million)
      --Raised Flooring (49,000 SF@$20/SF=$0.980 million)
      --Millwork (40,000 SF@$5/SF=$0.2 million)
      --Window Treatment (75,000 SF@$1.50/SF=$0.075 million)
      --Signage (1.35 million SF@$1/SF=$1.35 million)
      --Finishes (1.35 million SF@$35/SF=$5.25 million)
      --Pantries (1,280 SF@$30/SF=$.0384 million)
      --Upgrade to Building Standard: Lighting, HVAC (General office),
            Plumbing, Electrical, Telephone Infrastructure, Acoustical
            Ceiling Tiles and Grid, Hardware (Doors, hardware) (1.35
            million SF@$19.90/SF=$26.865 million).

                                    DOT RENT

        Question. Please compare what has been appropriated for rental of
    leased space to actual expenses over the past 5 years.
        Answer. Over the past 5 years, the Government's annual appropriated
    rent payment has been approximately $37 million per year to cover
    actual rent expenditures for the DOT Nassif building.

                              WORKING CAPITAL FUND

        Question. Please provide a break out of what is included in the
    request of each modal administration for the Working Capital Fund and
    identify which account includes such funding.
        Answer. The information follows.

        OPERATING ADMINISTRATIONS WORKING CAPITAL FUND REQUEST BY ACCOUNT
                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                                                Fiscal Year
                                                               2005 Request
    ------------------------------------------------------------------------
    Federal Aviation Administration: Operations.............          24,626
    Federal Highway Administration: LAE.....................           8,299
    Federal Motor Carrier Safety Administration: Motor                 3,586
     Carrier Safety Operations & Programs...................
    National Highway Traffic Safety Administration:
        General Fund........................................           7,660
        Trust Fund..........................................           7,660
    Federal Railroad Administration: Safety and Operations..           2,928
    Federal Transit Administration: Administrative Expense..           3,152
    St. Lawrence Seaway Development Corp: Saint Lawrence                 376
     Seaway Development Corp................................
    Research and Special Programs Admin:
        Research and Special Programs.......................           2,518
        Pipeline Safety.....................................             847
    Office of the Inspector General: Salaries and Expenses..           2,218
    Surface Transportation Board: Salaries and Expenses.....              90
    Bureau of Transportation Statistics: Federal aid to                4,093
     Highways allocation....................................
    Maritime Administration: Operations and Training........           5,926
    Office of the Secretary: Salaries & Expenses, Office of           19,062
     Civil Rights...........................................
                                                             ---------------
          Total.............................................          93,040
    ------------------------------------------------------------------------

        Estimates are provided to the operating administrations to assist
    them in their budget formulation process. These estimates are used as a
    building block for the WCF budget request but do not represent the
    total WCF budget estimate. The WCF obligation request is built upon the
    customer estimates and additional obligation authority that is used to
    cover the potential to compete for business which results in higher
    demand levels for WCF services. For example, increases to demand come
    about during times of heightened security levels. The WCF budget
    estimate is developed based on the potential for the WCF to provide
    business services. Additionally, obligations for capital assets are
    required in 1 year but are provided to the operating administrations
    over multiple years based on the depreciation schedule.
        Question. Please breakout according to the fiscal year 2005 budget
    request, the obligations in the Working Capital Fund by line of
    business and compare to obligations over the past 3 fiscal years.
        Answer. The information follows.

                                                  WORKING CAPITAL FUND
                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                        Fiscal Year     Fiscal Year     Fiscal Year     Fiscal Year
                                                        2002 Actual     2003 Actual    2004 Enacted    2005 Estimate
    ----------------------------------------------------------------------------------------------------------------
    Office of the Deputy Assistant Secretary for                 374              96             323             394
     Administration.................................
    Office of Strategic Initiatives.................             426             512             722             717
    Office of Financial Management..................           5,935           5,749          16,095          13,980
    Office of Human Resource Management.............          10,254          10,686           9,923          11,481
    Office of Transportation and Facilities Services         135,237         184,793         212,793         225,222
    Office of Information Services..................          24,087          18,421          20,007          21,966
    Office of Headquarters Building and Space                  5,585           5,372           5,112           6,050
     Management.....................................
    Office of Security..............................          10,689           9,993          14,767          17,271
    Office of the Senior Procurement Executive......         152,465         225,236         126,269         118,439
                                                     ---------------------------------------------------------------
          Total Office of the Assistant Secretary            345,052         460,858         406,011         415,520
           for Administration.......................
          Total Office of the Chief Information               26,199          28,990          53,216          73,378
           Officer..................................
                                                     ===============================================================
          Total Working Capital Fund................         371,251         489,848         459,227         488,898
    ----------------------------------------------------------------------------------------------------------------

                     AUTHORIZATION OF DOT PROGRAMS AND FEES

        Question. Please list by agency of the Department of Transportation
    all appropriations or obligation limitations that are currently
    unauthorized. Also please provide the year in which the authorization
    expired.
        Answer. The information follows.
        The DOT accounts which require authorization/reauthorization in
    fiscal year 2005 include the following:

                                          APPROPRIATIONS NOT AUTHORIZED BY LAW
                                                 [Dollars in thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                                                                      Appropriations
                                                         Amount of     Last Year of    Authorization   in Last Year
                   Agency and Account                 Program or New   Authorization       Level            of
                                                           Fees                                        Authorization
    ----------------------------------------------------------------------------------------------------------------
    Federal Transit Administration:
        Administrative Expenses.....................         $79,931            2004     \2\ $56,290  ..............
        Formula Grants..............................  ..............            2004   \2\ 2,862,262  ..............
        University Transportation Research..........  ..............            2004       \2\ 4,473  ..............
        Transit Planning and Research...............  ..............            2004      \2\ 93,942  ..............
        Job Access and Reverse Commute..............  ..............            2004      \2\ 93,196  ..............
        Capital Investment Grants...................  ..............            2004   \2\ 2,339,241  ..............
        Major Capital Investment Grants.............   \1\ 1,563,198  ..............  ..............  ..............
        Formula Grants and Research.................   \1\ 5,622,871  ..............  ..............  ..............
    Research and Special Programs:
        Research and Special Programs (Hazardous              25,486            1997          19,670         $15,268
         Materials Safety)..........................
        Emergency Preparedness Grants...............          14,300            1998          21,250           7,970
    Federal Motor Carrier Safety Administration: \3\
        Motor Carrier Safety Operations and Programs         228,000             N/A             N/A             N/A
        Motor Carrier Safety Grants.................         227,000             N/A             N/A             N/A
    National Highway Traffic Safety Administration:
        Operations & Research--General Fund.........         139,300  ..............  ..............  ..............
        Operations & Research--Trust Fund...........          90,000            2003          72,000      \4\ 71,532
        National Driver Register....................           4,000            2003           2,000       \4\ 1,987
        Highway Traffic Safety Grants...............         456,000            2003         225,000     \4\ 223,537
    Federal Railroad Administration:
        Safety and Operations \5\...................         142,396            1998  ..............  ..............
        Railroad Safety.............................             N/A            1998          90,739          57,050
        Grants to the National Passenger Railroad            900,000            2002         955,000         826,476
         Corp.......................................
    Surface Transportation Board....................          20,621            1998          12,000          13,850
    Federal Highway Administration: Federal-aid       \6\ 34,282,000            2004  \7\ 26,433,750  \8\ 33,643,326
     Highway Program................................
    ----------------------------------------------------------------------------------------------------------------
    \1\ Major Capital Investment Grants and Formula Grants and Research reflect a proposed restructuring of
      accounts.
    \2\ Reflects amounts authorized in Public Law 108-224 for the period October 1, 2003, to June 30, 2004.
    \3\ New Account Structure Proposed in Fiscal Year 2004 and Submitted Again in Fiscal Year 2005--Pending
      Enactment of SAFETEA.
    \4\ Fiscal year 2003 Appropriation reflects 0.65 percent across-the-board reduction pursuant to Public Law 108-
      7.
    \5\ Was formerly the Office of the Administrator and Railroad Safety Accounts. The Office of the Administrator
      had general authority under 49 U.S.C. Section 103, however, no specific amount was authorized.
    \6\ Includes all elements except the Emergency Relief program.
    \7\ Reflects amounts authorized in Public Law 108-224 for the period October 1, 2003, to June 30, 2004.
    \8\ Represents the limitation on obligations enacted for fiscal year 2004 in Public Law 108-199, net of 0.59
      percent rescission. Does not includes exempt obligations for Minimum Guarantee.

        Question. Please provide a list of all new programs or fees that
    require authorization.
        Answer. The information follows.

                                          APPROPRIATIONS NOT AUTHORIZED BY LAW
                                                 [Dollars in thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                                                                      Appropriations
                                                         Amount of     Last Year of    Authorization   in Last Year
                   Agency and Account                 Program or New   Authorization       Level            of
                                                           Fees                                        Authorization
    ----------------------------------------------------------------------------------------------------------------
    Federal Transit Administration:
        Major Capital Investment Grants.............  \1\ $1,563,198  ..............  ..............  ..............
        Formula Grants and Research.................   \1\ 5,622,871  ..............  ..............  ..............
    Federal Motor Carrier Safety Administration: \2\
        Motor Carrier Safety Operations and Programs         228,000             N/A             N/A             N/A
        Motor Carrier Safety Grants.................         227,000             N/A             N/A             N/A
    National Highway Traffic Safety Administration:
        Operations & Research--General Fund.........         139,300  ..............  ..............  ..............
        Operations & Research--Trust Fund...........          90,000            2004     \3\ $53,681     \4\ $71,575
        National Driver Register....................           4,000            2004       \3\ 2,684       \4\ 3,579
        Highway Traffic Safety Grants...............         456,000            2004     \3\ 167,754     \4\ 223,673
    Federal Highway Administration: Federal-aid       \5\ 34,282,000            2004  \6\ 26,433,750  \7\ 33,643,326
     Highway Program................................
    ----------------------------------------------------------------------------------------------------------------
    \1\ Major Capital Investment Grants and Formula Grants and Research reflect a proposed restructuring of
      accounts.
    \2\ New Account Structure Proposed in Fiscal Year 2004 and Submitted Again in Fiscal Year 2005--Pending
      Enactment of SAFETEA.
    \3\ Reflects amounts authorized in Public Law 108-224 for the period October 1, 2003, to June 30, 2004.
    \4\ Represents the limitation on obligations enacted for fiscal year 2004 in Public Law 108-199, net of 0.59
      percent rescission.
    \5\ Includes all elements except the Emergency Relief program.
    \6\ Reflects amounts authorized in Public Law 108-224 for the period October 1, 2003, to June 30, 2004.
    \7\ Represents the limitation on obligations enacted for fiscal year 2004 in Public Law 108-199, net of 0.59
      percent rescission. Does not include exempt obligations for Minimum Guarantee.

                           AIRLINE STABILIZATION ACT

        Question. What is the unobligated balance of funds made available
    by the Airline Stabilization Act?
        Answer. As of June 1, 2004, the program maintained a balance of
    approximately $270 million for remaining obligations, including the
    litigation reserve.
        Question. What is the amount of funds made available by the Airline
    Stabilization Act that is under consideration for payment or still
    being disputed or litigated?
        Answer. Two hundred seventy million dollars, including a
    ``litigation reserve.'' Were the Department not to prevail in its
    litigation with Federal Express and two other smaller carriers, it is
    possible that the Court of Appeals, in framing its decision, could be
    sufficiently broad in its language so as to permit some other carriers
    to attempt to revise their applications and seek supplemental payments.
    Thus, the full balance has been maintained so as to include this
    litigation reserve. We expect the Court to act very soon in issuing its
    decision, and are hopeful that this figure can be revised downward
    thereafter to reflect a favorable outcome in the case.
                                     ______

                Questions Submitted by Senator Robert F. Bennett

         TRANSPORTATION OF DIAGNOSTIC AND INFECTIOUS MEDICAL SPECIMENS

        Question. The following Medical Specimen Transport White Paper was
    sent to me by ARUP Laboratories, a medical laboratory affiliated with
    the University of Utah's Medical Center. I am submitting it for the
    record so that Secretary Mineta can comment on the concerns raised and
    the questions I will supply at the end of this document.
    ``Introduction
        ``As a result of recent interpretations provided to ARUP
    Laboratories by the Department of Transportation (DOT) and the Federal
    Aviation Administration (FAA), an atmosphere of uncertainty now exists
    within the air transportation system. Medical specimen shipments from
    hospitals and laboratories in a number of locations within the United
    States are being rejected for air transport, creating the potential to
    cause patient harm through delayed testing and result availability.
    ``Background
        ``Prior to February 14, 2003, the United States Department of
    Transportation (DOT) did not regulate the transportation of medical
    specimens sent for diagnostic purposes within the United States. Prior
    to January 1, 2003, the International Air Transport Association (IATA),
    a trade association of the airlines, instructed that medical specimens
    transported by air were to be divided into two categories: Diagnostic
    Specimens and Infectious Substances. This requirement was based on
    regulations put forth by the United Nations International Civil
    Aviation Organization (UN (ICAO)). Under UN (ICAO) and IATA, Infectious
    Substances were, and still are, regulated as hazardous materials. The
    Federal Aviation Administration (FAA), the enforcement agent for DOT,
    recognizes ICAO regulations, but does not reference IATA rules in their
    enforcement actions.
        ``Prior to January 1, 2003, medical specimens that were identified
    as Diagnostic Specimens could not contain any known or suspected
    infectious agent. Any specimen that was identified as having an
    infectious agent required shipment as an Infectious Substance.
    Infectious Substance shipments could only be transported by airlines
    that were considered as `Will Carry' airlines, meaning that they
    provide formal training and handling information to cargo personnel on
    Hazardous Materials. Diagnostic Specimens could be shipped by any
    airline at that time.
        ``On February 14, 2003, revised DOT regulations went into effect
    that incorporated a definition for Diagnostic Specimens into the
    hazardous materials regulations. As a result of this revision, the DOT
    and FAA are now instructing any airline that is considered a `Will Not
    Carry' airline to avoid carrying ALL Diagnostic Specimens.
        ``Airline routing changes and service discontinuation, partly due
    to the terrorist attacks of September 11, 2001, have resulted in an
    increasing number of areas now served almost exclusively by `Will Not
    Carry' regional airlines. Under the new regulations, these airlines can
    no longer carry shipments they had previously been allowed to carry.
    Delays in diagnostic testing for patients in those areas have the
    potential to prolong patient management and hospital stays. This will
    increase medical costs, and could affect as many as 6,000 patients per
    day receiving results from ARUP Laboratories alone. Other laboratories
    may have similar issues.
        ``The DOT offers an exemption for specimens that are not considered
    infectious in DOT 49 CFR 173.134(b)(2). This exemption is not clearly
    defined, nor are there any specific instructions for the shipping of
    these specimens. If we assume, as we have been told, that this
    exemption creates a new unregulated category, i.e. medical specimen,
    there is no assurance airlines will recognize such an unregulated term.
    Because personnel training is a requirement of the regulations, it is,
    at present, unclear what terminology will be recognized for this
    category of unregulated specimens. Efforts to quickly and effectively
    revise existing medical specimen training programs will be further
    impeded until these concerns are resolved.
        ``In excess of 80 percent of clinical data is represented by
    laboratory results. The specimens from which 5 to 10 percent of this
    clinical data is derived are shipped between requesting and testing
    locations within the United States that may be affected by these
    regulatory changes. Lack of consistency between regulatory agencies,
    the transportation industry, and health care entities (as shippers)
    potentially create unnecessary liability and may compromise patient
    care.
        ``In conclusion, it is noteworthy that the laboratory industry for
    many years has been a leader in developing safe handling practices to
    deal with the fact that every single medical specimen is a potentially
    hazardous material. The industry as a whole has a remarkable and
    enviable safety record in the transportation of medical specimens.''

        Is it the intent of DOT regulations to limit the transport of
    diagnostic specimens by ``will-not-carry'' airlines?
        Answer. No, the Department of Transportation's (DOT) Hazardous
    Materials Regulations (HMR; 49 CFR Parts 171-180) establish safety and
    security requirements for the commercial transportation of hazardous
    materials by all modes. The regulations are not intended to limit the
    transportation of hazardous materials by certain types of carriers;
    rather the regulations set forth the safety and security requirements
    that must be met by shippers and carriers who choose to transport
    hazardous materials.
        The decision not to carry one or more types of hazardous materials
    rests with individual carriers, not DOT. Since economic deregulation,
    air carriers have been able to accept or reject hazardous materials.
    Air carriers making a business decision to accept hazardous materials
    are called ``will-carry'' air carriers and those deciding not to accept
    hazardous materials are called ``will-not-carry'' air carriers. These
    business decisions are influenced by factors such as insurance rates
    and anticipated hazmat package volumes. Once an air carrier makes this
    decision, the Federal Aviation Administration (FAA) reviews its hazmat
    training program. Employees of will-carry air carriers are trained to
    recognize and accept hazardous materials while employees of will-not-
    carry air carriers are trained to recognize and reject hazmat. Although
    air carriers can change their will/will-not-carry status, the initial
    acceptance procedures applied by their employees is crucial and affects
    subsequent operational decisions.
        Under the Hazardous Materials Regulations (HMR), infectious
    substances are classed as Division 6.2 materials. An infectious
    substance is a material known to contain or suspected of containing a
    pathogen, which is a virus or microorganism that has the potential to
    cause disease in humans or animals. Infectious substances must be
    packaged, marked, and labeled in accordance with applicable regulatory
    requirements; further, shipments of infectious substances must be
    accompanied by a shipping paper and by appropriate emergency response
    information. Employees of shippers or carriers who handle infectious
    substances must be trained in the regulatory requirements that apply to
    these materials.
        Under the HMR, a diagnostic specimen is defined as human or animal
    material that is being transported for diagnostic or investigational
    purposes. A diagnostic specimen that, in the judgment of a medical
    professional, is known to contain or suspected to contain an infectious
    substance is regulated as a hazardous material under the HMR. However,
    the requirements applicable to the transportation of diagnostic
    specimens are less stringent than those for other types of infectious
    substances. For example, shipments of diagnostic specimens need not be
    accompanied by shipping papers or emergency response information, and
    the required training for hazmat employees is less rigorous than for
    other types of infectious substances.
        Under the HMR, a diagnostic specimen that, in the judgment of a
    medical professional, is not likely to contain an infectious substance
    is not regulated as a hazardous material and may be transported by a
    ``will-not-carry'' air carrier without limitation. Thus, no packaging,
    shipping documentation, marking or labeling, or training requirements
    would apply.
        Because the HMR exempts diagnostic specimens that do not contain
    infectious substances from all regulatory requirements, many packages
    identified as containing diagnostic specimens may not actually contain
    infectious substances and, thus, could be transported by will-not-carry
    air carriers. DOT is working with the Centers for Disease Control and
    Prevention and the International Civil Aviation Organization to
    consider whether a unique shipping name is necessary to distinguish
    infectious diagnostic specimens from non-infectious diagnostic
    specimens.
        Question. Has DOT done any analysis with regard to the impact of
    this regulation on States such as Utah and the Intermountain West that
    rely on regional air carriers to transport diagnostic specimens?
        Answer. No, DOT has not analyzed the impact of the regulations on
    States that rely on regional air carriers to transport diagnostic
    specimens. The decision to provide or not provide hazardous materials
    transportation service on a particular air route is a business decision
    of the air carrier. The regulations governing the transportation of
    infectious substances, including diagnostic specimens, were most
    recently revised and updated in a final rule that became effective on
    February 14, 2003. The regulatory evaluation developed in support of
    that rulemaking examined the costs of several regulatory alternatives
    on shippers and carriers of diagnostic specimens and the benefits that
    would be expected to accrue from each regulatory alternative on the
    Nation as a whole.
        Representatives from the FAA have met with the Regional Airline
    Association and the Air Transport Association of America concerning the
    transport of diagnostic specimens to discuss various alternatives. One
    alternative would be for the will-not-carry air carrier to contact
    their diagnostic specimen shipping firms to determine if the packages
    being offered actually contain infectious substance. If the packages do
    not contain infectious substances, will-not-carry airlines would be
    able to accept and transport them.
        Question. What is the typical cost for a regional airline to
    provide training to its employees to qualify to handle ``infectious
    substances''?
        Answer. DOT does not collect nor require regional airlines to
    provide data on costs to qualify employees to handle infectious
    substances.
        The training requirements in the Hazardous Materials Regulations
    (HMR) are flexible performance standards that permit employers that
    assign employees to perform functions regulated by the HMR to meet the
    training requirements using a variety of methods, such as by utilizing
    classroom training, computer- or web-based training, on-the-job
    training, or some combination of these and other training methods. The
    training must include general awareness training that provides
    familiarity with the requirements of the HMR; function-specific
    training that provides an understanding of the requirements of the HMR
    applicable to the specific job each employee performs; safety training
    that provides information on responding to emergency, personal
    protection, and methods for avoiding accidents; and security awareness
    training that familiarizes the employee with the security risks
    associated with hazardous materials transportation. Training costs for
    an individual carrier will vary based on the number of people it
    employs whose job responsibilities directly affect the safety of
    hazardous materials in transportation and the training methods it
    elects to utilize.
        In addition, in accordance with FAA airworthiness requirements, all
    air carriers must provide hazmat training. Will-not-carry air carriers
    must provide some hazmat training to their employees on such topics as
    labeling, marking and general awareness so they can recognize hazmat. A
    rough estimate for a will-not-carry air carrier to provide initial
    training would be $320 per applicable employee. In addition, annual
    recurrent hazmat training for will-not-carry air carriers would be
    approximately $160 per applicable employee. These estimates include the
    cost of the employee's salary while in training. A rough estimate for
    will-carry air carrier initial training would be an additional $880
    (for a total of $1,200) per applicable employee. Annual recurrent
    hazmat training for will-carry air carriers would be an additional $160
    (for a total of $320) per applicable employee.
        Question. What can DOT do to provide these regional/national
    clinical laboratories with regulatory relief so that they can move
    their specimens more efficiently?
        Answer. The Hazardous Materials Regulations (HMR) provide
    significant regulatory exceptions applicable to the transportation of
    diagnostic specimens. A diagnostic specimen that, in the judgment of a
    medical professional, is not likely to contain an infectious substance
    is not regulated as a hazardous material and, therefore, is not subject
    to any regulatory requirements. A diagnostic specimen that, in the
    judgment of a medical professional, contains or is suspected to contain
    an infectious substance is subject to minimal packaging and hazard
    communication requirements, but is not regulated as stringently as
    other types of infectious substances.
        For example, an infectious substance generally must be transported
    in a packaging that has been tested and certified to meet specific
    performance standards. A diagnostic specimen may be transported in a
    less stringent, and therefore less expensive, type of packaging. A
    package containing an infectious substance generally must be marked
    with the United Nations identification number and proper shipping name
    of the material and must be labeled with a Division 6.2 label and must
    be accompanied by a shipping paper and emergency response information.
    A package containing a diagnostic specimen must be marked only with the
    words ``Diagnostic Specimen'' and need not be accompanied by a shipping
    paper or emergency response information. Further, persons who ship or
    transport diagnostic specimen are exempt from the training requirements
    of the HMR; instead employees of such shippers and carriers must be
    informed about the requirements applicable to the transportation of
    diagnostic specimens.
        In addition, in December, 2003, the FAA corresponded with the Air
    Transport Association and the Regional Airline Association suggesting
    that will-not carriers may wish to contact shippers individually. As a
    result, one regional will-not-carry air carrier serving Utah and the
    Intermountain West, SkyWest, has developed a ``shipper's confirmation
    of non-infectious substance form'' that is acceptable to the FAA. The
    form is available on the SkyWest website. In addition, it would be
    acceptable for those offering non-infectious diagnostic specimens to
    simply mark their packages as NOT containing hazardous material. In
    fact the ARUP Laboratories, a large shipper of medical specimens in
    Utah, indicates on their website that it will mark its packages
    ``Medical Specimens, non HMR.'' This would also be sufficient to allow
    will-not-carry air carriers to transport the ARUP non-infectious
    packages and is acceptable to the FAA.
        Question. What was the impetus for DOT's revision of the
    regulations on February 14, 2003, incorporating a definition for
    Diagnostic Specimens into hazardous material regulations?
        Answer. DOT's adoption of the regulations for transporting
    infectious substances, including diagnostic specimens, that became
    effective February 14, 2003, was primarily intended to harmonize the
    Hazardous Materials Regulations (HMR) with international standards
    applicable to such transportation.
        Generally, to facilitate the safe and efficient transportation of
    infectious substances, the HMR permit shipments to be transported under
    provisions of the Technical Instructions for the Safe Transportation of
    Dangerous Goods by Air (Technical Instructions) issued by the
    International Civil Aviation Organization (ICAO), the International
    Maritime Dangerous Goods Code (IMDG Code) issued by the International
    Maritime Organization (IMO), and the Transportation of Dangerous Goods
    Regulations (TDG) issued by Transport Canada, as appropriate. Prior to
    our adoption of the new requirements, however, the HMR did not provide
    for the level of safety achieved by the ICAO Technical Instructions or
    the IMDG Code. Moreover, the HMR at that time included a complete
    exception from all requirements for shipments of diagnostic specimens,
    even those that contained extremely hazardous infectious substances.
        Harmonization of the HMR with the international standards has
    several important benefits. Carriers are able to train their hazmat
    employees in a single set of requirements for the classification,
    packaging, communication of hazards, handling, stowage, and the like,
    thereby minimizing the possibility for improperly transporting a
    shipment of infectious substances because of differences in national
    regulations. Similarly, many shippers find that consistency in
    regulations for the transportation of infectious substances aids their
    understanding of what is required, thereby permitting them to more
    easily comply with these safety regulations when shipping hazardous
    materials to many different countries. Uniformity of national and
    international hazardous materials transportation regulations is
    critical to safety and trade facilitation of hazardous materials
    transportation. Consistency between United States and international
    regulations enhances the safety of international hazardous materials
    transportation through better understanding of the regulations, an
    increased level of industry compliance, the smooth flow of hazardous
    materials from their points of origin to their points of destination,
    and consistent emergency response in the event of a hazardous materials
    incident.
        Question. How would DOT respond to the suggestion of a moratorium
    on the enforcement of the regulations regarding the classification of
    Diagnostic Specimens until such time as a study can be made to assess
    the impact of the regulations on patients, health care, and medical
    practice within the United States and the risks of allowing ``Will-Not-
    Carry'' airlines to carry Diagnostic Specimens?
        Answer. DOT strongly opposes an enforcement moratorium applicable
    to the transportation of diagnostic specimens. Surveillance and
    enforcement must reflect the underlying safety requirements.
        A diagnostic specimen known or suspected to contain an infectious
    substance poses a safety, health, and security risk in transportation
    that must be addressed. Diagnostic specimens that contain infectious
    agents such as the HIV or SARS viruses are routinely transported by air
    both domestically and internationally. The regulations governing such
    transportation in the HMR and in international standards protect
    transport workers and the general public from possible exposure to such
    infectious agents. The regulations applicable to the transportation of
    diagnostic specimens were developed through a process that balances
    their potential costs and other impacts with their benefits. The
    packaging and hazard communication requirements minimize the
    possibility that a transport worker or other individual will be exposed
    to an infectious agent and enhance the ability of carriers and
    emergency response personnel to effectively respond to an accident
    involving an infectious agent.
        Question. Would DOT consider the addition of laboratory health care
    professionals to groups studying and promulgating new regulations
    affecting the transport of laboratory specimens?
        Answer. DOT welcomes the participation of laboratory health care or
    other medical professionals as we consider proposals for revising the
    current regulatory requirements applicable to the transportation of
    diagnostic specimens and other types of infectious substances.
        Prior to the adoption of the February 14, 2003 regulations, the
    Federal Aviation Administration (FAA) met with laboratory professionals
    and carefully considered their comments and concerns as we developed
    the final regulations. In addition, the American Clinical Laboratory
    Association, the American Society of Clinical Pathologists, and the
    American Biological Safety Association were among dozens of
    organizations and individuals who offered comments to the rulemaking
    docket on this issue. The international standards applicable to the
    transportation of infectious substances were recently revised. DOT is
    currently considering revisions to the HMR to harmonize our domestic
    requirements with the most recent international revisions. FAA is
    working with the Centers for Disease Control and Prevention, the Food
    and Drug Administration, the U.S. Department of Agriculture, and other
    national agencies responsible for public health issues.
        In October 2003, FAA hosted a public meeting specifically to
    discuss issues related to the air transportation of diagnostic
    specimens and other infectious substances. In June 2004, the FAA is
    hosting a second meeting to discuss revisions to the international
    transportation standards, including revisions that should help make it
    easier for air carriers to distinguish between diagnostic specimens
    that are regulated for purposes of transportation and diagnostic
    specimens that are exempt from such regulation.
                                     ______

                Questions Submitted by Senator Richard J. Durbin

                                     AMTRAK

        Question. Why did the administration only include $900 million for
    Amtrak in the fiscal year 2005 budget when this level of funding will
    send the company into insolvency?
        Answer. The administration believes that the Federal role in
    intercity passenger rail service needs significant change. While the
    administration supports intercity passenger rail service as a component
    of this Nation's system of passenger mobility, we are not willing to
    commit increasing amounts of limited discretionary funds available for
    transportation investment on a business model that does not work.
    However, the administration is prepared to support higher levels of
    funding for a reformed system of intercity passenger rail service. The
    administration expects that if Amtrak were to receive $900 million, the
    corporation could remain solvent through fiscal year 2005 while
    Congress enacted intercity passenger rail reform legislation, through
    deferral of capital investments, reductions in overhead and, perhaps,
    some cuts in services.
        Question. Does the administration support reauthorization of
    Amtrak? Or would the administration rather break the intercity
    passenger railroad up and privatize operations?
        Answer. The administration's legislative proposal, the Passenger
    Rail Investment Reform Act, outlines a third course of action. The
    administration believes that intercity passenger rail service should
    exist where the States, as the driving force behind surface
    transportation planning, determine that service is an important
    component of an intermodal plan for passenger mobility and thus worthy
    of investment. The States would competitively select operators for
    those services the States deem are important enough to warrant public
    support from among qualified firms, perhaps including a restructured
    Amtrak. While these operators would be private sector companies, they
    would receive operating support from the State(s) and capital
    investment from the States and Federal Government.

                                AVIATION DELAYS

        Question. How do you expect to proceed on addressing aviation
    congestion and flight delays at Chicago O'Hare International Airport in
    addition to the temporary, voluntary flight reductions during peak
    hours? When will data on the flight reductions be available?
        Answer. This administration is committed to addressing aviation
    congestion in both the short- and long-term by working with the
    carriers and local authorities. In Vision 100 (Public Law 108-176),
    Congress gave the Federal Aviation Administration (FAA) a number of new
    tools to use when demand exceeds capacity at an airport. Under Section
    422, the FAA can schedule Delay Reduction Meetings; under Section 423,
    the FAA can engage in Collaborative Decision Making. In addition, the
    Administrator retains her authority to issue orders that concern the
    safety or efficiency of the airspace. While these are all short-term
    methods, FAA's long-term goal to address congestion nationwide will be
    accomplished by gaining additional capacity at the Nation's airports.
    FAA will continue to monitor delays and will adjust approaches to air
    traffic delays as needed during the busy summer flying season. Complete
    data on the effectiveness of the actions taken so far at O'Hare and
    possible future actions to reduce delays will not be available until
    after the busy summer flying season.

                          LEVERAGED LEASE TRANSACTIONS

        Question. As you know Mr. Secretary, at the request of the U.S.
    Treasury Department, the Federal Transportation Administration (FTA)
    formally suspended its practice of reviewing and approving proposals
    for leveraged lease transactions involving public transit assets. FTA's
    decision to immediately comply with Treasury's request and suspend
    consideration of the 15 pending transactions could have sizable budget
    implications for the entities that submitted those transactions and
    who, up until that time, had every reason to believe that FTA would
    proceed to review and approve those transactions in the same manner it
    has done for years. Each of these entities likely incurred significant
    costs in negotiating the leases, and had a reasonable expectation of
    realizing substantial revenue from them following FTA approval. What is
    the FTA's plan to reconsider its decision to suspend pending leveraged
    lease transactions absent further action by Congress on this issue?
        Answer. The Department was informed by the Chairman of the Senate
    Finance Committee in November 2003, that his committee was conducting
    an investigation of abusive tax shelters involving subway systems and
    other assets funded with taxpayer dollars and asked for our cooperation
    in the investigation. Also in November 2003, the Department received a
    direct request from the Treasury Department that the Federal Transit
    Administration suspend its review and approval of tax-advantaged lease
    transactions because of concerns about whether the asserted tax
    benefits are allowable.
        FTA notified the transit agencies whose assets would be involved in
    the leasing transactions that reviews would be suspended until the
    Department of Treasury completed its review of these and similar
    transactions. Should the Treasury Department complete its review and
    any rulemaking regarding these leasing transactions, FTA would then act
    in accordance with the resulting instructions from the Treasury
    Department.
                                     ______

                 Questions Submitted by Senator Byron L. Dorgan

                         ESSENTIAL AIR SERVICE FUNDING

        Question. I am very upset that the administration continually tries
    to cut back this program which is so important for rural America. Last
    year, for fiscal year 2004, President Bush proposed only $50 million
    for EAS, but we in Congress fought hard to maintain funding, and funded
    EAS at $102 million. This year, even though the FAA reauthorization
    bill allows up to $115 million for the basic program, plus another $12
    million for pilot projects, the administration once again only funds
    EAS at $50 million. Could you tell me why the administration is not
    following Congress' mandate in the FAA reauthorization bill?
        Answer. The administration believes that the EAS program must be
    reformed or the costs will escalate out of control. As more and more
    regional carriers upsize their fleets to larger turboprops or even
    regional jets, it will leave more communities reliant upon subsidized
    EAS. In addition, as the spread of low-fare carriers continues, more
    local communities will be unable to support their local airport's
    service as passengers are willing to drive for a larger part of their
    journeys in order to take advantage of nearby, low-fare jet service.
    EAS service of two or three round trips a day cannot compete with low-
    fare jet service, and more and more communities are falling into this
    situation. For example, just a few years ago, Utica, New York generated
    about 24,000 passengers a year, and was served profitably without EAS
    subsidy. Shortly after Southwest inaugurated service at Albany and
    JetBlue at Syracuse (less than 50 miles away), annual, passenger levels
    fell to 3,500 and we were paying well over $1,000,000 in EAS subsidy in
    an attempt to compete with the low-fare, jet service nearby. This
    example illustrates why we need EAS reforms.

                       ESSENTIAL AIR SERVICE COST-SHARING

        Question. I was also disappointed that the President seeks to
    require all communities receiving EAS funds to provide non-Federal
    matching funds. Communities fewer than 100 highway miles from a large
    or medium hub airport, 75 miles from a small hub airport, or 50 highway
    miles from a non-hub airport with jet service would have to contribute
    not less than 50 percent and would only be eligible for surface
    transportation subsidies. Communities in North Dakota that participate
    in EAS, such as Devils Lake, Jamestown and Dickinson-Williston, are
    more than 210 highway miles from a medium or large hub airport, and
    will have to provide 10 percent, and all others will have to provide
    not less than 25 percent. This is patently unfair and goes against the
    purpose of the EAS program to promote and protect air service to rural
    areas, and I will fight hard to prevent the President's plan from
    taking effect. Given that Congress explicitly rejected such a harsh
    cost-sharing requirement in the FAA reauthorization process last year,
    why would the administration propose it now after the reauthorization
    bill has passed? Isn't this patently unfair to rural America?
        Answer. Requiring a modest contribution would encourage civic
    officials and business leaders at the local and State levels to
    evaluate the need for the EAS program, given other local funding
    priorities, and, as stakeholders in their service, the communities will
    become key architects in designing their specific transportation
    package based on their need and requirements.

                          AIR TRAFFIC CONTROL TRAINING

        Question. According to the GAO, the FAA will likely need to hire
    thousands of air traffic controllers in the next decade to meet
    increasing traffic demands and to address the anticipated attrition of
    experienced controllers, predominately because of retirement. The GAO
    raised the point that ``the FAA's process of hiring replacements only
    after a current controller leaves does not adequately take into
    consideration the time it takes to train a replacement to become a
    fully certified controller--up to 5 years, which might result in gaps
    of coverage or increased overtime.'' To address this problem, I
    attached an amendment to expressly authorize the FAA to spend such sums
    as may be necessary to carry out and expand the Collegiate Training
    Initiative. As you may know, one of those schools participating is the
    John D. Odegard School of Aerospace Sciences at UND. Knowing this, what
    efforts are being taken at the FAA to address this problem? Would you
    support efforts to add funding for this initiative?
        Answer. Currently, the FAA has no plans to expand the Air Traffic
    Collegiate Training Initiative (AT-CTI) beyond the 13 colleges and
    universities. The AT-CTI candidate pool is fairly large and growing
    (about 361 waiting to be hired). The number of controllers to be hired
    in fiscal year 2004 and beyond is being evaluated. There has been no
    controller hiring since October 2003. We are reluctant to add
    additional colleges until the hiring picture is clearer and the need
    for additional training resources is better quantified.
        If the AT-CTI pool grows too large, FAA runs the risk of not being
    able to hire a significant enough percentage of graduates to make the
    program worthwhile to the colleges. Colleges market this program to
    their students and we maintain a balance between having enough
    candidates and not overstating our ability to hire them. Colleges can
    withdraw at any time; they are not obligated to the FAA.
        The FAA reauthorization bill Vision 100--Century of Aviation
    Reauthorization Act, Public Law 108-176, allows for AT-CTI expansion if
    necessary. However, the Departments of Transportation and Treasury and
    Independent Agencies fiscal year 2004 House Appropriations Report 108-
    243 specifically directs FAA not to expand the AT-CTI program. It
    states, ``While the Committee does not oppose continuation of the Air
    Traffic Control Collegiate Training Initiative, the Committee does not
    believe it should be expanded, and directs the FAA not to expand these
    programs.''

                                     AMTRAK

        Question. I was disappointed that the administration has again
    proposed only $900 million for Amtrak this year. I am particularly
    concerned about the impact of any cuts to Amtrak on long distance
    trains, such as the Empire Builder. If enacted, what impact do you
    think your budget request would have on long distance train service?
        Answer. The administration believes that the Federal role in
    intercity passenger rail service needs significant change. While the
    administration supports intercity passenger rail service as a component
    of this Nation's system of passenger mobility, we are not willing to
    commit increasing amounts of limited discretionary funds available for
    transportation investment on a business model that does not work.
    However, the administration is prepared to support higher levels of
    funding for a reformed system of intercity passenger rail service. The
    administration expects that if Amtrak were to receive $900 million, the
    corporation could remain solvent through fiscal year 2005 while
    Congress enacted intercity passenger rail reform legislation, through
    deferral of capital investments, reductions in overhead and, perhaps,
    some cuts in services. Amtrak would determine how to best operate with
    available resources. Therefore, I would prefer not to speculate which,
    if any, route or service type would be impacted in the short-term by
    the administration's budget request of $900 million for Amtrak.

                              SUBCOMMITTEE RECESS

        Senator Shelby. Mr. Secretary, I thank you for your
    appearance. As usual, you bring a lot to the table and a past
    friendship too.
        Secretary Mineta. Thank you very much.
        Senator Shelby. This concludes our hearing.
        [Whereupon, at 11:30 a.m., Tuesday, March 9, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND
              RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2005

                                  ----------

                            THURSDAY, APRIL 1, 2004

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:03 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard C. Shelby (chairman)
    presiding.
        Present: Senators Shelby, Stevens, and Murray.

                          UNITED STATES POSTAL SERVICE

    STATEMENT OF JOHN POTTER, POSTMASTER GENERAL AND CEO

                 OPENING STATEMENT OF SENATOR RICHARD C. SHELBY

        Senator Shelby. Good morning. The committee will come to
    order.
        Today the subcommittee will hear from the United States
    Postmaster General, John Potter. Mr. Potter has testified at a
    number of hearings in the last few months on postal reform,
    terror attacks using mail, and other issues facing the Postal
    Service. It has been several years, however, since the
    subcommittee has had the privilege of receiving testimony from
    the Postmaster General. We are pleased to welcome you here
    today.
        As a vital component of our Nation's economy, it is
    absolutely crucial that the Postal Service maintain its role as
    a Federal Post and maintain the solemn obligation of universal
    service. In doing so, it is undeniable that the Postal Service
    must change and adapt in order to provide an affordable service
    that continues to tie our Nation together.
        Without question, the United States Postal Service has
    confronted some significant changes over the last few years.
    The current business model of the Postal Service is outdated
    and is not economically viable in the 21st century. The
    financial problems have been further complicated since the
    terrorist attacks that used the mail system to deliver
    biological weapons.
        Even as the number of customers and addresses that the
    Postal Service serves has increased, the volume of first class
    mail has dropped steadily since 2001. The Postal Service now
    faces stiff competition from a variety of electronic
    communications options that did not widely exist a few years
    ago, as well as from private sector delivery services.
    Furthermore, postage rate hikes have only caused consumers to
    further rely on alternative means of communications. All of
    these factors have become a self-fulfilling prophecy of future
    postage rate increases to offset the decline in volumes of
    first class mail.
        And as one who believes that a comprehensive Postal Service
    for all Americans, rural and urban, is one of the central
    elements of keeping the country connected, the first class
    revenue and volume dilemma is one we have to address and solve.
        As difficult as these challenges are, the Postal Service is
    also charged with ensuring the safety of the mail. The anthrax
    attacks in 2001 and the more recent attacks using the deadly
    toxin ricin create a daunting overlay on every aspect and
    element of the Postal Service's operation.
        I need not elaborate today any further on the challenge
    this presents to the Postal Service and look forward to hearing
    what steps are being taken to prevent these attacks from
    happening in the future.
        I would also appreciate learning about your plan for
    screening the mail to provide for the safety of Postal
    customers and Postal employees while also ensuring timely
    delivery.
        In the wake of anthrax attacks, Congress provided the
    Postal Service with emergency funding to decontaminate sorting
    facilities and to procure biohazard detection equipment. The
    Postal Service has used this funding to install sensors that
    detect anthrax at several facilities. I have been told,
    however, by the General Accounting Office and others, that the
    system cannot adequately detect other agents.
        I am concerned that the prior investment may be too focused
    on reacting to the last threat and not focused enough on
    detecting other threats.
        The Postal Service submitted a budget request to Congress
    that includes $779 million for emergency preparedness
    activities. This funding, however, was not included in the
    President's budget. I hope you will discuss the next steps for
    the Postal Service and what sort of investment we can expect in
    future years.
        Today, I would also like to discuss the reform plans that
    you have put in place and those legislative reforms that the
    Postal Service is pursuing in order to properly transform
    itself into a self-sustaining enterprise.
        The Postal Service has several advantages that are relevant
    in the 21st century. It is the only delivery service capable of
    reaching every household in America, by providing direct access
    to each and every mailbox. It connects communities,
    particularly those in rural areas. It also presents tremendous
    potential for those mailers who desire to reach 100 percent of
    the population in a given community or area.
        I look forward to hearing your thoughts, Mr. Potter, on how
    best to leverage these and other of the Postal Service's unique
    attributes into increase revenues and market growth.
        The Postal Service has been granted significant relief from
    its retirement obligations through the recently enacted Postal
    Service Retirement System Funding Reform Act. I would
    appreciate hearing your perspective on how the Postal Service
    expects to utilize these newly available resources.
        As part of any serious reform effort, the Postal Service
    must improve its focus on its core services. It has not been an
    effective competitor in commercial activities that are
    unrelated to its traditional responsibilities, and these forays
    have diverted funds from other necessary expenses.
        In addition, the post office must not lose sight of its
    efforts to control its costs. I commend the Postmaster General
    for streamlining the workforce by 10 percent over the last 5
    years without layoffs. This is a good start, but more cost-
    cutting measures will be needed to reshape the Postal Service
    into a self-sustaining, commercially viable enterprise.
        We have basically two tracks that we can take. We can
    either do things better or do things differently. We hear time
    and again about processes that private businesses have put in
    place to become more competitive. Perhaps now we should find
    ways to challenge the Postal Service to bring their costs in
    line with what is offered in the domestic marketplace.
        And, perhaps now is the time to pursue reforms and
    performance measures that focus the Postal Service on those
    things that no one else can do and encourage American
    businesses to provide those services that they can do better.
        The Revenue Foregone Reform Act of 1993 retains free
    postage for visually impaired customers and for overseas
    absentee balloting materials. To pay for these services, the
    Act provides for an annual $29 million appropriation to
    continue through 2035. Since 1994, the Postal Service has used
    this annual appropriation to pay off debt accumulated in the
    early 1990s. In reviewing the administration's budget request,
    I found that no funds were provided.
        In recent years, some have suggested that the Postal
    Service should reduce its days of operation, as well as the
    scope of its service to rural areas of the country, in order to
    cut costs. I am heartened that you and the Service have
    steadfastly resisted such short-sighted so-called reforms. In
    the course of your testimony today, I hope that you will renew
    your commitment to maintaining universal 6-day-a-week service.
        Mr. Postmaster General, as encouraged as I am by your
    defense of affordable universal service, I am concerned that
    the current moratorium on new construction has left many
    communities without adequate facilities for the dispatch and
    delivery of U.S. mail. For universal service to be meaningful,
    it must be reasonably accessible and convenient for customers.

                               PREPARED STATEMENT

        It is my express hope that you will, today, outline the
    Postal Service's plan for again investing in the communities to
    which its service and presence are so vital and for innovative
    arrangements to keep the rural communities connected to the
    post office.
        Again, I want to welcome you to the subcommittee and look
    forward to discussing the important matters during the question
    and answer period.
        Senator Murray.
        [The statement follows:]

                Prepared Statement of Senator Richard C. Shelby

        Good morning. Today the subcommittee will hear from the United
    States Postmaster General John Potter.
        Mr. Potter has testified at a number of hearings in the last few
    months on postal reform, terror attacks using mail, and other issues
    facing the Postal Service. It has been several years, however, since
    the subcommittee has had the privilege of receiving testimony from the
    Postmaster General, and we are pleased to welcome you.
        As a vital component of our Nation's economy, it is absolutely
    crucial that the Postal Service maintain its role as the Federal Post
    and maintain the solemn obligation of universal service. In doing so,
    it is undeniable that the Postal Service must change and adapt in order
    to provide an affordable service that continues to tie our Nation
    together.
        Without question, the United States Postal Service has confronted
    some significant challenges over the last few years. The current
    business model of the postal service is outdated and is not
    economically viable in the 21st century. The financial problems have
    been further complicated since the terrorist attacks that used the mail
    system to deliver biological weapons.
        Even as the number of customers and addresses that the Postal
    Service serves has increased, the volume of first class mail has
    dropped steadily since 2001.
        The Postal Service now faces stiff competition from a variety of
    electronic communications options that did not widely exist a few years
    ago as well as from private sector delivery services.
        Furthermore, postage rate hikes have only caused consumers to
    further rely on alternative means of communications.
        All of these factors have become a self-fulfilling prophecy of
    future postage rate increases to offset the declining volume of first
    class mail. And, as one who believes that a comprehensive postal
    service for all Americans--rural and urban--is one of the central
    elements of keeping the country connected, this first class revenue and
    volume dilemma is one we have to address and solve.
        As difficult as these challenges are, the Postal Service is also
    charged with ensuring the safety of the mail. The anthrax attacks in
    2001 and the more recent attacks using the deadly toxin ricin create a
    daunting overlay on every aspect and element of the Postal Service's
    operation.
        I need not elaborate any further on the challenge this presents to
    the Postal Service and look forward to hearing what steps are being
    taken to try to prevent these attacks from happening in the future. I
    would also appreciate learning about your plan for screening the mail
    to provide for the safety of Postal customers and Postal employees
    while also ensuring timely delivery.
        In the wake of the anthrax attacks, Congress provided the Postal
    Service with emergency funding to decontaminate sorting facilities and
    to procure biohazard detection equipment. The Postal Service has used
    this funding to install sensors that detect anthrax at several
    facilities.
        I have been told, however, by the General Accounting Office and
    others that the system cannot adequately detect for other agents. I am
    concerned that the prior investment may be too focused on reacting to
    the last threat and not focused enough on detecting other threats.
        The Postal Service submitted a budget request to Congress that
    includes $779 million for emergency preparedness activities. This
    funding, however, was not included in the President's budget. I hope
    you will discuss the next steps for the Postal Service and what sort of
    investment we can expect in future years.
        I would also like to discuss the reform plans that you have put in
    place and those legislative reforms that the Postal Service is pursuing
    in order to properly transform itself into a self-sustaining
    enterprise.
        The Postal Service has several advantages that are relevant in the
    21st century. It is the only delivery service capable of reaching every
    household in America, by providing direct access to each and every
    mailbox.
        It connects communities, particularly those in rural areas. It also
    presents tremendous potential for those mailers who desire to reach 100
    percent of the population in a given community or area.
        I look forward to hearing your thoughts, Mr. Potter, on how best to
    leverage these and other of the Postal Services' unique attributes into
    increased revenues and market growth.
        The Postal Service has been granted significant relief from its
    retirement obligations through the recently-enacted Postal Civil
    Service Retirement System Funding Reform Act. I would appreciate
    hearing your perspective on how the Postal Service expects to utilize
    these newly available resources.
        As part of any serious reform effort, the Postal Service must
    improve its focus on its core services. It has not been an effective
    competitor in commercial activities that are unrelated to its
    traditional responsibilities, and these forays have diverted funds from
    other necessary expenses.
        In addition, the post office must not lose sight of its efforts to
    control its costs. I commend the Postmaster General for streamlining
    the workforce by 10 percent over the last 5 years, without layoffs.
    This is a good start, but more cost-cutting measures will be needed to
    reshape the Postal Service into a self-sustaining, commercially viable
    enterprise.
        We have basically two tacts we can take. We can either do things
    better or do things differently. We hear time and time again about
    processes that private businesses have put in place to become more
    competitive.
        Perhaps now we should find ways to challenge the postal service to
    bring their costs into line with what is offered in the domestic
    marketplace. And, perhaps now is the time to pursue reforms and
    performance measures that focus the Postal Service on those things that
    no one else can do and encourage American businesses to provide those
    services that they can do better.
        The Revenue Forgone Reform Act of 1993 retains free postage for the
    visually impaired customers and for overseas absentee balloting
    materials. To pay for these services, the Act provides for an annual
    $29 million appropriation to continue through 2035. Since 1994, the
    Postal Service has used this annual appropriation to pay off debt it
    accumulated in the early 1990's. In reviewing the administration's
    budget request, I found that no funds were provided.
        In recent years, some have suggested that the postal service should
    reduce its days of operation as well as the scope of its service to
    rural areas of the country in order to cut costs. I am heartened that
    you and the Service have steadfastly resisted such short-sighted so-
    called reforms.
        In the course of your testimony today, I hope that you will renew
    your commitment to maintaining universal, 6-day-a-week service.
        Mr. Postmaster General, as encouraged as I am by your defense of
    affordable universal service, I am concerned that the current
    moratorium on new construction has left many communities without
    adequate facilities for the dispatch and delivery of U.S. mail. For
    universal service to be meaningful, it must be reasonably accessible
    and convenient for customers.
        It is my express hope that you will, today, outline the Postal
    Service's plan for again investing in the communities to which its
    service and presence are so vital and for innovative arrangements to
    keep the rural communities connected through the Post Office.
        Again, I welcome you before the subcommittee today and look forward
    to discussing these important matters during the question-and-answer
    period.
        With that, I yield to Senator Murray for her opening statement.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you, Mr. Chairman.
        This is our subcommittee's first hearing with the Postal
    Service since we took over appropriations jurisdiction for this
    critical Federal agency.
        I want to welcome the Postmaster General, John Potter, to
    the subcommittee. Mr. Potter is a true American hero. He worked
    his way up from the most junior ranks at the Postal Service to
    become the Postmaster General.
        Today the Postal Service faces unprecedented challenges as
    it seeks to cover its expenses through the postal revenues paid
    by the public. The same technologies that helped make our
    country more productive have undermined the financial
    foundation of the United States Postal Service.
        Today first class mail represents less than half of the
    volume of mail delivered by the post office. At the same time,
    mail service revenues continue to decline year after year.
        Many of the technological advances that have allowed our
    citizens to avoid first class mail were developed in my home
    State of Washington. Even so, I am concerned that we be
    attentive to the critical role that the Postal Service plays in
    all of our communities. The Postal Service's existing business
    model is now viewed as unsustainable.
        Some of the alternatives being considered are ending mail
    service to all rural addresses and ending mail delivery on
    Saturdays. For high tech households in urban areas like Seattle
    that may be fine. They can pay their bills online and
    communicate through PDA's, e-mails and cell phones. But that
    alternative is certainly not acceptable to retirees living on
    fixed incomes in Pend Orielle County or Klickitat County in
    Washington. They may be waiting on their Saturday mail delivery
    to get their Social Security check or their prescription drugs.
        We have got to be attentive to the ways that these proposed
    changes would affect all of our citizens in all of our
    communities.
        In his formal opening statement, Postmaster Potter will
    discuss the fact that the Department of Homeland Security and
    the Department of Health and Human Services are developing a
    plan through which our Nation's letter carriers can be called
    on to deliver antibiotics to Americans in the event of a
    catastrophic incident involving a biological agent.
        This plan highlights the fact that our Postal Service is a
    critical standing army that touches all American households in
    all Congressional districts 6 days a week, no matter how rural,
    how isolated or how poor those households may be. We should
    take great care before we sacrifice this ready and able Federal
    force. We cannot envision today every reason why we may need
    them in the future. After all, before September 11th, 2001 we
    never envisioned the need for our Postal Service to perhaps
    deliver emergency vaccines in the event of a biological
    emergency.

                               PREPARED STATEMENT

        So I hope our subcommittee will be attentive to the very
    real appropriations needs that will be articulated by the
    Postmaster this morning. In many cases, the needs of the Postal
    Service have been ignored by the Bush Administration's fiscal
    year 2005 budget request. For the first time ever, the Bush
    Administration is not even requesting funds to honor the
    Federal commitment to the Revenue Foregone Act of 1993. In 11
    years no president has zeroed out funding for this activity. So
    here, as in many areas, the subcommittee may need to chart its
    own path to ensure that all Americans in all regions of the
    country are joined together through a vibrant and effective
    postal system.
        Thank you, Mr. Chairman.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        Thank you, Mr. Chairman. This is our subcommittee's first hearing
    with the Postal Service since we took over appropriations jurisdiction
    for this critical Federal agency.
        I want to welcome the Postmaster General, John Potter, to the
    subcommittee. Mr. Potter represents a true American hero. He worked his
    way up from the most junior ranks of the Postal Service to become the
    Postmaster General.
        Today the Postal Service faces unprecedented challenges as it seeks
    to cover its expenses through the postal revenues paid by the public.
        The same technologies that have helped make our country more
    productive have undermined the financial foundation of the United
    States Postal Service.
        Today, first class mail represents less than half of the volume of
    mail delivered by the Postal Service. At the same time, mail service
    revenues continue to decline year after year.
        Many of the technological advances that have allowed our citizens
    to avoid first class mail were developed in my home State of
    Washington. Even so, I am concerned that we be attentive to the
    critical role that the Postal Service plays in all of our communities.
        The Postal Service's existing business model is now viewed as
    unsustainable. Some of the alternatives being considered are ending
    mail service to all rural addresses and ending mail delivery on
    Saturdays.
        For high tech households in urban areas like Seattle, that may be
    fine. They can pay their bills online and communicate through PDA's,
    email, and cell phones.
        But that alternative is certainly not acceptable to retirees living
    on fixed incomes in Pend Oreille County or Klickitat County in
    Washington.
        They may be waiting on their Saturday mail delivery to get their
    Social Security check or their prescription drugs. We've got to be
    attentive to the ways that these proposed changes would affect all of
    our citizens in all communities.
        In his formal opening statement, Postmaster Potter will discuss the
    fact that the Department of Homeland Security and the Department of
    Health and Human Services are developing a plan through which our
    Nation's letter carriers can be called on to deliver antibiotics to
    Americans in the event of a catastrophic incident involving a
    biological agent.
        This plan highlights the fact that our Postal Service is a critical
    standing army that touches all American households in all congressional
    districts 6 days a week, no matter how rural, how isolated or how poor
    those households may be.
        We should take great care before we sacrifice this ready and able
    Federal force. Today, we can't envision every reason why we may need
    them in the future.
        After all, before September 11, 2001, we never envisioned the need
    for our Postal Service to perhaps deliver emergency vaccines in the
    event of a biological emergency.
        So I hope our subcommittee will be attentive to the very real
    appropriations needs that will be articulated by the Postmaster this
    morning.
        In many cases, the needs of the Postal Service have been ignored by
    the Bush Administration's fiscal year 2005 budget request.
        Indeed for the first time ever, the Bush Administration is not even
    requesting funds to honor the Federal commitment to the Revenue
    Foregone Act of 1993. In 11 years, no president, including the current
    president's father, has zeroed out funding for this activity.
        So, here as in so many areas, the subcommittee may need to chart
    its own path to ensure that all Americans in all regions of the country
    are joined together through a vibrant and effective postal system.
        Thank you, Mr. Chairman.

        Senator Shelby. Mr. Postmaster General, your written
    statement will be made part of the record in its entirety. We
    have reviewed that. You proceed as you wish. Welcome again to
    the committee.

                          STATEMENT OF JOHN E. POTTER

        Mr. Potter. Thank you, Mr. Chairman.
        Good morning to you and to Senator Murray.
        I appreciate this opportunity to speak with you today about
    the Postal Service, its accomplishments over the past years and
    our appropriations request for the next fiscal year. You have
    my detailed testimony, as the Chairman said, so I will keep my
    remarks brief.
        My thanks to the subcommittee for its support of the Civil
    Service Retirement System legislation that was enacted last
    year. We continue to work with the Congress on two open issues:
    the escrow account and military retirement provisions. We hope
    they will both be resolved as soon as possible.
        The legislation has helped our customers by providing for
    stable rates until 2006. Stable rates and strong service
    performance are key elements to enable the mailing industry to
    stabilize and grow again. I remain committed to a strong
    customer focus. I remain committed to a Postal Service that is
    financially strong. We continue to aggressively manage the
    business. We are doing more and doing it better with less.
        Last year we added more than 1.7 million new addresses to
    our delivery network. Service performance and customer
    satisfaction reached their highest levels ever. Total factor
    productivity grew for an unprecedented fourth straight year. We
    remain on schedule to remove at least $5 billion from our
    annual operating costs over the 5-year period ending in 2006.
    Internally, key indicators point to an improving work place
    environment.
        Yet these successes mask a marketplace that continues to
    show signs of long-term erosions. In 2003 First Class volume
    fell by more than 3 billion pieces of mail. We have seen First
    Class continue its decline this year as well.
        It is clear that the Postal Service can no longer rely on a
    limited monopoly that assumed rising mail volumes would offset
    the costs of an ever-expanding delivery network. At the end of
    the day that means the level of universal service that America
    enjoys is in jeopardy unless we all act now.
        I encourage the Congress to continue to explore new models
    that will lead to modern day management flexibility in how we
    operate.
        As the reform process continues to unfold we are here today
    to address more immediate needs and to submit our appropriation
    request for fiscal year 2005.
        Our first request is for $29 million for revenue foregone
    reimbursements to cover the cost of services we provided from
    1991 through 1998. This will be the 12th of 42 interest-free
    payments. The administration's budget submission for 2005 does
    not include provision for this statutory reimbursement. Failure
    to receive these funds may require us to treat the remaining
    payments of nearly $900 million as bad debt. That would put
    upward pressure on our rate structure.
        The second part of our request is for $75.9 million. This
    request provides funding for the free mailing of materials used
    by the blind and other handicapped persons. It also includes
    funding for absentee balloting materials that can be mailed
    free by members of the armed forces and other U.S. citizens
    residing outside the United States.
        The administration proposes $61.7 million and continues the
    practice where reimbursement is not made until the fiscal year
    after the mailings have been handled and delivered.
        The third part of our appropriation request is for homeland
    security preparedness costs of $779 million. We gratefully
    acknowledge the funding previously given to us for this
    purpose. Those funds enabled us to accelerate implementation of
    our emergency preparedness plan which was submitted to Congress
    in 2002, and which we updated last spring.
        The previous appropriation of $587 million enabled us to
    provide personal protective equipment for our employees, to
    provide equipment and facilities to treat mail for the
    legislative, executive and judicial branches of government to
    neutralize any biohazards that may exist in that mail, to
    undertake decontamination of major mail processing facilities
    in Washington, DC and Trenton, New Jersey, and the development,
    testing and purchase of state-of-the-art biohazard detection
    and ventilation and filtration systems for deployment to 282
    mail processing facilities in every State in the union.
        The task ahead of us is both costly and critical to the
    safety of our employees and the millions of Americans who rely
    on the mail day in and day out to build their businesses and
    stay connected with families and loved ones. I believe it is
    imperative that we continue the work we have already begun on
    homeland security.
        The funds we request will enable us to complete that work.
    Specifically, the funding will support the full deployment of
    the biohazard detection system, the ventilation and filtration
    system and the construction of a Washington-based mail
    irradiation facility.
        Our request covers only the capital expenses of obtaining
    this equipment. After initial deployment, operation and
    maintenance will become part of the Postal Service's normal
    operating expenses.
        At the same time, we recognize that the threat of
    bioterrorism is pervasive, that the threats we face today may
    be far different than in the future. With that knowledge, we
    continue to evaluate technologies that offer protection from
    other hazards.
        I wish these funds were not necessary. But as we learned
    from the anthrax attacks and the recent ricin incidents, the
    threats remain real.
        In a democratic society marked by free and open
    communications, there will always be the possibility that some
    person or group will use the mail's unequaled tradition of
    privacy to mask an agenda of hate and destruction. As a Nation,
    we must be prepared to do what is necessary to neutralize the
    threat to the extent possible.
        We are more than willing to do our part on this war on
    terrorism. We are working with first responders as we deploy
    bioterrorism systems. In community after community we are
    acting as a catalyst to create dialogue and establish protocols
    consistent with standardized Federal response procedures. This
    is an important role that can save lives in the event of any
    future real attacks.
        In addition, the Postal Service's efforts to contribute to
    homeland security were advanced by a joint agreement with the
    Department of Health and Human Services and the Department of
    Homeland Security. In the event of a catastrophic biological
    incident, our letter carriers would voluntarily deliver
    antibiotics to affected Americans. The procedures we develop
    will augment and not replace those of local communities.

                               PREPARED STATEMENT

        Finally Mr. Chairman, I want to add that although we are
    authorized by statute to request an annual public service
    appropriation of up to $460 million, we have not made that
    request since 1982 and I am pleased to say we are not
    requesting that appropriation for fiscal year 2005.
        Thank you, Mr. Chairman. I will be pleased to respond to
    any questions you may have.
        [The statement follows:]

                      Prepared Statement of John E. Potter

        Good morning, Mr. Chairman and Members of the subcommittee.
        I appreciate this opportunity to speak with you today about the
    Postal Service, its accomplishments over the past years and our
    appropriations request for the next fiscal year. You have my detailed
    testimony, so I will keep these remarks brief.
        My thanks to the subcommittee for its support of the Civil Service
    Retirement System legislation that was enacted last year. We continue
    to work with Congress on two open issues--the escrow account and
    military retirement provisions. We hope they will both be resolved as
    soon as possible.
        The legislation has helped our customers by providing for stable
    rates until 2006.
        Stable rates and strong service performance are key elements to
    enable the mailing industry to stabilize and grow again.
        I remain committed to a strong customer focus, and I remain
    committed to a Postal Service that is financially strong. We continue
    to aggressively manage the business.
        We are doing more--and doing it better--with less. Last year, we
    added more than 1.7 million new addresses to our delivery network.
    Service performance and customer satisfaction reached their highest
    levels.
        Total factor productivity grew for an unprecedented fourth straight
    year. We remain on schedule to remove at least $5 billion from our
    annual operating costs over the 5-year period ending in 2006.
        Internally, key indicators point to an improving workplace
    environment.
        Yet these successes mask a marketplace that continues to show signs
    of long-term erosion. In 2003, First-Class volume fell by more than 3
    billion pieces. We've seen First-Class continue its decline this year
    as well.
        It is clear that the Postal Service can no longer rely on a limited
    monopoly that assumed rising mail volumes would offset the costs of an
    ever-expanding delivery network. At the end of the day, that means the
    level of universal service that America enjoys is in jeopardy unless we
    all act now.
        I encourage the Congress to continue to explore new models that
    will lead to modern-day management flexibility in how we operate.
        As the reform process continues to unfold, we are here today to
    address more immediate needs and to submit our appropriations request
    for fiscal year 2005.
        Our first request is for $29 million for revenue foregone
    reimbursements to cover the cost of services we provided from 1991
    through 1998.
        This would be the twelfth of 42 interest-free payments. The
    administration's budget submission for 2005 does not include provision
    for this statutory reimbursement.
        Failure to receive these funds may require us to treat the
    remaining payments of nearly $900 million as a bad debt. That would put
    upward pressure on our rate structure.
        The second part of our request is for $75.9 million. This request
    provides funding for the free mailing of materials used by the blind.
    It also includes funding for absentee balloting materials that can be
    mailed free by members of the Armed Forces and other U.S. citizens
    residing outside the overseas.
        The administration proposes $61.7 million, and continues the
    practice where reimbursement is not made until the fiscal year after
    the mailings have been handled and delivered.
        The third part of our appropriations request is for homeland
    security preparedness costs of $779 million.
        We gratefully acknowledge the funding previously given to us for
    this purpose. Those funds enabled us to accelerate implementation of
    our Emergency Preparedness Plan which was submitted to Congress in 2002
    and which we updated last spring. The previous appropriation of $587
    million enabled us to:
      --Provide personal protective equipment for our employees;
      --To provide equipment and facilities to treat mail for the
            legislative, executive and judicial branches of government to
            neutralize any biohazards that may exist;
      --To undertake decontamination of major mail processing facilities in
            Washington DC, and Trenton, New Jersey and,
      --The development, testing, and purchase of state-of-the-art
            biohazard detection and ventilation, filtration equipment for
            deployment to 282 mail processing facilities in every State of
            the union.
        The task ahead of us is both costly and critical to the safety of
    our employees and the millions of Americans who rely on the mail day in
    and day out to build their businesses and to stay connected with
    families and loved ones.
        I believe it is imperative that we continue the work we've already
    begun to support homeland security. The funds we request will enable us
    to complete that work.
        Specifically, the funding will support the full deployment of the
    Biohazard Detection System, the Ventilation and Filtration System, and
    the construction of a Washington-based mail-irradiation facility.
        Our request covers only the capital expense of obtaining this
    equipment. After initial deployment, operation and maintenance would
    become part of the Postal Service's normal operating expenses.
        At the same time, we recognize that the threat of bioterrorism is
    pervasive--that the threats we face today may be far different in the
    future. With that knowledge, we continue to evaluate technologies that
    offer protection from other hazards.
        I wish these funds were not necessary, but as we learned from the
    anthrax attacks and the three recent ricin incidents, the threats
    remain real.
        In a democratic society marked by free and open communications,
    there will always be the possibility that some person or group will use
    the mail's unequalled tradition of privacy to mask an agenda of hate
    and destruction. As a Nation, we must be prepared to do what is
    necessary to neutralize the threat to the extent possible.
        We are more than willing to do our part on this war on terrorism.
    We are working with first responders as we deploy bioterrorism systems.
    In community after community, we are acting as a catalyst to create
    dialogue and establish protocols consistent with standardized Federal
    response procedures.
        This is an important role that can save lives in the event of any
    future real attacks.
        In addition, the Postal Service's efforts to contribute to homeland
    security were advanced by a joint agreement with the Department of
    Health and Human Services and the Department of Homeland Security.
        In the event of a catastrophic biological incident, our letter
    carriers would voluntarily deliver antibiotics to affected Americans.
    The procedures we develop will augment--not replace--those of local
    communities.
        Finally, Mr. Chairman, I want to add that although we are
    authorized by statute to request an annual public service appropriation
    of up to $460 million, we have not made that request since fiscal year
    1982. And I am pleased to say that we are not requesting that
    appropriation for fiscal year 2005.
        Thank you, Mr. Chairman. I will be pleased to respond to any
    questions.

                             EMERGENCY PREPAREDNESS

        Senator Shelby. I want to discuss emergency preparedness
    expenses if I could.
        Since 2002, Congress has provided emergency appropriations
    to support the Postal Service's anthrax emergency preparedness
    activities. After the attacks, the Congress appropriated $762
    million to decontaminate postal buildings and to buy and
    install biohazard detection equipment. The Postal Service
    reportedly has spent a total of $971 million on emergency
    preparation, which includes $209 million from its revenue.
        Provide us an overview, briefly, of what this funding has
    been spent on to date. In other words, give us an accounting.
        Mr. Potter. The funding has been spent on--$268 million of
    it has been spent for building restoration; $402 million has
    been spent for biodetection systems; $271 million has been
    spent on ventilation and filtration systems; $9 million will be
    spent on a D.C. area irradiation facility. We have not
    committed to that. We are doing some environmental assessments
    but our intent is to spend it on that.
        Senator Shelby. How much will that cost, roughly?
        Mr. Potter. It will cost roughly $16 million. But we have
    bought the equipment to irradiate the mail and that is the $9
    million of expense that we have. Our intent is to do it on the
    campus of the Brentwood facility, on the grounds of the
    Brentwood facility.
        Senator Shelby. Since your emergency preparedness plan was
    submitted last spring, what additional steps have you taken to
    prepare for another attack if there is one? We hope there is
    never another one.
        Mr. Potter. One of the things that we are constantly doing,
    Mr. Chairman, is looking at other technologies that might be
    out there. Today we have a test underway for chemi-
    luminescence. That is a test that will not only detect
    biohazards as the polymer rays----
        Senator Shelby. Will that detect chemicals?
        Mr. Potter. It will detect chemical. It will be able to
    detect ricin, biological and chemical, as well.
        And we have designed our system----
        Senator Shelby. How is the technology coming along? Are you
    testing it?
        Mr. Potter. We are testing that as we speak. We are using
    the Department of Defense to help us with those tests. We have
    designed our biodetection system to be flexible enough to add
    new technologies to that system.
        So our base system is there. We are excited about the new
    technologies that are coming down, that appear to be on the
    horizon, and we are actively testing those that show promise.
    And we are doing that with the appropriate Federal agencies.
        Senator Shelby. You submitted a request for $779 million to
    install biodetection equipment and to improve ventilation and
    filtration systems at postal facilities. Why is the Postal
    Service having difficulty with OMB getting that approved?
        Mr. Potter. I believe that they understand the need for it.
    Obviously there are--given the fact that the country is at war,
    there are a number of priorities. And I believe that, in terms
    of their priorities and their immediate needs, they have made a
    decision about where that stands for fiscal year 2005.
        We wrote a letter of appeal to OMB when we heard about
    their decision because we believe that there is a need to
    provide these systems throughout the country to protect all
    communities.
        Senator Shelby. You have been quoted as saying that funding
    for biohazard detection equipment is either going to come
    through an appropriation or rate increase. Is that the only
    choice you have? Or do you have money that you could get out of
    your escrow fund?
        Mr. Potter. The only ways that the Postal Service can
    obtain money is through appropriations or through the rates
    process. So any cost, whatever it is, for the Postal Service,
    if it is not appropriated by Congress--and there are very
    limited amounts of funds that are appropriated by Congress, $29
    million and the monies for the blind--the only way we have to
    raise money is through rates.
        Now I am not saying that this would mean that we have to
    raise rates tomorrow, but the funds would have to come through
    the rates process at some point in time in the future.
        Senator Shelby. Detecting biohazards in the mail is the
    next subject I want to raise. We have been told by the GAO and
    others that the detecting systems that the Postal Service has
    acquired may not have the capability to detect other hazardous
    agents such as chemical or a radiological weapon. Would you
    explain the capabilities of these systems that you are getting?
        Mr. Potter. The current system that we are----
        Senator Shelby. But you want to spend money wisely, and I
    know you do.
        Mr. Potter. We are spending it wisely. But we also
    recognize there is an immediate need to move.
        Senator Shelby. You have got to be thinking of the future.
    What else is out there, right?
        Mr. Potter. Exactly. So we believe our system can be
    augmented. And we have designed a system that is flexible
    enough to add new technologies to it.
        So today we can detect DNA. Our systems are designed to
    detect DNA or measure DNA or look at DNA. Our system today can
    do that.
        We are working with the appropriate authorities to
    determine what other threats are out there that might be of a
    bio-nature. And we can add up to 10 agents being detected with
    the current system.
        In addition to that, we are looking at electro-
    chemiluminescence as an opportunity down the road to be able to
    now detect chemical or toxins. And it appears to be promising
    but we have to await the tests before we move on it.

                               PERFORMANCE GOALS

        Senator Shelby. Performance measures. The European Union
    has agreed to a standard of 85 percent of cross-border letter
    mail must be delivered in 3 days and 97 percent must be
    delivered in 5 days. Has the Postal Service established similar
    performance goals? And if you have not, do you contemplate it?
    And what are the standards used by the Postal Service to
    determine if the performance goals are being met?
        Mr. Potter. The goals of the European Community have been
    shared and are measuring themselves against what was formed as
    part of the International Postal Corporation. The Postal
    Service is a member of that group. We do measure performance
    within a small community of nations, European, Canada and the
    Postal Service. The UPU, the United Nations Universal Postal
    Union is having a big meeting this year where they are going to
    discuss the notion of expanding what has been done within the
    IPC to the rest of the world. We certainly will embrace the
    notion of putting standards amongst the countries of the world.
        Obviously there are some Third World countries that would
    have problems meeting such a standard. But the Postal Service,
    the United States Postal Service, is engaged through the UPU in
    discussions on increasing the standards for delivery of mail
    throughout the world.
        Senator Shelby. Are you going to those same standards? And
    if so, when do you think you will be doing that for the
    delivery of mail?
        Mr. Potter. Right now within the IPC we are, for those
    communities. But it is not measured--beyond that small group of
    nations--mail is not measured.
        Senator Shelby. Let us talk about the United States of
    America. Let us say from Seattle, Washington to Portland,
    Maine. What is the average first class delivery on that?
        Mr. Potter. The standard is 3 days and we are achieving
    that, about a 90 percent on-time delivery.
        If you look at the United States, our overnight area which
    is generally within about 100 to 150 miles of an origin, our
    goal is overnight service. Right now we are achieving 95
    percent.
        Within 500 or 600 miles is our 2-day standard. We are
    achieving a little over 90 percent. Three-day nationwide, our
    goal for areas beyond 600 miles, our goal is 3 days. Last
    quarter we achieved a 90 percent. This quarter we are at about
    an 88 percent. The reason for the decline is the weather that
    we have experienced and the shutdown of airports around the
    country.
        Senator Shelby. What would be the average mail performance
    of first class mail from Atlanta, Georgia to Birmingham,
    Alabama? It is about 150 miles.
        Mr. Potter. It would probably be a 2-day standard and I can
    give you specifically in a follow-up what the actual
    achievement was. I would be guessing at best if I attempted to
    tell you. I hope it is very high, though.
        [The information follows:]

        A First-Class letter mailed from Birmingham, AL, to Atlanta, GA, is
    delivered in 2 days. During the first quarter of fiscal year 2004,
    First-Class Mail destined for overnight delivery in Alabama was
    delivered on time 93 percent of the time.

        Senator Shelby. I was going to use Spokane, Washington to
    Seattle. What is the delivery time there from Spokane to
    Seattle? I hope about half a day.

                                COST REDUCTIONS

        Cost reductions. Would you touch on cost reduction measures
    for just a minute? And also, how do you intend to implement the
    process of streamlining the Postal Service's operations?
        Mr. Potter. The first thing that we have done nationwide is
    to standardize our operations.
        Senator Shelby. What do you mean by standardize?
        Mr. Potter. By standardize I mean what we have done is we
    have benchmarked internally against ourselves and we have
    identified the top quartile of performers in the country in any
    operation, whether it is sorting mail, canceling mail. And what
    we have done is we have looked at the best practice--and we
    have done this about 3 years ago.
        We looked at what the best practices were that enabled them
    to be in the top quartile. We then, in turn, shared that
    throughout the country and said these are the practices that
    work, here is an expectation of how you should perform. And we
    set targets for improvement year by year.
        What you have seen is a continuous improvement in
    productivity throughout the country. You have seen us be able
    to not replace work force that we had habitually just replaced,
    as people leave, we replaced them. For every three people that
    leave the Postal Service we replace one. And largely it is
    because of the opportunity to improve productivity.
        We have also gone back and looked at all of our carrier
    routes to determine whether or not the 8-hour job that this
    route was based upon is still 8 hours. With the decline in mail
    volume over the years, what has happened is the average
    delivery in America which as recently as the year 2000 was
    reaching 1,870 pieces of mail per year, that has declined to
    1,700 pieces of mail per year.
        Senator Shelby. What percentage of those 1,700 is first
    class mail?
        Mr. Potter. Just slightly less than half.
        And so as a result of the decline in volume per delivery,
    that has reduced the workload for a carrier and has enabled us
    to go back in and reconfigure those routes so they have more
    deliveries.
        So it is those kind of just basic practices that have
    enabled us to streamline and lower our costs.
        In addition to that, we have been very careful about the
    purchase of goods and services. Over the last 3 years we have
    reduced our annual spending on goods and services by $1
    billion. So any time a truck route comes up for rebid, we
    review it. A lease for a facility, we review it and look at our
    needs and determine whether or not it is the most economical
    way to go.
        Senator Shelby. Have you saved a lot of money that way?
        Mr. Potter. We have saved over $1 billion in our base per
    year.
        Senator Shelby. How many years have you been associated
    with the postal system?
        Mr. Potter. Me, personally? Twenty-five.
        Senator Shelby. So you have done just about every job?
        Mr. Potter. Pretty much, yes.
        Senator Shelby. Thank you.
        Senator Murray.

                             APPROPRIATIONS REQUEST

        Senator Murray. Thank you, Mr. Chairman.
        As the Chairman referred to, on security and emergency
    preparedness efforts, it is a big undertaking and one that is
    necessary so that our mail workers can be protected and the
    mail processing and deliveries will be as safe as possible.
        Congress was able to provide some initial funding in the
    amount of $762 million. Last year you requested $350 million,
    not even a dollar of which this subcommittee was able to
    provide.
        This year you are requesting $779 million, which includes
    the 2005 request of $429 million plus the 2004 request that was
    not funded.
        If we are to do anything in support of this request it must
    be exempt from the spending cap set forth in the budget
    resolution. In other words, the only way to provide this
    funding would be if it were declared an emergency.
        You did not receive any appropriations last year for
    emergency preparedness and you were still able to proceed with
    anthrax decontamination and are now proceeding with plans to
    put in place biodetection devices in all of your plants. If
    that is the case, why are you asking for funding?
        Mr. Potter. Because when the initial funding was provided,
    it was noted that it was an extraordinary circumstance that
    surrounded this whole biohazardous-material-in-the-mail issue.
    And at the time, the Congress said that it was providing
    funding because of these specific security concerns and the
    Congress's notion that they wanted to help protect the mail
    system from biohazards.
        So consistent with that sentiment that was expressed a
    couple of years ago, we feel that we have continued down that
    path and asked for the funds again simply for the capital
    portion of these systems, with the Postal Service picking up
    the operating expenses. So again, we are responding to the
    sentiment of the Congress in the past and we would hope that it
    would continue on into the future.

                          BIOHAZARD DETECTION SYSTEMS

        Senator Murray. The biodetection systems that you referred
    to a few minutes ago that you are planning to install to detect
    anthrax, do you have an estimate yet on how much it would cost
    to retrofit the machines to detect ricin or other toxins?
        Mr. Potter. We believe that they can be retrofitted. Our
    estimates are, if we move to the new technology, we could do it
    within the $779 million because of the fact that we have not
    fully deployed these systems and we can reduce the amount of
    the systems that we would have to deploy. So right now it looks
    like we could do it within the requested funding.
        Senator Murray. How can we be sure that those machines will
    be effective against anthrax or other toxins? And is there a
    chance it is going to be outdated before we get it installed?
    Is nanotechnology coming?
        Mr. Potter. We were very concerned about a couple of
    things. One was, and very important, was the reliability of the
    system. Because a false-positive, as we have learned over the
    last several years, creates a lot of panic not only within the
    postal community and our workers but also within the
    communities that surround our facilities.
        And so we were very, very diligent in making sure that
    these systems were effective. And our requirement was that we
    have no more than one in every 500,000 tests be a false-
    positive. And that was a high hurdle for us to achieve and for
    our suppliers to achieve. And that is why it has taken quite a
    long time for us to do that.
        One of the things that we have done is we have tested in a
    lab environment a thing we call an anthrax simulant. So
    basically it is a non-virulent form of anthrax. And we have
    tested the system such that every time we put this non-virulent
    form of anthrax in, it has a 100 percent hit. We did not want
    to err on the side of lack of false-positives and in the
    process compromise the notion that if something was in the
    system it would be found.
        So we have again spent a lot of time, a lot of diligence
    coming up with a system that right now is state-of-the-art,
    that again we do not know and we cannot forecast what the
    equipment will be 3 and 5 years down the road. But the need for
    us is immediate.
        We have had over 20,000 incidents where buildings have been
    closed, postal facilities have been closed because of anthrax
    hoaxes or just accidental spills. And we believe we need, again
    for the safety of our employees and the people in facilities,
    we do not want to get to the point where we become so callous
    to the fact that these incidents occur that when the real one
    does happen we are not ready to react. So we have to step up
    and move this equipment out.
        And I wish I knew what the best would be 10 years from now
    and I could buy it today but that is simply not the case. We
    have to move on the best we know. And we have used a whole army
    of folks in every agency that we could think of that could help
    us to determine what the best technology is today and to move
    out on it.
        Again, safety of our employees and safety of the
    communities is paramount. I wish we could wait but I do not
    think we have the time to.
        Senator Murray. Fair enough.

                           POST OFFICE CONSOLIDATION

        Mr. Potter, an issue that has always been a concern to this
    subcommittee is the consolidation or closure of small or rural
    post offices. In fact, every year we carry bill and report
    language prohibiting any of the funds provided from being used
    in the consolidation of or closing of rural and other small
    post offices.
        In addition, Title 39 of the U.S. Code stipulates that ``no
    small post office shall be closed solely for operating a
    deficit, . . .''. It is not altogether clear that consolidation
    or closures undertaken by the Postal Service are consistent
    with the law.
        Is the Postal Service planning to consolidate any
    operations or close any post offices this year?
        Mr. Potter. The post office does suspend post office
    operations and has done so for years and will continue to do
    so. We have, just to describe it to you, we have over 2,500
    post offices that serve less than 200 people. We have over
    4,500 post offices that serve less than 200 deliveries. Now I
    am not here to tell you that any one of those post offices
    should or can be closed.
        But I also will tell you that we do have post offices that
    are in people's living rooms. We have post offices that are in
    stores. And as these smaller communities, and I just described
    a profile of some of them, as these communities in some cases
    wither and die, we cannot get people to volunteer their living
    rooms to be post offices when somebody retires.
        Or if we are the last storefront in town and a flood wipes
    it out, we are not about to rebuild the post office.
        And we have had emergency closures and we have followed the
    procedures as laid out by the Postal Rate Commission. We
    followed those procedures for closures. But we have no
    wholesale plan.
        I think there is some assumption that someone in the Postal
    Service has a plan to close 20,000 facilities. There is no such
    plan.
        However, we do have these small units that by act of God or
    somebody retiring, you know, we have to make decisions about
    how we best serve those communities and we do. In many cases,
    what we do is we provide delivery to the door or delivery to
    the end of a person's property versus them having to travel
    down to the post office.
        So we are committed to universal service. We will provide
    service to every American wherever they are and we have no game
    plan to close post offices en masse. There is nobody sitting
    with a secret list of 20,000 post offices to close, although
    people would have you believe that. But every time that there
    is an act of God or retirement we do consider okay, how do we
    best serve the community?

                             VERTICAL IMPROVED MAIL

        Senator Murray. In downtown Spokane, in my State, recently
    six of the satellite post offices were closed. Those six post
    offices served as kind of a collection point of mail for the
    majority of businesses that are in downtown Spokane. They have
    now been replaced with unstaffed mailrooms and locked
    mailboxes. And as a result there has been a lot of disruption
    of service to the buildings. My office has received a lot of
    phone calls and letters regarding that.
        Can you tell me if that type of consolidation is occurring
    in other parts of the country?
        Mr. Potter. We call it a VIM room.
        Senator Murray. You call it what?
        Mr. Potter. VIM, which stands for ``Vertical Improved
    Mail''. Years ago the Postal Service decided that as large
    buildings were constructed, we provide centralized delivery.
    And in many cases, the building owner provided us a room in
    which our employees could come and work and sort mail so that
    the people in the building could pick it up from the equivalent
    of a post office box. And they could pick up their packages by
    knocking on the door.
        What has happened over the course of time is the volume of
    mail for those vertical buildings, those big tall buildings,
    has gone away. Business-to-business delivery or business-to-
    business white communication letter and flat communication has
    dropped dramatically. Because the first group to move to
    electronic communication were businesses who were equipped to
    do that.
        And so what we have done is we have undertaken an
    evaluation of those delivery units that are only located in
    large buildings. They are not post offices. They were built to
    provide delivery. If our person can go in there and sort the
    mail for the building in 2 hours, it makes no sense to leave
    the person there for 8 hours.
        And so we have gone throughout the country, and again the
    action is a result of a reduction in mail. In some of those
    cases what we have done is we have had two and three people
    working in those units and we have reduced the number of
    people. They may still get 8 hour coverage. But 40 percent of
    those units throughout the country have eliminated full-time
    staffing in those units.
        Again, it is a result of demand. If the customer is not
    using the mail, we are not going to leave that open.
        Senator Murray. I think one of the problems and the reason
    people were so upset is that the Spokane business community was
    not officially informed or told that any of this consolidation
    was happening. A lot of them learned about the service
    reduction from signs that the post office posted after the
    service reductions were made. And in some cases, the
    information on the signs was inaccurate and postal customers
    were really left in the lurch, which is why we are hearing from
    them.
        I would just encourage you to, if you have to do these
    kinds of things, really work with the business community
    especially in those areas to make sure they understand and are
    working with you.
        Mr. Potter. You have my assurance, we will look at the
    whole communications effort. Because I think if people
    understood the background that I just described to you, they
    would know that we are making a good business decision. And our
    intent is not to reduce the level of service to those buildings
    but to maintain it, if not improve it.
        Senator Murray. Thank you. I really appreciate that.
        Thank you, Mr. Chairman.
        Senator Shelby. Senator Stevens, thank you for joining us.

                        STATEMENT OF SENATOR TED STEVENS

        Senator Stevens. Thanks very much, Mr. Chairman.
        We have several subcommittees meeting this morning at 9:30
    and 10 o'clock. So I am sorry I was not here at the beginning
    of it. Would you place my opening statement in the record?
        Senator Shelby. Without objection, it will be made part of
    the record.
        [The statement follows:]
                   Prepared Statement of Senator Ted Stevens
        Thank you Chairman Shelby for holding this hearing.
        I commend Postmaster General Jack Potter for his efforts which have
    guided the Postal Service since June 1, 2001. Under his leadership, the
    Postal Service has increased productivity and has improved customer
    satisfaction.
        In the early 1970's, I along with other senators, joined together
    to create the Postal Service out of the Old Post Office Department. In
    1971, President Nixon signed into law the Postal Reorganization Act.
    Since the Postal Reorganization Act was originally adopted,
    technological advances coupled with the financial state of the Postal
    Service have demonstrated the need for postal modernization.
        Reducing the Post Office's debt is a priority. I am committed to
    working with Senator Collins, Senator Carper, and other members of the
    Government Affairs committee to draft postal reform legislation to
    ensure the vitality of the Postal Service.
        For my State of Alaska, the Postal Service and the concept of
    universal service are essential. Alaska does not have access to the
    infrastructure found in the lower 48. For many Alaskans the mail
    service is a lifeline. Each day the Postal Service delivers 2 million
    pieces of mail to Alaskan homes and businesses, including vital
    products that would not otherwise be available in bush Alaska.
        The services provided by the United States Postal Service reach
    every home and business in America and are essential to American
    commerce and society.
        I know the Postal Service is requesting funds for emergency
    preparedness and I believe it is important to ensure the Postal Service
    has adequate funds to safeguard this country from a hazardous substance
    attack. The Postal Service is a possible conduit for terrorist
    activity, therefore it is necessary for the Postal Service to have
    detection systems to not only protect postal employees, but to
    intercept mail carrying hazardous substances.
        I believe we should do what we can to help the Postal Service
    ensure this Nation's safety.

        Senator Stevens. I do commend the Postmaster General for
    his handling of systems right now, particularly during this
    period of terrorism. And I want the subcommittee to know that I
    have personally visited with him concerning the emergency
    preparedness funding that is so essential. And after that,
    personally visited with the director of OMB.
        We are still trying to work out how we can handle this
    because the budget, as you know, has not handled it in the
    budget session. We will have to work with the Governmental
    Affairs Committee and members of our committee to see if we can
    get support for an emergency declaration for the money that
    they need.
        I believe that the Senate, in particular, should push this
    because after all we were the target of both the attacks. The
    terrorists' use of the mails to come to the Senate, I think is
    something the Senate must respond to.
        And I do believe that if we declare that emergency that the
    House will accept it.
        So I cannot tell you we have got an agreement yet, Mr.
    Postmaster General, but we are still working on it.
        I do thank you for the new post office that is going to be
    brought to that little town I live in in Alaska, which is a
    very welcome development from our point of view. And I hope
    that you will be able to come up this summer and dedicate it.
        Maybe the Chairman would come, also.
        Senator Shelby. I would like to do that.
        Senator Stevens. And we will have a little event there.
    There are only 1,900 people living there, Mr. Chairman.
        Senator Shelby. Do you have fish around there, Mr.
    Chairman?
        Senator Stevens. Not right there but we might be able to
    travel to a place where they fish.
        I just pointed out to another subcommittee that when I was
    in Iraq and Afghanistan I pointed out that both of those
    nations would fit within my State with some space leftover.
    Actually, they are only each about the size of Texas.
        I just really came by to give my support to you, my friend,
    and to urge the committee to work with me and with Chairman
    Collins and see if we can find the support that what we have to
    have for this emergency declaration for the money that you
    seek.
        Mr. Potter. Thank you, Senator.
        Senator Stevens. Thank you.
        Senator Shelby. Thank you, Chairman Stevens.
        Do you want to respond to any of that?
        Mr. Potter. I would just like to thank Senator Stevens for
    his comments and to apologize to him. I did not realize how bad
    things were in Girdwood until I got there and found out that we
    had taken your post office box away and made you begin to get
    general delivery.
        So I am sorry that you had to get in line to get your mail,
    but we will rectify that situation and certainly there other
    safety issues there. So I appreciate your bringing them to my
    attention.
        Senator Stevens. I may have failed to pay the rent, I am
    not sure.
        Senator Shelby. Mr. Potter, what would be the time sequence
    on mailing a first class letter from Fairbanks to Anchorage?
    When would it get there?
        Mr. Potter. Overnight.
        Senator Shelby. Thank you.
        Senator Stevens. That is called Alaska delivery.
        Senator Shelby. We like that Alaska delivery.

                            COMPETITION: E-COMMERCE

        Competition. Why should the Postal Service, a $68 billion
    enterprise with a government monopoly, be allowed to compete
    with the private sector in areas other than its original
    mission?
        In other words, after reviewing the dismal financial
    results of virtually all the Postal Services' commercial
    initiatives, would it not make more sense to concentrate your
    focus on the Postal Service's core mission instead of risking
    new ventures? In other words, what steps have been taken by
    management to ensure that financial mistakes will not continue
    to happen?
        Mr. Potter. I think you will be happy to know, Mr.
    Chairman, that I have eliminated practically all of those
    ventures that were beyond our core mission. We still have a
    mailing online electronic presence. We believe that people
    should be able to, through the Internet, access a printer and
    send cards and letters and we believe that is part of our core
    business.
        But for all intents and purposes, everything else has
    either been eliminated or the only thing that we lend to any of
    these ventures is our brand identity. We have pulled back from
    any expenditures that are beyond what we consider to be our
    core business.

                                REVENUE FOREGONE

        Senator Shelby. The Revenue Foregone Reform Act, to which
    Senator Murray alluded, required an annual reimbursement to the
    Postal Service of $29 million to subsidize certain nonprofit
    mail. The total payment the Postal Service is expected to
    receive is $1.2 billion.
        You have received payments for the past 11 years but this
    budget submission does not request funding this year for this
    reimbursement.
        What impact will this have on the Postal Service and its
    customers if this appropriation is not funded in 2005?
        Mr. Potter. One might say what is $29 million to a $68
    billion organization? The real concern for us is that there is
    still some $899 million owed and it is part of the statute that
    required a $29 million-a-year payment.
        Our auditor has told us that if that revenue stream is not
    a real revenue stream, according to GAAP rules, we may have to
    declare that entire revenue stream as being lost to us. And so
    that is the immediate concern that we have, that we would have
    to write off that revenue stream as a bad debt owed to us.

                        CIVIL SERVICE RETIREMENT SYSTEM

        Senator Shelby. Mr. Potter, the Postal Civil Service
    Retirement System Funding Reform Act, that is a mouthful, of
    2003 reduced the Postal Service's funding requirement for Civil
    Service Retirement System pensions after it was discovered that
    the Postal Service was overfunding its--that is unusual--its
    Civil Service Retirement System obligation. The Postal Service
    used the savings from the Act to reduce its debt by $3.8
    billion. After 2004, the savings are to be held in escrow until
    otherwise provided by law.
        How do you plan to expend the escrow savings if allowed to
    use them?
        Mr. Potter. The law required us to pay down debt last year
    with the savings, which we did. In fact, we paid down more debt
    than the savings were. This year it requires us also to take
    the ``savings'' and pay down debt.
        In 2005, the law assumes that we will use those funds for
    operating expenses. And our goal next year is to break even or
    do better than break even.
        In 2006 is when those monies would go into an escrow
    account. Now the escrow account, as we understood it, was
    created because there was concern on the part of some in
    Congress of how we would use those monies.
        And we have provided a plan to the Congress, to the House,
    a very specific plan, a very thick plan, on how those funds
    would be used. It includes, in particular, a concern about how
    we would handle and deal with capital investments because there
    was some concern that we were not going to capitalize future
    equipment requirements that would help make the Postal Service
    more efficient.
        So we have gone into great detail about what our capital
    investment plan is and we have talked about and addressed an
    issue of concern that was employee retiree health benefit
    funding.
        So I have had a hearing at the House since and the
    indications have been that that plan has at least met the needs
    of most of the Congressmen. We have a similar request from the
    Senate and we are to provide that, I believe, by the end of
    this week, a similar plan. We have done some minor
    modifications but it is essentially the same plan.
        So we believe we have addressed the concerns that caused
    folks to create the escrow account.
        We need the escrow account to be eliminated now that people
    understand how we spend the money because there are no--if we
    are in a break even mode in 2005, there are no funds to create
    a $3 billion plus escrow account. And so we would like that to
    be eliminated.
        And the funds in 2006 would be used similar to the way they
    were used in 2005. Basically, they would be used for operating
    expenses and to fund the capital requirements.

                                FACILITY ISSUES

        Senator Shelby. Regarding facilities repair and new
    construction, I would like to get back to this for a minute.
        In the last 3 years, the Postal Service has reduced capital
    expenditures by more than 50 percent by limiting capital
    commitments to levels that could be funded solely from cash
    flow. The infrastructure continues to age, as we all know.
        In addition, many facilities can no longer meet the needs
    of customers as the delivery network continues to expand, while
    other customers lack convenient access to the postal system
    altogether.
        What priority, Mr. Potter, has the Postal Service given to
    address new construction and expansion needs? And during the
    freeze on capital commitments, what has the Postal Service done
    to adequately maintain its existing infrastructure and preserve
    buildings in an economically effective manner? And, how will
    the Postal Service address infrastructure needs that have been
    deferred since the freeze on capital commitments commenced in
    2001?
        Mr. Potter. Life safety is our No. 1 issue and throughout
    this process we have not taken any funds out of life safety. If
    buildings have been destroyed by acts of God, we have spent the
    money to repair those facilities. We have a robust repair and
    alteration budget. We have not eliminated capital funds for
    repair and alteration. We have slowed the building of new
    buildings. We have 38,000 buildings in the Postal Service. We
    only own 8,000 of those buildings.
        Senator Shelby. Say that again?
        Mr. Potter. There are 38,000 buildings in the Postal
    Service that we have. We only own 8,000 facilities.
        So we have continued with leased facilities, a concept that
    has gone on. But the capital side, the building of postal
    facilities was slowed.
        Now the rationales for slowing that down were a couple. One
    was cash flow. But another real important issue was what are
    our facility requirements going forward, particularly in light
    of the fact that we are seeing volumes decline, we are seeing a
    change in mailer behavior?
        Mailers have taken advantage of rates that allow them to
    deposit mail close to delivery. So where in 1990, if you were
    to mail an advertising piece of mail from Washington, DC to
    anywhere in the country it would be the same rate for you to
    mail it from Washington, DC to Spokane, Washington or to
    Chicago.
        Today we have rates that allow you to bring that mail well
    into the system, right down to the processing center. So I can
    bring the mail to the Seattle plant for mail in Washington and
    I pay a lower fee in order to do that.
        Mailers have taken advantage of that in a significant way
    over the last decade. And in the process of doing that, they
    have reduced the infrastructure that we are required to have.
    So we are constantly analyzing that infrastructure.
        Right now I believe we have more space in plants than we
    need.
        In addition to that, delivery units, if you go back
    historically in delivery units----
        Senator Shelby. You have more space in plants now?
        Mr. Potter. That is the 282 processing centers.
        Now in delivery units, we have also stepped back to take a
    look at what our requirements are. Today, about 80 percent of
    the mail for a letter carrier, letter size mail, is walk-
    sequenced. It is presented to the carrier off of a machine that
    is in a plant, where a decade ago they would have to sort all
    of those letters into a case to take out on the street. It is
    now presented to them in a tray. So that case does not have to
    be as big as it was before.
        In addition to that, oversized letter mail, flat mail we
    call it, which is a catalog, a magazine or a large manila
    envelope. In the past all of that mail had to be sorted to the
    carrier route. So it would go to the post office, sort it to
    the carrier route in that unit by clerks at cases. Today, the
    bulk of that, over 90 percent of that sorting, has moved from
    that post office to the plant because we have automated
    equipment that sorts this mail at a very high productivity
    level.
        In fact, we have doubled the level of productivity on flat
    mail in the last couple of years because we have automated it.
        So where a post office used to have to have cases to sort
    mail, flat mail, to carriers and they would have to have
    carrier cases to sort mail for the walks along the way, the
    requirements of that unit have shrunk dramatically.
        In addition to that, the number of packages that we have in
    the system has declined. Priority Mail, Express Mail and
    package mail is down. So we are looking at the demands for
    space within that unit and what we are finding out is that we
    have enough space, we just have to change the methods that
    people are using.
        Now, that is not to say that we do not have growth areas
    like a Las Vegas, where we have whole new communities sprouting
    up. And in those cases we are building post offices.
        Senator Shelby. Let me ask you another question. Could you
    save money, for example, in a lot of areas, like smaller
    communities, by following the business practice of UPS and
    Federal Express where they have bought businesses like the
    copying company, where they will pick up parcels.
        And it looks to me like in some of the smaller communities
    you might not need a new postal building. But if you could rent
    from a store there or if you could rent a little space in that
    store--and I know you do in certain instances--it looks like
    that would be economical.
        Mr. Potter. It would, Senator, and we have over 5,000----
        Senator Shelby. That is what I want to hear.
        Mr. Potter [continuing]. Contract post office units
    throughout the country. We also sell stamps at over 40,000
    locations other than post offices. So we sell stamps in grocery
    stores, people can buy postage stamps through ATM's.
        Senator Shelby. You do not necessarily need a huge
    facility, do you?
        Mr. Potter. We do not, to have a retail operation, we do
    not.
        Also, every one of our 60,000 rural routes are post offices
    on wheels. So they are designed to bring services to the
    customer.
        People now can access, through the Internet they can now
    access a system--we call it Click and Ship--to print a priority
    label and pay for postage online.
        So we are trying to bring as many services as we can to the
    doors of all Americans. We do not think that a traditional post
    office is the only way of doing it.
        Now that said, we are still going to need post offices
    throughout the country for post office box operations. Our
    carriers are going to have to be housed, they have to come and
    collect their mail.
        Senator Shelby. But, you could have a facility without
    spending all of the money?
        Mr. Potter. Exactly and we are doing that, sir.
        Senator Shelby. Especially in smaller areas?
        Mr. Potter. Exactly.

                        CIVIL SERVICE RETIREMENT SYSTEM

        Senator Shelby. Let us go back a minute to the Civil
    Service Retirement System correction, you elaborated on that.
    Would you submit this plan to the committee when you get it?
        Mr. Potter. Yes.
        Senator Shelby. We would like that.
        Mr. Potter. We would be happy to do that.

                                CONSUMER ACCESS

        Senator Shelby. Expanded points of service. We were talking
    about this.
        The President's Commission of the U.S. Postal Service
    proposed to revolutionize retail access by bringing a wider
    range of postal services and products to consumers in grocery
    stores, pharmacies, and other convenient locations. What is the
    current status of your efforts--I know I alluded to it a minute
    ago--to expand access to retail Postal Services at venues other
    than post offices? In other words, where people are.
        Mr. Potter. We are actively engaged and talking with a
    number of national retail outlets.
        Senator Shelby. I am not trying to promote Wal-Mart or
    Target.
        Mr. Potter. You are pretty close there.
        Senator Shelby. But look at the traffic that is going
    through these or Home Depot or Lowe's. You go there and you see
    that there are thousands of people going through those stores
    all over America every day.
        Mr. Potter. Right, and we are working closely with several
    of them. There are issues that we are dealing with, with some
    legal requirements but we are actively engaged in that.
        We recently had a deal with Hallmark Crown Stores. Seventy
    percent of all greeting cards end up in the mail, which I
    thought was a much higher number than I expected it to be. So
    we have worked out an arrangement with them where they will
    sell stamps, they will sell Priority Mail. And we are looking
    at all our options to do that. But we want to do it in an
    economical way.

                             FINANCIAL TRANSPARENCY

        Senator Shelby. Mr. Potter, the President's Commission has
    also proposed to try to enhance the transparency of the Postal
    Service's financial reporting. What steps have you done,
    working with the Board of Governors, to enhance annual
    financial reporting? Is the Postal Service committed to report
    financial information in accordance with the SEC reporting
    requirements and disclosure statements?
        Mr. Potter. The Postal Service has begun doing quarterly
    reports, that we believe are comparable to SEC. Obviously we
    are not a private corporation with stockholders but we have
    begun enhanced quarterly reporting. We have posted it on our
    web site. We have begun to report the equivalent of the 8-Q
    where basically if there is a major incident that might affect
    our finances, we are reporting that.
        We have changed our annual statement to become what we
    believe is more transparent.
        In addition to that, we are in contact and having
    discussions with the SEC and they are taking a look at our
    reports and we are looking forward to their recommendations on
    what we can do.
        Right now we believe we are probably more transparent than
    most, in terms of the level of information that we provide
    through the rates process and through all of the oversight that
    we have.
        Senator Shelby. But first of all, you need to know your
    financial condition, the real financial condition. Otherwise,
    you really cannot run the place if you do not know what is
    going on.
        Mr. Potter. One of the outcomes of doing that was the Civil
    Service Retirement legislation change. At the time people were
    saying, there were some saying we were underfunding our
    retirement benefits.
        Senator Shelby. You certainly do not want to do that,
    either.
        Mr. Potter. But we were of the opinion that we might have
    been overfunding. So there was the exploration and thanks to
    GAO and the administration, who took it upon themselves to help
    us with that, we were able to find out, thankfully, that we
    were in an overfunding condition.

                                  SPONSORSHIPS

        Senator Shelby. What return on investment has the Postal
    Service realized from sponsorship deals such as those with the
    New York Yankees, Tampa Bay Devil Rays, and Lance Armstrong?
        Mr. Potter. The sponsorships, I do not have a specific
    return.
        Senator Shelby. Would you furnish that for the record?
        Mr. Potter. I can furnish a response. I do not know if we
    have a specific return.
        Senator Shelby. You need some kind of way to measure that.
        Mr. Potter. It is very subjective and we will provide you
    what our analysis is for the record.
        Senator Shelby. But if you were advertising in private
    business, you would measure that advertising to see if you are
    selling cars or you are moving certain goods and services.
    Otherwise, you stop that advertising or you change it.
        Mr. Potter. Exactly. We will provide it for the record.
    Some of the numbers are I believe, for example, some you will
    look at with a skeptical eye and say I do not think it is worth
    that much. I have that same skeptical eye when it comes to a
    few of these.
        Senator Shelby. I am not in a position to say.
        Mr. Potter. I am not either, so we will share with you what
    others' analyses of it are.
        [The information follows:]

        Sponsorships increase brand awareness, build positive corporate
    image, promote employees' corporate pride and accrue positive public
    relations. While some of those attributes may be difficult to measure,
    the Postal Service did commission its advertising agency, Campbell-
    Ewald, to track and measure the level of media exposure for the Postal
    Service for the July-August 2003 timeframe, including the 2003 Tour de
    France. The value of domestic exposure for the Postal Service for this
    2-month time frame represented in excess of $31 million.
        Regarding the other sponsorships, the Devil Rays sponsorship should
    be regarded more as an advertising purchase; it solely comprises a
    billboard in the outfield promoting Priority Mail. Most of what we pay
    for in our Yankees sponsorship is also about advertising exposure in
    the stadium. However, in the case of the Yankees relationship we also
    received permission to produce philatelic merchandise that includes
    Yankee images. From the sale of this merchandise we gross several
    million dollars annually.

                                DELIVERY GROWTH

        Senator Shelby. The postal mail volume has continually
    dropped since fiscal year 2000, while the number of new
    addresses has increased by 5.4 million annually. The volume of
    first class mail and the number of delivery points are moving
    in opposite directions it seems.
        How do you plan to address, Mr. Potter, the delivery
    requirements for communities with the rapid growth of homes and
    businesses? And once the determination has been made that a new
    postal facility is needed, what is the approval process? Is it
    too protracted or can you have a fast track?
        You know, you have got communities growing by leaps and
    bounds and you have got some that are shrinking.
        Mr. Potter. We have got advance site acquisition where we
    actually go out and buy land in anticipation of growth.
        Senator Shelby. Save you some money, will it not?
        Mr. Potter. For example, out in Las Vegas we worked with
    the Bureau of Land Management, which has control over expansion
    beyond the city. And there are different actions that are
    taken----
        Senator Shelby. Did they give you the land? They should.
        Mr. Potter. We have been able to do that. I do not want to
    publicize it. We have been able to work certain arrangements,
    but in other parts of the country we cannot do that. But that
    is an example of what we do. We have different strategies in
    different areas around the country.
        But advance site acquisition is one of the methods that we
    use where we anticipate growth.
        Senator Shelby. You do that by demographic trends, among
    other things, do you not?
        Mr. Potter. Exactly, and you just look at, for example, the
    midsection of the country, you look at Montana, South Dakota,
    Iowa, down to Oklahoma. We have seen 30 percent of the
    population has been reduced. And obviously, the growth is in
    other sections.
        We do look to build facilities in those areas of the
    country. And we have provided funds to do that and we are
    expanding the amount of money that we have spent on that.

                               UNIVERSAL SERVICE

        Senator Shelby. As you look at the demographics of rural
    America, rural America is shrinking in population. How do you
    anticipate that to reduce the facilities and your costs? What
    about the political overtones there?
        Mr. Potter. Well, reducing the facilities is a major issue
    and one that by law we cannot do for economic reasons. So we
    live within the law. It is one thing that we would hope that,
    if we were to get reform legislation, would be considered by
    the Congress.
        Senator Shelby. It is universal mail service.
        Mr. Potter. We are not going to back away from universal
    mail service. If we do, I do not think you need a Postal
    Service in this country. That is the reason that we were
    formed. There are communities in America that would not get
    service if it were not for the Postal Service. We recognize
    that and we believe that.
        And I think that based on everything that I have read about
    the creation of the Postal Service, that that is why we were
    formed, to assure that. Some people have suggested that we get
    out of the package business, for example. So I said, how did we
    get into it?
        It turns out in 1912 there was a law passed by Congress,
    prior to which the Postal Service was not able to carry
    anything that weighed more than 4 pounds. But what happened and
    what was happening throughout the country was that there were
    rural communities that were either getting no service or
    whatever service they were getting, was an infrequent service,
    they were paying exorbitant rates to get.
        There were inner-city communities, the less affluent inner-
    cities communities that were not getting regular package
    services. And when they were getting it they were paying
    exorbitant fees to receive it.
        So when I look back historically I think wow, think about
    it today. If we were not in certain areas, I am not sure that
    the private sector could step in or would step in and deliver
    without surcharges.
        And today, many of our competitors surcharge rural
    Americans for delivery of mail or companies that want to reach
    rural Americans. And certainly others do not have daily
    delivery to certain communities that are less affluent.
        So I think the role of the Postal Service still is relevant
    today in light of what we were founded to do and the notion
    that everybody has equal access to a system to conduct business
    and send messages.
        Senator Shelby. At one time, you were in the banking
    business, too.
        Mr. Potter. We were and I wish we could get back into it.
    If you look at foreign post, many of them are getting into the
    banking business because they have retail outlets in these
    small communities.
        Senator Shelby. As chairman of the Banking Committee, I am
    not recommending that.
        Mr. Potter. I can always try, right.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Shelby. Mr. Potter, we appreciate your appearance.
    We appreciate your candor and we have a number of requests you
    said you would get back with the record to us.
        [The following questions were not asked at the hearing, but
    were submitted to the Service for response subsequent to the
    hearing:]

                Questions Submitted by Senator Richard C. Shelby

                        DETECTING BIOHAZARDS IN THE MAIL

        Question. I am told by GAO and others that the detecting systems
    that the Postal Service has acquired may not have the capability to
    detect other hazardous agents, such as a chemical or radiological
    weapon. Given that there are many other toxic agents that can be sent
    through the mail without being detected by your system, is the Postal
    Service still planning to deploy such detecting systems?
        Answer. Yes. We currently plan to install 1,708 Biohazard Detection
    Systems (BDS) at 282 facilities nationwide. National deployment of the
    BDS began in early April 2004. The 282 sites were selected because they
    represent our major processing facilities and cover our collection mail
    entry points for the entire postal network. Today, we have a total of
    32 BDS systems in operation.
        Nationwide installation of the BDS will resume on June 5. The
    program experienced a slight delay for testing to determine why some
    systems were producing ``inconclusive'' test results. Inconclusive or
    non-determinant results do not mean that a threat was in the mail. It
    simply means that tests had to be rerun to get a valid result.
        Our goal through the testing, implementation and everyday use of
    the BDS has been to ensure the safety of every employee and the
    customers we serve. That is why it was critical that the system
    operated properly before installation continued. Postal Service
    Engineering, working along with the equipment contractors, conducted
    tests to determine the cause of the problem. The cause has been
    determined and changes to basic processes and procedures have been
    instituted to return BDS to normal performance levels.
        Our methodology has been to develop a threat assessment that
    outlines known threats to our resources. Based on that assessment, we
    have identified and developed technologies to mitigate those known
    threats. These technologies include the BDS, capable of detecting
    biohazards, the Ventilation and Filtration System, capable of
    containing biohazards, and an irradiation process that neutralizes
    biohazards.
        BDS was developed as a scaleable system. In its current state, the
    system can detect only for the presence of Anthrax. However, BDS can be
    expanded in the future to detect for other biological agents, as well
    as toxins such as Ricin. Working in conjunction with our primary
    contractor for the BDS program, Northrup Grumman, we are integrating a
    prototype device in the BDS equipment that is capable of detecting
    Ricin. Testing of the device is planned for the spring of 2004.
        Question. How many systems have been installed? Where have they
    been installed and at what cost?
        Answer. We currently have 31 production systems and 1 pre-
    production system operating. The pre-production system will be replaced
    with a production unit as part of the national deployment effort.

    ------------------------------------------------------------------------
               Unit Location               Number of Units    Costs (Approx)
    ------------------------------------------------------------------------
    Cleveland, OH.....................  9 Production Units..      $2,250,000
    Baltimore, MD.....................  11 Production Units.       2,750,000
    Pittsburgh, PA....................  1 Pre-Production             250,000
                                         Unit.
    Lancaster, PA.....................  5 Production Units..       1,250,000
    Queens, NY........................  6 Production Units..       1,500,000
    ------------------------------------------------------------------------

        We estimate the manufacturing and installation costs for one BDS
    system to be approximately $250,000 to $180,000 for the hardware and
    $70,000 for logistical support and installation efforts. To date, we
    have awarded a contract for the first production phase that consists of
    the manufacture and installation of 742 BDS systems. Total funding
    committed to date is $212.1 million.
        Question. Will additional detection capabilities be added in the
    future? If so, how cost effective is it to address one threat at a
    time?
        Answer. We have developed a threat assessment that outlines known
    threats to our resources. Based on this assessment, we have identified
    and developed the Biohazard Detection System (BDS) capable of detecting
    biohazards. BDS was developed as a scaleable system. In its current
    state the system can detect only for the presence of Anthrax. However,
    BDS can be expanded in the future to detect for other biological
    agents, as well as toxins such as Ricin. Working in conjunction with
    the primary contractor (Northrop Grumman) for the BDS, we are
    integrating a prototype device within the BDS equipment that is capable
    of detecting Ricin. Testing of the device is planned for the spring of
    2004.
        As threats are identified and required to be detected by BDS, we
    will aggressively pursue adding the capabilities to our detection
    systems. However, in order to add additional threats to BDS, specific
    reagent sets and processes must be developed and scientifically
    validated with respect to each individual threat.
        Question. Are there any analyses of how the Postal Service's
    efforts compare to the steps that private sector mail companies have
    taken to detect hazardous agents?
        Answer. Yes. After the anthrax attacks of October 2001, the Postal
    Service consulted with the Joint Program Office (JPO) for Biological
    Defense as well as other military and Federal agencies. After these
    consultations, it was determined that a system did not exist that met
    the needs of the Postal Service. From October 2001 to September 2002
    more than 20 systems were tested. BDS was the only system that
    successfully passed all test protocols jointly established by the
    Postal Service and Bio-Defense experts.

                                COST REDUCTIONS

        Question. Please outline the cost-cutting measures planned for the
    Postal Service for fiscal year 2005.
        Answer. We are in the process of finalizing cost reduction plans
    for fiscal year 2005, which will become a part of the fiscal year 2005
    Integrated Financial Plan, scheduled for Board of Governors review in
    September. It is our expectation that we will plan for a sixth straight
    year of positive productivity gains as a result of continuing cost
    reduction efforts that has been successful in the past 5 years.
        We have achieved savings through a variety of measures, which we
    will build upon for fiscal year 2005. Postal management will continue
    to identify best practices and achieve savings through breakthrough
    productivity initiatives. We will continue to deploy automation that
    will save mail processing costs, and that also will have a positive
    effect on delivery productivity through higher levels of sequenced mail
    for the letter carrier. We will also continue to achieve additional
    savings and cost avoidances through streamlined transportation
    networks, refreshed communications/computer networks, centralized
    support functions and opportunities presented by supply chain
    management initiatives.
        Through stringent cost management, we have delivered $5 billion in
    cost savings since 2000. This includes $2.7 billon in savings resulting
    from Transformation Plan initiatives over the last 2 years. We are on
    track to surpass the $5 billion in savings called for by the Plan over
    the 5-year period ending in 2006.
        Question. What actions does the Postal Service intend to implement
    to continue the process of streamlining its operations?
        Answer. In its July 31, 2003 report, the President's Commission on
    the United States Postal Service made a total of 35 recommendations
    derived from the findings of its four subcommittees that reviewed all
    aspects of Postal Service operations. Of those 35 recommendations, 17,
    or approximately 50 percent, aligned closely with the strategies that
    the Postal Service adopted as ``near-term'' strategies in its April
    2002 Transformation Plan. The ``near-term'' strategies are those the
    Postal Service can accomplish without statutory change. For example,
    the President's Commission recommended that the Postal Service expand
    retail access to postal products and services. This was a key
    Transformation Plan strategy that is being implemented currently
    through such programs as retail access to postal services through
    partnerships with commercial retail stores, such as Safeway, and
    continuing expansion of product and service offerings over the
    Internet.
        For a complete review of the progress of Transformation Plan
    strategies please see the attached November 2003 Transformation Plan
    Progress Report. Please note that the Transformation Plan made two key
    commitments: to hold rates steady and to remove $5 billion in costs by
    the end of 2006. The Postal Service is well on its way to meeting these
    commitments. Rates will be held steady until 2006, and $2.7 billion of
    the $5 billion commitment was achieved by the end of fiscal year 2003.
        Of the 18 remaining President's Commission recommendations, most
    deal with issues that require statutory change, such as changes in the
    governing structure of the Postal Service. In the Transformation Plan
    the Postal Service associated such topics with structural change, and
    while it made some recommendations, it recognized that many of the
    policy issues are within the purview of the Congress, not the Postal
    Service. There were a small number of President's Commission
    recommendations that the Postal Service did not address in its
    Transformation Plan in any form, such as personalized postage stamps
    and an independent advisory body for the evaluation, acquisition and
    deployment of technology. The Postal Service has been studying the
    feasibility of such recommendations. Early in 2004 the Citizens' Stamp
    Advisory Committee, which reviews and approves subjects for printed
    postage stamps, recommended against implementation of personalized
    postage stamps by a vote of eight to three. The Committee cited nine
    reasons, including concerns about counterfeiting and negation of the
    social value of stamps as a unifying symbol of culture and community.

                             E-COMMERCE INITIATIVES

        Question. The 2003 Comprehensive Statement on Postal Operations
    states that the Postal Service is evaluating and modifying non-postal
    business plans. It is my understanding that e-commerce was an area of
    special concern. As a result of the e-commerce evaluation, what changes
    has the Postal Service made regarding commercial ventures, including e-
    commerce activities?
        Answer. We have aggressively reevaluated e-commerce initiatives and
    we have eliminated those that didn't meet expectations. We are focusing
    on repositioned core-product initiatives to satisfy customer needs. Our
    Postal Service website, www.usps.com, is a logical extension of our
    core mission. Our customers may access this site to buy stamps, look up
    ZIP Codes, and even ship parcels through our new Click-N-Ship service,
    a convenient online shipping solution that allows customers to send
    mail without leaving their home or office.
        And we are moving toward greater reliance on private sector
    providers to eliminate postal expenses. For example, we repositioned
    Electronic Postmark and Mailing OnLine to private sector agreements.
        We will continue to support initiatives that align with our core
    mission. As we gain experience, we will assess performance and make
    determinations on a product-by-product basis.
        Question. How do initiatives, such as the partnership with Hallmark
    Gold Crown, differ from prior e-commerce ventures?
        Answer. Our latest initiative is building upon previous initiatives
    designed to expand customer access without creating additional,
    permanent network costs.
        Recently, we have identified potential partnerships with
    sophisticated multi-location retailers, such as Hallmark, through
    standardized contract terms and conditions that are individually
    awarded. These limited-service contract postal at units will provide
    only the most desired postal products and services and times and in
    locations that are convenient to consumers. This relationship between
    two partners with an interest in ``keeping customers in the mail'' was
    not intended to replace post offices that offer a full line of
    services.
        These multi-location retailers are easily recognized and well
    respected brands that complement the USPS brand. These providers also
    have the marketing expertise and advertising funds to support the
    promotion of these units. These partners will provide retail services
    below the cost of the traditional post office.
        Hallmark was the first limited service CPU provider and the first
    to use Postal Service-provided postage evidencing devices to affix
    postage. By using this device, we reduce administrative costs in the
    field by eliminating stamp orders (stamps are provided under the
    consignment program) and eliminating daily financial reporting as well
    as auditing and bonding requirements. Because Hallmark stores pre-pay
    for the postage loaded onto the provided meters, the consumer benefits
    from conducting their store purchase with their postal purchase in one
    transaction and they can use their credit cards (credit card postal
    purchases are not allowed in traditional contract postal units.)
        By providing expanded access to Postal Service customers, contract
    postal units (CPUs) provide the Postal Service with a flexible and
    adjustable retail network that is a lower-cost alternative to Postal
    owned facilities.
        As customer behavior changes and they begin to access postal
    services through the Internet or through other means, and as they move
    to new communities, we will have the ability to adjust our retail
    network to meet the demand. CPU partners typically offer customers the
    convenience of providing postal services in the evenings and on
    weekends where customers live, work and shop.
        Customers can also purchase stamps ``at post office prices'' at
    participating Stamps-on-Consignment locations such as grocery stores,
    convenience stores, drug stores, banks and ATMs. Approximately 40,000
    locations and ATMs are part of this network. These stamp channels also
    provide expanded hours and days of access. These stamps are provided to
    our consignees through our vendor. The Postal Service cost to sell
    stamps through consignment is one of our least expensive methods of
    selling postage.

                                REVENUE FORECAST

        Question. Is it possible to offset the revenue loss without
    additional rate increases?
        Answer. We continuously assess our products and services to
    identify ways to stabilize costs to offset any revenue losses
    independent of our rate increases. As mentioned earlier, we are on
    track to take $5 billion in cost out of the system by 2006.
    Concurrently, we are working to enhance our products to keep pace with
    customer needs and grow revenue.
        Question. What is the Postal Service doing to reverse the revenue
    losses it has experienced with Express Mail since 2000 and Priority
    Mail since 2001?
        Answer. In terms of Express Mail and Priority Mail, customers have
    told us that the four most important factors in choosing a shipping
    company are service/reliability, price, ease of use/access, and
    information.
        In late 2001, we entered into a transportation agreement with FedEx
    to fly a significant portion of our Express Mail and Priority Mail. As
    a result, costs were reduced and service levels are at an all time
    high. We are also regularly reviewing our Express Mail network for
    opportunities to expand our overnight reach.
        Some of the cost-reduction initiatives we are working on include
    processing and barcode standardization to increase automation of the
    parcel mail-stream. We recently awarded a contract for 75 Automated
    Package Processing Systems (APPS) that will provide high-speed parcel
    and bundle processing, reduce labor costs, and provide en route
    tracking information for customers.
        Another initiative to help generate revenue was our recent launch
    of a pre-paid Priority Mail Flat Rate envelope to make it easier for
    customers to use Priority Mail service. We are also evaluating a Flat
    Rate Priority Mail box. These products will make it easier for
    customers to mail documents and merchandise anywhere in the country for
    one flat rate without the need for weighing and rating to determine how
    much postage needs to be placed on their package. We also enhanced our
    parcel pickup capabilities by allowing customers to notify their local
    post office when they have prepaid Priority Mail and Express Mail
    packages to be shipped. The notification alerts their carrier to pickup
    the packages at the same time they deliver their mail. Since we are
    already at the address, there is no charge for the pickup.

                           PUBLIC-PRIVATE PARTNERSHIP

        Question. The President's Commission stated that the Postal Service
    should continue to look for opportunities to offer discounts for
    additional work-shared products and to expand opportunities for small
    mailers to participate in them, particularly as new technologies are
    developed, that reflect the lowest combined public-private sector
    costs.
        Does the current rate-setting environment prevent the
    implementation and acceptance of work-sharing discounts with large
    mailers and cost the USPS potential sources of revenue?
        Does the Postal Service believe the work-share discounts are
    appropriate?
        What opportunities does the Postal Service foresee regarding
    additional work-sharing and what impact will it have on the budget?
        Answer. The current rate setting environment has not prevented the
    implementation or acceptance of generic worksharing discounts. Generic
    discounts are available to all postal customers and are used by
    thousands of customers; they are applied in a standard manner for use
    at thousands of postal facilities. We note that these thousands of
    customers are not only large mailers, but also small, local businesses
    and nonprofit organizations.
        Many customers or groups of customers have different mail
    preparation capabilities. At the same time, the operations of different
    postal facilities can be enhanced by variations in mail preparations
    designed to accommodate unique mailing needs. This creates potential
    opportunities to design worksharing arrangements for small groups of
    customers (niche classifications) or individual customers (negotiated
    service agreements or NSAs.) The current rate setting process often
    involves protracted and expensive litigation for these relatively
    simple cases. For instance, a current small filing for Periodicals,
    which affects primarily one mail preparer and roughly a tenth of 1
    percent of total mail volume, is 3 months into what is an
    ``accelerated'' schedule. Realistically, this process cannot be
    repeated for thousands of customers or customer niches.
        The Postal Service is a strong supporter of workshare discounts. In
    testimony before the President's Commission on the U.S. Postal Service,
    Chief Marketing Officer Anita Bizzotto stated:

        ``Partnering with customers through worksharing has been one of the
    major success stories of the U.S. Postal Service over the past 30
    years. These partnerships, now valued at $15 billion a year, have
    provided affordable mailing alternatives for customers; reduced Postal
    Service costs; and; have been a primary source of mail volume growth.
    These partnerships and worksharing discounts have helped usher in the
    age of automation by encouraging customers to prepare machine-readable
    mail and have remained an important tool for aligning the mail with the
    operating environment.''

        Some opportunities for additional worksharing will come in the form
    of more customized arrangements. At the same time, there is still
    opportunity for new generic arrangements. For instance, we believe more
    incentives are needed to encourage the transporting of magazines and
    newspapers downstream closer to their points of delivery. Such
    destination entry incentives have been successful in holding down rate
    increases for parcel and advertising mail customers but current policy
    has limited the applicability of these incentives. We have not
    succeeded in extending worksharing opportunities to Priority Mail but
    we are looking for opportunities that would serve the needs of Priority
    Mail customers.
        Lastly, we are concerned that the language in some of the
    legislative proposals may have a harmful effect on workshare in the
    future. In general, the more rigid standards which are applicable only
    to worksharing rates run counter to attaining one of the enunciated
    goals of postal reform: a more flexible rate structure. Rigid standards
    for worksharing rates would limit the Postal Service's ability to
    implement and maintain workable worksharing rates in a dynamic
    operating environment.

                             RETAIL STORES REVENUE

        Question. Has the Retail Network Optimization Plan been
    implemented?
        Answer. Since the initial development of the Transformation Plan,
    the Postal Service has established a retail direction that is focused
    on access, convenience, and ease of use for the customer. Building upon
    these goals, we have implemented a program that allows customers to
    purchase postage on-line, enabling letter carriers to pick up their
    postage materials when the carrier is delivering to the area. This is
    accomplished via the USPS Web site and eliminates the need for a
    special trip to the Post Office, which is a real convenience to small
    businesses and consumers who cannot always make a visit to the post
    office during normal businesses hours.
        Our retail network of access is evolving on a continuing basis and
    does not easily fit into an absolute optimization plan. For example,
    since the development of the Transformation Plan was announced, we have
    implemented a much more robust Web access channel. We do know that in
    order to serve the customer we must be where they work, shop, and live.
    Our focus is to provide that access and to adjust the network to meet
    those needs.
        In the Transformation Plan we talked about technology and the role
    it plays for retail. We have begun the roll-out of 2500 Automated
    Postal Centers (APCs), that enables our customers to perform 80 percent
    of the most common transactions that take place at our counters. They
    are located in our busiest offices and provide access to our products
    and services up to 24 hours a day, 7 days a week. Implementation will
    be completed by December of this year.
        The retail network continues to evolve, and like most businesses it
    is more than ``brick and mortar''--all of the access points are
    critical in order to provide universal service. The Postal Service will
    continue to review, monitor, and adjust this network (expansion and
    consolidation) to ensure that it is operating as efficiently as
    possible and providing needed services to our communities.
        Question. How were threshold values (proximity to other postal
    facilities, retail productivity indicators, number of households,
    deliveries, walk-in revenue, and small business accounts) determined?
        Answer. We do not have established thresholds for the Postal
    Service. We have a database that contains this type of information that
    we provide to the field to help them determine how to adjust their
    retail operations to meet the needs of customers.

                        EMERGENCY PREPAREDNESS EXPENSES

        Question. Since 2002, Congress has provided emergency
    appropriations to support the Postal Service's anthrax emergency
    preparedness activities. After the attacks, Congress appropriated $762
    million to decontaminate postal buildings and to buy and install
    biohazard detection equipment. The Postal Service reportedly has spent
    a total of $971 million on emergency preparation, which include $209
    million from its revenue.
        Please provide an overview of what this funding has been spent on
    to date.
        Answer. Following this paragraph, please find excerpts from the
    Postal Service's fiscal year 2005 Budget Congressional Submission,
    which addresses emergency preparedness costs to date, as well as our
    appropriations request. The following is information quoted directly
    from this document.
    U.S. Postal Service Fiscal Year 2005 Budget Congressional Submission,
            page 12:

        ``Pursuant to Public Law No. 107-117, the Postal Service submitted
    on March 6, 2002, an Emergency Preparedness Plan that outlined and
    discussed in detail the activities considered necessary to provide for
    the safety of our employees and customers. The Plan covered a span of
    several years and the activities are categorized as Near-Term,
    Intermediate-Term and Long-Term in describing the time frames during
    which these activities are planned. At the request of the
    Appropriations Committee, an update to the Plan was submitted April 30,
    2003.
        ``In the Plan, obligations for the Near-Term activities identified
    for fiscal year 2002 were projected to total $587 million. Of this
    total, $500 million was funded by Public Law 107-117, and $87,000,000
    was funded by Public Law 107-206.
        ``No funding for emergency preparedness was included in the initial
    Postal Service Fiscal Year 2003 Budget Request pending completion of
    the Emergency Preparedness Plan, however, a fiscal year 2003 budget
    amendment request was subsequently forwarded to the Office of
    Management and Budget to fund activities totaling $799.8 million
    relating to fiscal year 2003.
        ``The Postal Service 2004 Budget requested $350 million to continue
    emergency preparedness activities.
        ``No additional funding beyond the $587 million, received in 2002,
    has been received.
        ``The Plan and related requests are dynamic and, as such, some
    modifications are necessary as our field-testing proceeds, our
    knowledge of biohazard detection increases, and as technology
    matures.''
    U.S. Postal Service Fiscal Year 2005 Budget Congressional Submission,
            page 13:
        ``Significantly more funds than originally anticipated were
    required to clean and restore two mail processing centers that had been
    closed due to anthrax contamination. Safety was the paramount concern
    in performing this task and actions were coordinated with several
    scientific, medical, and government agencies. Delays were experienced
    due to questions regarding indemnification of contractors performing
    the process and the sheer scale of the task for which EPA required
    additional testing and verification. Reimbursement is now requested for
    the additional costs required in the refurbishment of these facilities.
        ``A major portion of the $779 million Emergency Response funds
    requested for fiscal year 2005 and prior years will be used to continue
    acquisition and deployment of ventilation and filtration (VFS)
    equipment that was initiated with the funds provided previously. A
    portion of the $587 million provided during fiscal year 2002 is being
    used to develop, acquire and install VFS on our culling and canceling
    equipment. Our Emergency Preparedness Plan discussed further deployment
    of VFS equipment to be installed on our delivery barcode sorters (DBCS)
    and automated flat sorting machines (AFSM) 100 and loose mail systems.
    The $779 million includes funding for the DBCS and AFSM 100 VFS
    acquisition and deployment.''

                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                                        Fiscal Year
                                  Item                                  Prior Years        2005            Total
    ----------------------------------------------------------------------------------------------------------------
    Building Restoration............................................         268,800  ..............         268,800
    Biohazard Detection System......................................         402,700          24,000         426,700
    Ventilation and Filtration......................................         271,700         364,000         635,700
    DC Area Mail Irradiation Facility...............................           9,000           7,000          16,000
    Other...........................................................          18,800  ..............          18,800
                                                                     -----------------------------------------------
          Subtotal..................................................         971,000         395,000       1,366,000
    Appropriation Received..........................................        -587,000  ..............        -587,000
                                                                     -----------------------------------------------
          Total.....................................................         384,000         395,000         779,000
    ----------------------------------------------------------------------------------------------------------------

                                     ______

                  Questions Submitted by Senator Patty Murray

      CONSOLIDATION OF RURAL POST OFFICES AND CLOSURE OF SMALL POST OFFICE

        Question. There have been instances when the Postal Service does
    not consult with or officially inform the customers and community prior
    to closures or consolidation. Why not? What is the process employed by
    the Postal Service when it closes a facility or consolidates
    facilities?
        Answer. The Postal Service follows post office closing and
    community notification procedures outlined in Title 39. There are
    occasions, however, due to emergency situations such as loss of lease
    with no suitable alternate quarters, a natural disaster or flood where
    there are no suitable alternate quarters or other similar emergencies.
    The Postal Service considers a suspension a temporary situation until a
    decision is made to either re-open the facility or propose
    discontinuance. If discontinuance is proposed, then a community meeting
    along with customer questionnaires are sent out to gather input from
    the community.
        Attached are the Postal Service regulations governing the
    discontinuance and emergency suspension of postal facilities.

                          POSTAL FACILITY CONSTRUCTION

        Question. The fiscal year 2004 Omnibus Appropriations bill directed
    the Postal Service to report on localities that require a new postal
    facility, the current conditions of post offices in need of renovation,
    and when a new facility or replacement will be built. The report is
    required within 90 days of the enactment or by my count, April 22,
    2004. Can you give me a preview of what the report will say? What is
    the status of postal facilities in Washington State and is there a need
    for any new construction or renovation in my State?
        Answer. In fiscal years 2001 and 2002 and part of 2003 due to
    financial constraints, the Postal Service implemented a freeze on
    capital and expense investments related to facilities. Exceptions to
    the freeze were allowed for ongoing construction and, on a case-by-case
    basis, projects were submitted to Headquarters for review and approval
    to address health and safety, emergency, legal, and lease pre-emption
    issues. Exceptions were also allowed for repair and alteration of
    facilities due to legal, health and safety, emergency, and maintenance
    of our infrastructure.
        During fiscal year 2003, the freeze was lifted. Annual budgets were
    established for repairs and alterations. Repair and alterations
    continue to be limited to projects addressing legal, health and safety,
    emergency, and infrastructure maintenance issues, within the budget
    provided. At the same time, a new national prioritization system was
    established for new or replacement customer service projects. This
    process focused on space deficiency and growth, and continued to allow
    exceptions to be submitted as part of the prioritization process and
    throughout the year for health and safety, emergency, legal, and lease
    preemptions issues, as well as those projects which generated favorable
    returns on investment. The projects included on the list depend on the
    funds available in the budget and the priority scores of the projects
    submitted. These do not include numerous other projects which are
    approved on an ongoing basis as exceptions.
        As a result of the actions above, we believe we are addressing our
    most critical facility needs and prioritizing projects within the
    funding available.
        Regarding Washington State facilities, the following is a list of
    projects being pursued as part of approved plans:
    New Facility Projects
      --Bickleton Main Post Office
      --Clarkston Main Post Office
      --Ford Main Post Office
      --Lake Stevens Carrier Annex
      --Lilliwaup Main Post Office
      --Seattle--Wedgewood Carrier Annex
      --Southworth Main Post Office
      --Spokane Vehicle Maintenance Facility
      --Union Main Post Office
    Repair and Alteration Projects
      --Auburn Main Post Office--lobby remodel
      --Colfax Main Post Office--life safety systems upgrade
      --Newport Main Post Office--heating/air conditioning replacement
      --Pasco--Processing & Distribution Facility--heating/air conditioning
            controls
      --Pullman Main Post Office--security upgrade
      --Spokane--Hillyard Station--enlarge collection box drop-off lane
      --Spokane Processing & Distribution Center--install concrete pad
            enclose dock
      --Tacoma Processing & Distribution Center--security upgrade
      --Vancouver--Downtown Station--window replacement
      --Veradale Main Post Office--enclose dock

                     POSTAL REFORM/REGULATORY BOARD ISSUES

        Question. Legislation enacted last year shifted the responsibility
    of funding civil service retirement benefits earned by postal employees
    while they served in the military from the Treasury Department to the
    Postal Service. I understand that most of the financial obligation is
    due to military service performed before the modern-day Postal Service
    was even created in 1970. The President's Commission recommends that
    military service costs not be borne by the Postal Service. What would
    be the financial impact on the Postal Service if the Postal Service is
    to be responsible for this $27 billion cost?
        Answer. The Postal Service has submitted two proposals concerning
    the disposition of these funds. Our first proposal requests that the
    United States Treasury again be required to fund all CSRS costs
    associated with the military service of Postal Service employees and
    retirees. Our second proposal assumes that responsibility for funding
    military service costs is transferred to the Postal Service.
        Under the first proposal, in fiscal year 2006, the Postal Service
    will contribute $5 billion to fund and pre-fund retiree health benefits
    for all career employees; under the second proposal it will contribute
    $1.9 billion to fund retiree health benefits and to pre-fund retiree
    health benefits for career employees hired after fiscal year 2002. The
    difference in the amounts reflects the fact that returning the funding
    of CSRS costs of military service to the Treasury increases the
    ``savings'' under the Act, and makes available additional funds that
    can be used to pre-fund retiree health benefits for career employees.
        Both proposals address the funding retiree health benefits, which
    we estimate to be valued at between $40 billion and $50 billion,
    depending on the long-term medical inflation assumption used, at the
    end of fiscal year 2002. At the end of fiscal year 2003, post-
    retirement health benefit obligations were estimated to be valued
    between $47 billion and $57 billion.
        Each proposal stands on its own merits. Neither was designed around
    its impact on rates. The first proposal returns to the U.S. Treasury
    the responsibility for funding CSRS pension costs earned by military
    service of Postal Service employees and uses funds made available from
    this adjustment to pre-fund retiree health benefits cost for current
    Postal Service employees. However, to provide the required level of
    funding, an additional $1.2 billion in funds would be necessary,
    causing a 2 percent increase in rates.
        In our second proposal, it is assumed that the transfer of CSRS
    military service costs to the Postal Service is not reversed and that
    retiree health benefits are pre-funded only for new employees hired
    after fiscal year 2002, when the pension funding reform legislation was
    enacted. This would require approximately $200 million more in
    additional funds, causing a 0.3 percent increase in rates. It would be
    possible to select arbitrarily a different hire date for funding
    employee retiree health benefits for new employees to match the
    additional funding requirement of $1.2 billion, but it would be just
    that, arbitrary.
        Question. I also want to let you know that I have heard concerns
    from constituents about the recommendation to establish a new Postal
    Regulatory Board. This entity would replace the current Postal Rate
    Commission and significantly expand its authority. What are your views
    on this proposal?
        Answer. We understand the rationale the President's Commission has
    defined for the Postal Regulatory Board. Yet regulators are normally
    required to operate within limits and guidelines. Regulated private
    companies and their shareholders have legal protections against
    arbitrary action by the regulator that the Postal Service cannot have
    as a government institution.
        At the least, there should be standards drawing a clear line
    between what is appropriately a managerial function within the
    oversight of the Governors or Directors, what is a regulatory function
    committed to the regulator, and what is a public policy function
    reserved to the Nation's lawmakers.
        For instance, the Postal Regulatory Board can revisit the vital
    national issues of the postal monopoly and universal service. These are
    clearly issues of broad public policy that should be resolved as part
    of our management responsibilities, as determined by Congress.
        They are not regulatory issues. Without defined limits or
    guidelines, the regulator could conceivably limit the monopoly in such
    a way as to jeopardize universal service or even redefine the scope of
    the Nation's mail service itself.
        The powers of the proposed Postal Regulatory Board could also
    affect the outcome of the collective-bargaining process. The Postal
    Service has been, and continues to be, a strong supporter of collective
    bargaining. This process of give and take assures that the interests of
    our employees--and the unions that represent them--are considered
    within the larger picture of the Postal Service's financial situation
    and the needs of our customers.
        By determining the range within which wages may be negotiated, the
    Postal Regulatory Board could impede the ability of the parties to
    successfully negotiate agreements.

                         REVENUE FOREGONE REIMBURSEMENT

        Question. Mr. Potter, I understand that for the first time ever,
    the fiscal year 2005 President's Budget does not include the $29
    million reimbursement to the Postal Service for the revenue foregone
    debt. Do you know why this has occurred? Do you consider this a
    violation of the agreement that has been in operation since the early
    1990's when legislation was enacted that promised the Postal Service
    $29 million annually from 1994 through 2035?
        Answer. The Office of Management and Budget (OMB) did not provide
    us with their rationale for not including our request for payment of
    earned but unpaid Revenue Foregone appropriations in the President's
    fiscal year 2005 budget request.
        In a December 3, 2003 letter to OMB Director Bolton, the Postal
    Service formally requested that OMB reconsider the funding reductions
    of the Postal Service, including reductions in revenue foregone
    payments, which OMB had proposed to include in the President's budget
    request. An OMB official verbally informed us on December 17 that our
    requested changes had been denied.
        In accordance with the Revenue Foregone Act of 1993, the Postal
    Service is to receive $29 million annually through 2035. These
    payments, totaling $1.2 billion, cover the cost of services we provided
    in fiscal years 1991 through 1993, but for which there were
    insufficient amounts appropriated. They also cover payment for services
    provided from fiscal year 1994 through 1998. The payment requested for
    fiscal year 2005 would be the twelfth in the series of scheduled 42
    annual payments.
        In an unusual departure from past Presidential budget submissions,
    the 2005 budget is silent on this statutory reimbursement. The Postal
    Service is required under generally accepted accounting principles to
    reduce the value of an amount receivable to reflect any uncertainty as
    to full payment. As a result, the failure to receive these funds may
    require the Postal Service to treat these remaining payments, which
    amount to nearly $900 million, as a bad debt, significantly increasing
    our costs. As we work to address our long-term obligations in a
    responsible manner, it is counterproductive to increase costs by
    writing off a debt deferred by interest-free installment payments
    spread over a period of 42 years.
        The second part of our request is for $75.9 million for free mail
    for the blind and for overseas voting materials, as defined by statute.
    This provides funding for the free mailing of materials used by the
    blind and others who cannot use or read conventionally printed
    materials. It also includes absentee balloting materials that can be
    mailed free by members of the armed forces and other United States
    citizens residing outside of the United States, and balloting materials
    that can be mailed in bulk between State and local elections officials.
        Our appropriations request for free mail differs from the
    President's budget proposal of $61.7 million. The President's budget
    proposes to continue the practice of ``advance'' funding the amount
    requested for free mail. This means that funding is ``advanced'' until
    the fiscal year following the actual mailings and not made available to
    the Postal Service until after these mailings have been handled and
    delivered. The Postal Service is not authorized to control or limit
    these mailings to reduce the funding needed. And while that is not a
    role we seek, the simple fact is that we have no way to mitigate the
    shortfall in funding. Providing less than the requested amount will
    only compound the financial burden caused by the current ``advance''
    funding.
        The amounts due under this Act are for the absolute nominal costs
    incurred related to services previously performed. The Act's
    requirements to reimburse the Postal Service over an extended time
    period with no payment of interest places additional cost burdens on
    other postal rate payers. For this reason, the Postal Service in the
    past has requested an accelerated repayment program.

                              POSTMASTER VACANCIES

        Question. According the Postal Service, there are more than 1,600
    post offices with postmaster vacancies. Please explain what steps are
    being taken to fill these postmaster slots.
        Answer. Six hundred of the current 1,600 vacancies consist of
    emergency closings and/or other non-vacancy, leaving about 1,000 valid
    vacant postmaster positions. The attrition rate in the Postal Service
    is about 5 percent, which equates to approximately 1,380 (5 percent of
    the total post office count of 27,620). With about 1,000 currently, we
    are below the number of postmaster vacancies that would be expected.
    The entire hiring and promotion process takes, at the very least, 90
    days and includes the following: vacancy announcement posting, review
    of applications, interview of the most eligible applicants, and
    generating the selection and non-selection communication.
        Vacant post offices are often used to develop employees who have
    identified the position of postmaster as a career goal, with the
    average developmental assignment lasting about 90 days. As positions
    are filled, others become vacant, which creates a constant vacancy rate
    of about 3 to 5 percent or 830 to 1,380 positions. The Postal Service
    is currently within that range.
                                     ______

                 Questions Submitted by Senator Robert C. Byrd

        Question. The administration has proposed to permanently repeal the
    annual appropriation for foregone revenue. What effect do you
    anticipate the permanent repeal of this appropriation would have on
    postal rates?
        Answer. The receipt of these funds for past services performed is
    used to pay for current-period expenses. Accordingly, if the funds are
    not received, the price of stamps will increase directly related to
    these costs.
        If the entire sum were written off as bad debt, postal rates could
    increase by approximately 0.5 percent in the year of the write-off. In
    each of the remaining years of the payment period, lesser, but direct,
    rate increases would result.
        On average we would expect the rate increase to be similar for all
    mailers. However, since commercial mail comprises more than 70 percent
    of all mail, we would expect that in terms of absolute dollars,
    commercial mailers would shoulder the greatest burden.
        If any of the payments due as specified in the Revenue Foregone
    Reform Act of 1993 are not received, the loss in reimbursement for
    services performed will increase postal rates directly. Accordingly,
    postal rate payers will fund the hundreds of millions in debt
    authorized to be paid through appropriation.
        Question. Under postal pension reform legislation (Public Law 108-
    18) enacted last year, the U.S. Postal Service will be required to
    assume all pension costs associated with Postal employees with military
    experience. What effect do you anticipate that this provision will have
    on postal rates?
        Answer. The Postal Service has submitted two proposals concerning
    the disposition of these funds. Our first proposes that the United
    States Treasury again be required to fund all CSRS costs associated
    with the military service of Postal employees and retirees. Our second
    proposal assumes that responsibility for funding military service costs
    is transferred to the Postal Service.
        Under the first proposal, in fiscal year 2006, the Postal Service
    will contribute $5 billion to fund and pre-fund retiree health benefits
    for all career employees; under the second proposal it will contribute
    $1.9 billion to fund retiree health benefits and to pre-fund retiree
    health benefits for career employees hired after fiscal year 2002. The
    difference in the amounts reflects the fact that returning the funding
    of CSRS costs of military service to the Treasury increases the
    ``savings'' under the Act, and makes available additional funds that
    can be used to pre-fund retiree health benefits for career employees.
        Both proposals address funding retiree health benefits, which we
    estimate to be valued at between $40 and $50 billion, depending on the
    long-term medical inflation assumption used, at the end of fiscal year
    2002. At the end of fiscal year 2003, post-retirement health benefit
    obligations were estimated to be valued between $47 billion and $57
    billion.
        Each proposal stands on its own merits. Neither was designed around
    its impact on rates.
        The first proposal returns to the U.S. Treasury the responsibility
    for funding CSRS pension costs earned by military service of Postal
    Service employees and uses funds made available from this adjustment to
    pre-fund retiree health benefits cost for current Postal Service
    employees. However, to provide the required level of funding, an
    additional $1.2 billion in funds would be necessary, causing a 2
    percent increase in rates.
        In our second proposal, it is assumed that the transfer of CSRS
    military service costs to the Postal Service is not reversed and that
    retiree health benefits is pre-funded only for new employees hired
    after fiscal year 2002, when the pension funding reform legislation was
    enacted. This would require approximately $200 million more in
    additional funds, causing a 0.3 percent increase in rates. It would be
    possible to select arbitrarily a different hire date for funding
    employee retiree health benefits for new employees to match the
    additional funding requirement of $1.2 billion, but it would be just
    that, arbitrary.
        Question. What are the likely financial ramifications of the
    sequestration of the U.S. Postal Service's Civil Service Retirement
    System (CSRS) contribution savings as a result of Public Law 108-18?
        Answer. Under this reform legislation, it will be necessary to
    include the ``savings'' as an expense in the revenue requirement of
    future rate filings. Therefore, in order to obtain funds to place in an
    escrow account in fiscal year 2006, a 5.4 percent increase in postage
    rates will be required unless the law is amended. Additionally, bi-
    annual postage rate increases between 1.0 percent and 1.5 percent would
    be necessary just to cover the escrow requirements over the next 15
    years. These escrow-driven rate increases will cause further declines
    in mail volume, contributing to the need for higher additional rate
    increases in order to fund the ever expanding delivery network.
        Question. How will the repeal of the foregone revenue
    appropriation, the assumption of military pension costs, and the
    sequestration of CSRS pension savings affect the Postal Service's long-
    term transformation?
        Answer. These actions, all of which require the Postal Service to
    subsidize the Federal Government, are nothing more than a transfer of
    its obligations from taxpayers to postal ratepayers. These transfers,
    totaling billions of dollars, will jeopardize the financial viability
    of the Postal Service and its long-term transformation efforts. It
    makes no sense in any circumstance to retroactively transfer such costs
    to the Postal Service, a self-sustaining public organization. But, in
    order to defray the financial obligations of the Federal Government,
    these actions would: transfer to the Postal Service the Federal
    Government's obligations of over $27 billion for military service
    pension costs; deny the Postal Service nearly $900 million in revenue
    foregone funds due for services it provided between 1991 and 1998; and
    deprive the Postal Service of an estimated almost $70 billion of its
    own pension over-funding. Further, in 2006, the Postal Service will be
    required to place the ``savings'' resulting from the Act in an escrow
    fund that, over time, would require postal rate payers to pay higher
    rates in order to fund the additional $70 billion escrow requirement.
    Taxing the Postal Service with these transfers at this time ignores the
    organization's critical business needs and the significant financial
    challenges resulting from declining mail volumes and the requirement to
    fund an ever expanding delivery network necessary to provide universal
    service.
        Further, implementing these cost transfers to the Postal Service
    would ignore the stated concerns of the President's Commission on the
    United States Postal Service regarding the fiscal health of the Postal
    Service and would run counter to the Commission's recommendations for
    actions necessary to institute a transformative business model for the
    Postal Service.
        Question. What is the status of the implementation of the Postal
    Service's Emergency Preparedness Plan?
        Answer. The Emergency Preparedness Plan covers four major areas:
    health-risk reduction, detection, intervention, and decontamination.
    First and foremost, we have been working swiftly over the past 2 years
    to ensure the safety and security of our employees and customers. While
    many efforts are underway, we are accomplishing this monumental task
    primarily through the development of leading-edge technologies and
    changes to our standard operating procedures.
    Health-Risk Reduction
        We have introduced improved standard operating procedures,
    including the use of High Efficiency Particulate Air (HEPA) vacuums to
    clean our mail processing equipment. Additionally, the Postal Service,
    in conjunction with the National Institute of Occupational Safety and
    Health (NIOSH), developed Ventilation and Filtration Systems (VFS).
    These systems are installed on key mail processing machines and
    function to collect and contain airborne particulates from the machines
    during mail processing operations. We have purchased over 1,300 systems
    to be deployed at our 282 major mail processing centers nationwide.
    National deployment of the systems began in April 2004.
    Detection
        The Postal Service has developed the Biohazard Detection System
    (BDS) to act as an early warning system against the threat of
    biohazards that may enter our mail network. We currently plan to
    install 1,708 detection systems at 282 facilities nationwide. National
    deployment of the BDS began in April 2004 and we currently have a total
    of 32 BDS systems in operation.
        In accordance with our threat assessment, we are also reviewing
    upgrades to the BDS that will allow for the detection of additional
    threats including toxins such as Ricin.
    Intervention
        We continue to irradiate government mail prior to its delivery.
    This process neutralizes hazardous substances that may be contained in
    the mail. We are meeting this commitment by contracting with IBA in
    Bridgeport, NJ to irradiate and sanitize the government mail.
    Additionally, we are considering plans to build and operate our own
    irradiation facility specifically designed to meet our needs. The
    facility will significantly reduce our annual operating expenses and
    improve our service with respect to government mail.
    Decontamination
        We have successfully decontaminated both Postal Service facilities
    that where closed due to the anthrax attacks of 2001. The Curseen/
    Morris facility (formerly known as the Brentwood facility) in
    Washington, DC resumed operations in December of 2003 and continues to
    operate today. The Trenton, NJ facility was successfully decontaminated
    in February 2004. Efforts are underway to refurbish this building and
    it is expected to begin operations in early 2005.

                              SUBCOMMITTEE RECESS

        Senator Shelby. We wish you well and thank you for
    appearing with us.
        Mr. Potter. Thank you, Mr. Chairman.
        Senator Shelby. The subcommittee is recessed.
        [Whereupon, at 11:14 a.m., Thursday, April 1, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND
              RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2005

                                  ----------

                            WEDNESDAY, APRIL 7, 2004

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:17 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard C. Shelby (chairman)
    presiding.
        Present: Senators Shelby and Reid.

                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

    STATEMENTS OF:
            MARK O. EVERSON, COMMISSIONER
            PAMELA J. GARDINER, ACTING TREASURY INSPECTOR GENERAL FOR TAX
                ADMINISTRATION, DEPARTMENT OF THE TREASURY
        Senator Shelby. The subcommittee will come to order.
        Good morning. I would like to welcome Internal Revenue
    Service (IRS) Commissioner Mark Everson and Pamela Gardiner,
    the Acting Treasury Inspector General for Tax Administration
    (TIGTA) to this morning's hearing. I look forward to hearing
    each of your views on the IRS's administration and enforcement
    of our Nation's tax code.
        As we all know, the April 15th tax filing season deadline
    is rapidly approaching. Each year the subcommittee requests
    that the IRS Commissioner appear before it in order to provide
    an update on how the Service is responding to the influx of
    questions and assistance that taxpayers need to correctly file
    their tax returns. This year we have also asked TIGTA to
    participate in order to provide a different perspective on the
    IRS's performance.
        I have taken note of the IRS's stated mission to provide
    America's taxpayers with top quality service by helping them to
    understand and meet their tax responsibilities, and by applying
    the tax law with integrity and fairness to all. This mission
    statement is appropriate, but some might question whether we
    are making progress toward achieving that goal.
        The IRS continues to face numerous challenges in tax law
    enforcement, customer service, and the modernization of its
    computer systems. While some strides have been made in some
    areas, much work remains to be completed. Each one of these
    tasks would prove difficult to undertake individually and to
    tackle all three at once is daunting indeed.
        I look forward to discussing each of these areas with both
    of you. The strength and weakness of our Nation's Federal
    income tax system is its reliance on the voluntary compliance
    of American taxpayers. Most Americans make every effort to
    comply with the law and pay their taxes. But as with any law,
    some intentionally seek to avoid compliance or engage in
    outright fraud. That is why effective enforcement of our tax
    laws is so important. If enforcement is lax, ineffective, or
    uneven, it encourages more people to commit fraud.

                            IRS ENFORCEMENT FUNDING

        While it is uncertain whether tax fraud is on the rise, I
    am certain that funding for the IRS tax enforcement has been
    and will continue to be an important priority for the
    administration and for the Congress. Over the past several
    years Congress has consistently increased funding for tax law
    enforcement, including a $265 million increase this past year.
        In each fiscal year since 2000, Congress provided the IRS
    with additional funding to increase its enforcement staff.
    Inexplicably, these staffing needs were not filled and the
    funds were instead used for other budgeted expenses. The use of
    these additional dollars to cover other funding shortfalls
    rather than increase staffing belies the priority the Service
    claims to place on enforcement. This diversion of funds is in
    direct contravention to your own statements, Mr. Commissioner,
    and is simply unacceptable.
        The first and foremost mission of the IRS must be to ensure
    the full and fair compliance of all U.S. taxpayers with their
    tax obligations. Yet, how can we ensure that the IRS is taking
    its enforcement responsibilities seriously if we continue to
    allow the Service to spend its funding for purposes other than
    that for which they have been requested and for which Congress
    has provided them?
        If there are administrative shortfalls caused by absorbing
    pay increases or diverting funds to other priorities and other
    unbudgeted items, then the IRS should ask for funding for these
    expenses and not hide behind claims of underfunding of
    initiatives such as customer service and enforcement. With
    100,000 employees and an annual budget that exceeds $10
    billion, I find it hard to believe that the IRS lacks the
    resources it needs to get the job done.
        I look forward to hearing both your comments and any update
    on how the IRS is utilizing the additional $265 million in
    enforcement and compliance funding appropriated recently. In
    the long term, a strong enforcement capability supported by
    necessary funding will continue to be a key part of combating
    tax non-compliance. But enforcement alone will never be enough.
    The IRS must provide high-quality customer service to assist
    taxpayers. I believe that many people who fail to comply with
    the code do so unintentionally because of its difficulty and
    complexity. Accurate and timely guidance from the Service is
    imperative to ensuring taxpayer compliance.
        The IRS is to be commended for the improvements it has made
    in customer service over the past few years. Helpful guidance
    is now much more accessible by way of the Internet, telephone,
    and in-person assistance. The accessibility of e-file options
    has eased the burden of filing tax returns for both the
    Government and the taxpayer.
        While the IRS has improved its responsiveness to taxpayer
    questions, the troubling fact remains that nearly one in four
    callers to its toll-free helpline receive inaccurate guidance.
    The numbers are only slightly better for online questioners and
    considerably worse for those taxpayers who seek in-person
    assistance in an IRS-operated taxpayer assistance center.
        I was even more alarmed, Mr. Commissioner, after learning
    of TIGTA spot audit visits to 26 different assistance centers
    throughout the country that uncovered, ``IRS employees
    incorrectly prepared 19 of 23 tax returns that they prepared,''
    during the audits. How can we expect taxpayers to understand
    and comply with the complexities of the tax code when IRS's
    employees themselves have so much trouble understanding and
    explaining it?
        Our Federal tax code is a large part of the problem. The
    code and accompanying regulations are more than 54,000 pages
    long, and are too complex, too confusing and costly to comply
    with. Comprehensive reform of the tax code itself would go a
    long way towards reducing tax fraud by making the process
    simpler and the system fairer for all taxpayers. Additionally,
    a less complex tax code would provide fewer opportunities for
    cheaters and reduce the paperwork burden for all taxpaying
    Americans.
        I continue to believe that a simple and transparent tax
    structure would promote taxpayer compliance and lead to
    increased collections for the Treasury, while also markedly
    reducing the huge cost of administration and enforcement of our
    current tax system.

                         BUSINESS SYSTEMS MODERNIZATION

        Now I would like to focus for just a few minutes on an area
    of particular concern to me, the ongoing effort to modernize
    the IRS computer systems, known as Business Systems
    Modernization (BSM). This effort has been ongoing for a number
    of years, and it has consistently run over schedule and over
    budget while also failing to achieve meaningful milestones for
    its development.
        Mr. Commissioner, your budget request wisely seeks a
    decrease of $102 million for BSM. I agree that now is an
    appropriate time to focus on reengineering efforts to achieve
    the goals set for the BSM initiative. This initiative was
    supposed to be completed in 10 years. However, I do not believe
    that anyone expects this schedule to be achievable as schedule
    delays continue to be the rule, not the exception, to this
    ongoing effort.
        By way of example, the Customer Account Data Engine (CADE),
    the centerpiece of the entire BSM effort, was originally
    scheduled to roll-out in January of 2002, 2 years ago. Former
    Acting Commissioner Wenzel last year testified that CADE would
    be ready in August of 2003. It is now April 2004, and there is
    still no sign of CADE. True to form, CADE is not only late but
    significantly over budget. These schedule slippages and cost
    overruns have been epidemic. In fact, the IRS is running late
    and is over budget on all seven core projects related to BSM.
        I am very concerned that BSM is becoming the 21st-century
    version of the Tax Systems Modernization (TSM) program which
    was abandoned after consuming $4 billion of Federal tax
    dollars. That prior modernization effort was a complete loss.
    The current BSM effort began in 1998 and has already cost $1.7
    billion. This program, like TSM before it, raises more
    questions than it answers. As you noted, Commissioner Everson,
    in February of 2002, ``good intentions and good beginnings are
    not the measure of success. What matters in the end is
    completion, performance, and results.'' Applying your own
    standard, Commissioner Everson, I think you will agree that the
    BSM effort has woefully under-performed.
        I look forward to hearing the thoughts of both witnesses as
    to the best approach to take to keep this all-important
    modernization program on track. Again, I welcome you to the
    committee. Your written testimony will be made part of the
    record in its entirety, and Mr. Commissioner, we will start
    with you.

                        STATEMENT OF SENATOR HARRY REID

        Senator Reid. Excuse me, can I make a statement?
        Senator Shelby. Senator Reid. Excuse me.
        Senator Reid. I also feel at somewhat of a disadvantage.
    You are 6 foot 4 and I am just a small guy, and you have got a
    pad under your chair and I am here in this hole. It does not
    seem fair to me, Mr. Chairman.
        Senator Shelby. I do not think you would be at a
    disadvantage to anybody, Senator Reid.
        Senator Reid. I briefly want to just say this. I have a
    statement that is prepared and I do not want to take the time
    of the committee, but I would ask your permission that it be
    made part of the record.
        Senator Shelby. It will be made part of the record in its
    entirety and you may proceed as you wish.
        Senator Reid. Mr. Chairman, let me just say this. I hope
    that we can give the Commissioner of the Internal Revenue
    Service (IRS) the money that has been requested. I hope we do
    not have to cut that. I say that because we in Nevada have been
    faced with someone who has been indicted, and I think that is
    good, but he has promulgated falsehoods around the country
    saying you do not have to pay your taxes, and thousands of
    people have followed his lead. As a result of that, it is just
    one indication of why we have to have an Internal Revenue
    Service that has the manpower to collect the money that is due
    the government, because it places an unfair burden on those of
    us who pay their taxes fairly, if others are not.

                               PREPARED STATEMENT

        Nobody likes to pay their taxes, but I would hope that we
    would give the Internal Revenue Service the tools they need to
    collect the taxes, and especially the tools to go after those
    people who are, like the person in Nevada, openly cheating.
    They do not have the manpower to do this adequately and I hope
    we can help them in that regard.
        [The statement follows:]

                    Prepared Statement of Senator Harry Reid

        Mr. Chairman, I want to thank you for calling this important
    meeting to talk about one of the most serious challenges facing the
    Internal Revenue Service today--the mismatch between the resources
    devoted to the Service's enforcement activities and the results that we
    in Congress and the public at large expect of it.
        Back in his 1996 State of the Union address, President Clinton
    declared that the ``era of big government is over.'' Generally
    speaking, with the exception of homeland security and defense, that has
    continued to be the case. It's a positive step to demand a more
    efficient, effective, and accountable government. Bloated and wasteful
    government is dangerous.
        But there is also danger in not having enough government to perform
    critical services in a responsible fashion. Take the S&L Crisis as an
    example. Back in the 1980s and early 1990s, the pool of Federal bank
    regulators shrank dramatically in size, training, and experience. That
    was a material contributing factor in the savings and loan crisis that
    saw over a thousand S&Ls with over $500 billion in assets fail. The
    Federal bailout of S&Ls eventually cost us $124 billion. If we had
    employed a better-trained, more experienced, and larger team of
    examiners, we could have prevented that crisis at a miniscule fraction
    of what it eventually cost us.
        I view the IRS's enforcement budget in much the same way. It's not
    that we're attempting to avert a crisis here--it's just that we have to
    make sure that the IRS has the tools it needs to conduct its important
    work effectively.
        Nobody likes to pay their taxes, but taxes are necessary for our
    society to function. And the collection of those taxes should be
    efficient, accurate, and fair. Without an adequate staff and budget,
    the IRS can't collect taxes efficiently, it can't collect them
    accurately, and it can't collect them fairly.
        Since 1996, the number of IRS agents has fallen from just under
    23,000 to 16,750, which is a decline of nearly a third. The number of
    taxpayers audited fell from 1.9 million to 849,000. Criminal cases
    against alleged tax offenders have fallen by about half, and civil
    cases have fallen by more than 60 percent.
        Those numbers indicate that the IRS is experiencing difficulty
    carrying out its mission--collecting revenue. Last year, the IRS chose
    not to pursue $16.5 billion of taxes owed on 2 million tax returns,
    mainly because of short-staffing. That represents 1.8 percent of the
    total individual and corporate income taxes expected for 2003.
    According to officials of the Service, many of these taxpayers would
    pay their bills if an agent simply called them.
        The problem extends beyond the delinquent accounts. As was noted in
    yesterday's USA Today, the Service estimates that it loses $250 billion
    every year from taxpayers who cheat, fail to file, or abuse tax
    shelters. The lost revenue constitutes 10 percent of the Federal
    budget. That amounts to almost as much as we spend on Medicare!
        When the IRS has a limited organizational capacity to go after this
    money--which is fairly owed--it means that the tax burden just got a
    little bit heavier on everyone who pays their taxes honestly. That's
    not right.
        Furthermore, especially at a time when the Federal budget deficit
    is $500 billion, we should be ensuring that everyone pays in full.
        Sometimes in our haste to create a smaller government, we settle
    for a considerably less efficient and productive government. That is
    unacceptable when it comes to the enforcement activities of the IRS,
    and I look forward to working with Commissioner Everson and his
    talented associates to ensure that they are equipped with the resources
    necessary to do their vital enforcement work.

        Senator Shelby. Thank you.
        Senator Reid. I am sorry to be here late.

                   PREPARED STATEMENT OF SENATOR PATTY MURRAY

        Senator Shelby. That is okay, Senator Reid.
        Senator Murray has submitted a prepared statement which
    will also be included in the record.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        Thank you, Mr. Chairman. Over the past 3 years, our country has
    pursued a destructive and inequitable economic policy centered on
    providing tax cuts to the wealthiest Americans while restricting
    spending on programs that help all Americans. As a result, our Federal
    budget has gone from one of the greatest surpluses in its history to
    the highest deficit ever known in the history of our country--$478
    billion--close to half a trillion dollars in the current fiscal year.
        But if that sea of red ink is not bad enough, it is even more
    disturbing when you consider that a growing percentage of Americans
    believe that it is okay to avoid the taxes that they do owe the Federal
    Government.
        Our IRS Commissioner, Mark Everson, is before the subcommittee
    today to report that the estimated tax gap, the difference between what
    the Nation's taxpayers actually owe versus the amount of actual tax
    receipts paid has grown to the level of $255 billion.
        In about 1 week from today, millions of American families who work
    hard every day and play by the rules will struggle to write a check to
    the Internal Revenue Service to cover their Federal tax liability while
    the rich and the super-rich in this country will pay an increasingly
    smaller percent of their income in taxes. If that isn't galling enough,
    the situation is made worse when you recognize that the Internal
    Revenue Service is very ill-equipped to catch and penalize those
    crooked Americans that do cheat on their taxes, especially the most
    wealthy and sophisticated of tax cheats.
        Indeed, the IRS's own methods of prosecuting tax cheats and
    collecting old debts is so troubled that the Treasury Inspector General
    for Tax Administration recently reported that the IRS has failed to
    collect the taxes due even from dozens of individuals who have been
    convicted in court for tax evasion. This is an appalling situation
    where the government goes through the effort and expense of dragging
    these individuals into court and convicting them of cheating on their
    taxes. Even then, the IRS fails to collect the debts owed by these
    convicted criminals. This situation is unacceptable and it has got to
    change. The IRS must turn a corner and cease to be the laughing stock
    of the wealthy and super-wealthy tax cheaters in this country.
        I am pleased to say that, today, the IRS Commissioner Mark Everson
    is here to testify on behalf of a budget that seeks to do something
    about the problem. He is asking for a 9.4 percent boost in funding for
    tax law enforcement, including funding for 2,942 additional enforcement
    agents. However, there are several questions that surround the
    Commissioner's request in this area that must be addressed in today's
    hearing.
        The first question is: are the resources that the Commissioner is
    seeking enough to do the job? Recently, an oversight board appointed by
    the President said that the answer is ``no.'' That oversight board
    pointed out that, absent even more resources beyond the level requested
    by the administration, the IRS will actually have to curtail some of
    its most critical enforcement and collection efforts.
        A second question of equal importance is ``will this subcommittee
    be in a position to fund the increased resources sought by the IRS?''
    Here, I believe that the Republican budget resolution adopted by the
    thinnest majority in the U.S. Senate indicates that the answer is
    ``no.''
        At a time when the IRS is seeking a budget increase for tax law
    enforcement of 9.4 percent, the budget resolution adopted by the
    Senate, which I voted against, allows for an overall funding increase
    in discretionary spending of less than 1 percent. This is precisely one
    of the reasons that I voted against the budget resolution. That budget
    calls for continuing tax cuts to the wealthiest Americans while forcing
    difficult and illogical choices when it comes to Federal spending.
        We know that when we provide for increased spending for the
    education of our young, we avoid even greater expenses down the road in
    job training, welfare payments, even the construction of new prisons.
    Similarly, if we can't fund enhanced enforcement in the Internal
    Revenue Service, our Federal budget will not gain the tax revenue that
    it is due and our deficit will be far worse. It is estimated that an
    increase in IRS enforcement efforts of several hundred million of
    dollars could yield billions in additional revenue that is owed to the
    government.
        A third question that must be asked is whether the IRS can really
    do the job when it comes to hunting down and prosecuting tax cheats.
    The agency is working with very antiquated computer systems, and its
    efforts to modernize those computer systems have failed to produce
    promised results. Moreover, the President's Budget singles out these
    modernization efforts for a 26.5 percent funding cut for the coming
    fiscal year.
        We have to recognize that it takes upwards of half a dozen years or
    longer for the IRS to finally pursue and prosecute individuals cheating
    on their taxes. We regularly have underpaid and overworked government
    lawyers going to court against handsomely paid private lawyers. Often
    times, those private lawyers are the very same lawyers that concocted
    the very complicated tax avoidance schemes that landed their client in
    court.
        So, I hope our hearing will, at a minimum, pursue these three
    central questions that surround the Commissioner's request. I am glad
    that he is here to testify before us. I should say that I believe his
    commitment to reversing the growing trend in tax avoidance and tax
    cheating is a sincere one and I look forward to hearing his testimony
    this morning.
        Thank you, Mr. Chairman.

        Senator Shelby. Mr. Commissioner.

                          STATEMENT OF MARK W. EVERSON

        Mr. Everson. Thank you, Mr. Chairman, Senator Reid. Nice to
    see you again. Thank you very much for your opening remarks. I
    am pleased to be here before the subcommittee today to speak
    about the President's 2005 budget request for the IRS. I would
    also like to welcome the future taxpayers behind me to this
    hearing.
        Our working equation for the IRS is service plus
    enforcement equals compliance, not service or enforcement. The
    IRS must do both. We must run a balanced system of tax
    administration based on a foundation of taxpayer rights.
        Last month we released our enforcement statistics for
    fiscal year 2003. They demonstrate that we have arrested the
    enforcement decline which began in the 1990s and worsened with
    the implementation of RRA 1998. Audits, criminal investigations
    and monies collected were all up. In particular, when compared
    with the fiscal year which started October 1, 2000, audits of
    taxpayers with incomes over $100,000 were up by over 50
    percent. That is taxpayer's income over $100,000. You can see
    how badly over a period of years this declined, as did a lot of
    our audit rates. But you can see we have turned that around and
    we have given great prominence to this category in particular.

                           IRS ENFORCEMENT ACTIVITIES

        The President's 2005 budget request for the IRS will
    continue to rebuild our enforcement activities. I would note
    that two-thirds of the new monies requested will be devoted to
    enforcing our compliance efforts in the areas of high income
    individuals, corporations, and criminal activities. The extra
    $300 million in new monies that we seek will carry out our four
    objectives in enforcement. They are, discourage cheating and
    non-compliance, particularly by corporations, high income
    individuals and tax-exempt groups; help attorneys, accountants,
    and other professionals adhere to professional standards and
    obey the law; detect and deter domestic and offshore tax and
    financial criminal activity; and discourage and deter non-
    compliance within tax-exempt and government entities, and
    misuse of such entities by third parties for tax avoidance and
    other purposes.

                           ADDRESSING NON-COMPLIANCE

        These incremental resources will help us address the tax
    gap, the difference between what is owed and what is paid due
    to non-filing, underreporting and underpayment, and secure
    billions of dollars for the Treasury. Furthermore, over a 4-
    year period we have seen an increase in the percentage of
    Americans who think it is okay to cheat on their taxes; an
    increase from 11 percent to 17 percent. I find this alarming,
    as I am sure do you. I believe, however, that enhanced
    enforcement efforts will improve attitudes concerning
    compliance by reassuring the average American who pays his or
    her taxes that when he or she pays neighbors and competitors
    will do the same.
        Once we have hired and trained the new enforcement
    personnel as requested in the President's budget, this direct
    return on investment would be 6 to 1. That is the dollars we
    would get back directly. Beyond the incremental revenues
    associated with the increased audits, investigations, and
    collection activities there will also be a favorable spillover
    effect. Other taxpayers will be discouraged from cheating when
    they observe that those who play fast and loose with the tax
    code are being held accountable. Behaviors at the margin will
    change.
        I am convinced we can augment our enforcement activities
    without diminishing our commitment to service. Our filing
    season results thus far in 2004 show that we can. Through last
    Friday, total returns filed have increased more than 1 percent.
    Our electronically filed returns are up 12 percent from last
    year. Electronic filing is more reliable both for the taxpayer
    and Service, and it is faster, allowing the IRS to issue
    refunds in half the time. Also noteworthy is that the Free File
    initiative, which helps low and middle-income taxpayers, has
    grown in volume by 23 percent from last year.
        Our other service indicators for the most part also show
    improvement. We have handled increased call volumes with stable
    resources and bettered our level of service. There is increased
    usage of automated services both on the phone and the Internet.
    While we made some changes to improve tax law accuracy and had
    some startup problems earlier in the season, in recent weeks
    our results in this area have recovered.
        I want to assure you that should the Congress approve our
    budget request we will spend these resources wisely. I am aware
    of the problems in the past, particularly in the efforts to
    modernize information technology at the IRS. We are addressing
    our challenges in IT modernization and our plans in the 2005
    budget take into account the necessity to improve as you
    indicated.

                               PREPARED STATEMENT

        In conclusion, let me note with gratitude the strong
    bipartisan support the President's IRS budget request is
    getting here in the Senate. I was pleased by the letters of
    support from the leaders of the Governmental Affairs Committee
    to the Appropriations Committee as well as the letter from the
    Finance Committee to the Budget Committee. I think the tax
    administration can and should be a matter of broad bipartisan
    agreement.
        Thank you.
        [The statement follows:]

                     Prepared Statement of Mark W. Everson

                                  INTRODUCTION

        Chairman Shelby, Ranking Member Murray, and Members of the
    subcommittee, thank you for the opportunity to testify today on the
    fiscal year 2005 budget request for the Internal Revenue Service.
        Our working equation at the IRS is service plus enforcement equals
    compliance. The better we serve the taxpayer, and the better we enforce
    the law, the more likely the taxpayer will pay the taxes he or she
    owes.
        This is not an issue of service OR enforcement, but service AND
    enforcement. As you know, IRS service lagged in the 1990's. In
    response, we took important and necessary steps to upgrade service--we
    significantly improved the answering of taxpayer telephone inquiries
    and electronic filing to name just a couple areas.
        Unfortunately, improvement in service coincided with a drop in
    enforcement of the tax law. After 1996, the number of IRS revenue
    agents, officers, and criminal investigators dropped by over 25
    percent.
        We currently have a serious tax gap--the difference between what
    taxpayers are supposed to pay and what is actually paid--in this
    country. By our best estimates, we lose a quarter trillion dollars each
    year due to non-filing, under-reporting, and underpayment. (This is a
    rough estimate based largely upon data from our old Taxpayer Compliance
    Measurement Program, most of which was collected in the 1980's. Our
    estimates have been updated to reflect changes in the economy during
    the intervening years, but a key assumption is that compliance behavior
    has remained largely unchanged. If taxpayer compliance has changed in
    the last 15 years, the tax gap could well be much different than our
    estimate suggests.)
        In addition, over the last 4 years, the number of Americans saying
    it is OK to cheat on taxes rose from 11 to 17 percent. Sixty percent of
    Americans believe that people are more likely to cheat on taxes and
    take a chance on being audited.
        We must restore the balance between service and enforcement, but
    that will not come at the expense of continued improvements to taxpayer
    service. In recent years, we have begun to attack these declines by
    revitalizing our investigations, audits and prosecutions against those
    who do not pay their taxes. The President's fiscal year 2005 budget--if
    approved by Congress--will help with our efforts to boost enforcement
    while maintaining our levels of service. The submission requests an
    additional $300 million for enforcement activities over the fiscal year
    2004 consolidated appropriations level.
       president's fiscal year 2005 budget seeks increase in enforcement
        The President has asked for an IRS fiscal year 2005 budget of
    $10.674 billion, a 4.8 percent increase over the fiscal year 2004
    consolidated appropriations level for the IRS.
        This budget includes the goals of customer service, infrastructure/
    modernization and enforcement. After a period of declining enforcement
    resources, the IRS has stabilized and increased the amount of resources
    dedicated to enforcement.
        This budget has an increase of $300 million for a more vigorous
    enforcement of the tax laws. This strong commitment to tax
    administration will provide a significant augmentation of our
    enforcement resources.
        The additional $300 million will increase enforcement in several
    key ways:
      --Discourage and deter non-compliance, with emphasis on corrosive
            activity by corporations, high-income individual taxpayers and
            other contributors to the tax gap;
      --Assure that attorneys, accountants and other tax practitioners
            adhere to professional standards and follow the law;
      --Detect and deter domestic and off-shored based tax and financial
            criminal activity;
      --Discourage and deter non-compliance within tax-exempt and
            government entities and misuse of such entities by third
            parties for tax avoidance or other unintended purposes.
        Let me now provide more details on the broad categories of the
    budget request for the IRS.

                     PROCESSING, ASSISTANCE, AND MANAGEMENT

        We are seeking $4,148,403,000 for processing, assistance and
    management. This includes necessary expenses for pre-filing taxpayer
    assistance and education, filing and account services, shared services
    support, and general management and administration. Up to $4.1 million
    of the $4.1 billion total will be for the Tax Counseling for the
    Elderly Program and $7.5 million of the total will be available for
    low-income taxpayer clinic grants.
        The Processing, Assistance, and Management (PAM) appropriation
    handles all functions related to processing tax returns, including both
    manual and electronic submissions, and provides assistance and
    education to taxpayers to enable them to file accurate returns. The PAM
    appropriation issues refunds, maintains taxpayer accounts, and provides
    tax law assistance that includes tax law interpretation and rulings and
    agreements related to tax law issues. This appropriation is responsible
    for IRS personnel, facilities, and procurement services.
        The IRS will continue to focus on pre-filing services and is
    requesting funding for taxpayer communication and education to help all
    taxpayers comply with tax laws and assume their fair share of the tax
    burden. Funding is being requested for resources to warn taxpayers of
    abusive tax schemes and improve compliance by preventing fraud and
    abuse. The IRS is redirecting funding to enhance customer service by
    reengineering processes to complement new technology and to develop an
    outreach strategy for the Child Tax Credit.
        The IRS is reinvesting resources for filing and account services by
    providing funding for field assistance to reduce filing season details
    of compliance staff, funding the Business Master File workload
    increase, improving the level of telephone service to taxpayers, and
    updating processes to complement technology.
        As part of the shared services program, the IRS will reinvest
    resources in new training and training delivery methods to develop and
    to improve expert consultative skills. This effort will significantly
    improve administrative and resource management decisions that will
    enhance delivery of compliance initiatives. Additional resource
    reinvestments will be used to defer rent annualization costs (based on
    partial year costs extrapolated annually for approved fiscal year 2003
    space expansion projects) to fulfill the IRS's operational mission
    objectives. Shared services will implement HR Connect, the integrated
    Human Resources Management System over the next 2 years. This system
    will seamlessly link multiple Human Resource applications that should
    result in significant program efficiencies.
        The OMB Program Assessment Rating Tool (PART) review of Submissions
    Processing recommends that IRS successfully implement the Modernized E-
    File IT projects. IRS is enabling e-file growth by increasing the
    numbers of returns eligible to be electronically filed. In fiscal year
    2005, the IRS plans to complete the architecture and engineering
    analysis required to develop and deploy functionality, allowing
    taxpayers to electronically file Forms 1065, 990T, and 1041.

                              TAX LAW ENFORCEMENT

        For enforcement, we are requesting $4,564,350,000. This
    appropriation ensures IRS's ability to: provide equitable and
    appropriate enforcement of the tax laws, identify possible non-filers
    for examination, investigate violations of criminal statutes, support
    the Statistics of Income program, conduct research to identify
    compliance issues and support the national effort to combat domestic
    and international terrorism.
        The resources in the Tax Law Enforcement (TLE) Appropriation
    provide service to taxpayers after a return is filed and support
    activities such as research to identify compliance and tax
    administration problems, as well as tabulation and publication of
    statistics related to tax filing. In fiscal year 2001, Tax Law
    Enforcement was realigned and redefined as mandated by the Internal
    Revenue Restructuring and Reform Act of 1998 (RRA 98) to better serve
    the needs of taxpayers. The modernized IRS structure is similar to
    those widely used in the private sector: organized around customers'
    needs, in this case taxpayers. The IRS has set up four operating
    divisions to service the four major categories of taxpayers; Wage and
    Investment Income (W&I), Small Business and Self-Employed (SBSE), Tax
    Exempt and Government Entities (TEGE) and Large and Mid-Sized Business
    (LMSB). Each of these business units has substantial operations within
    the Tax Law Enforcement appropriation. The Criminal Investigation (CI)
    business unit investigates criminal violations of the Internal Revenue
    Code and also supports the national effort to combat terrorist
    financing by integrating CI special agents into the Joint Terrorism
    Task Forces and other anti-terrorism task forces. CI has the largest
    part of its operation within the Tax Law Enforcement appropriation.
        The TLE appropriation is the primary source of funding for the
    compliance functions of the IRS, including: (1) automated, in-person
    and correspondence collection of delinquent taxpayer liabilities, (2)
    the matching of reporting documents with taxpayer returns, to insure
    reporting compliance, (3) face-to-face examination to determine
    taxpayers' correct income levels and corresponding tax liabilities, (4)
    service center support of the field examination function and
    correspondence with taxpayers regarding tax issues, (5) investigation
    of criminal violations of the tax laws, (6) processing of currency
    transaction reports over $10,000, (7) tax litigation, (8) acting as an
    advocate to provide prompt resolution of taxpayer problems and (9) a
    general counsel function to offer legal advice and guidance to all
    components of the IRS.
        I would specifically like to emphasize our continuing commitment to
    the administration's efforts to combat terrorism. The funding provided
    in the President's budget request will allow us to continue to make a
    significant contribution to this effort.
        The functions in TLE are essential to accomplishing the primary
    goals of the Fiscal Year 2005 Budget Request. To accomplish this goal,
    the IRS must restore the strength of the compliance function. Staffing
    devoted to compliance and enforcement operations has declined in recent
    years. Annual growth in return filings and additional work related to
    RRA 98 have contributed to a steady decline in enforcement presence,
    audit coverage and case closures in front-line compliance programs.
        The Fiscal Year 2004 Appropriations Act merged the Earned Income
    Tax Credit (EITC) Appropriation with the TLE Appropriation. The merge
    of EITC into the TLE appropriation will provide for customer service
    and public outreach programs, strengthened enforcement activities and
    enhanced research efforts to reduce over claims and erroneous filings
    associated with the Earned Income Tax Credit (EITC) compliance
    initiative.
        Customer service for the EITC initiative includes dedicated toll-
    free telephone assistance, community-based tax preparation sites and a
    coordinated marketing and educational effort (including paid
    advertising and direct mailings) to assist low-income taxpayers in
    determining their eligibility for EITC. Improved compliance activities
    include increased staff and systemic improvements in submission
    processing, examination, and criminal investigation programs. Increased
    examination coverage, prior to issuance of refunds, reduces
    overpayments and encourages compliance in subsequent filing periods; in
    addition, post-refund correspondence audits by service center staff aid
    in the recovery of erroneous refunds. Criminal investigation activities
    target individuals and practitioners involved in fraudulent refund
    schemes and generate referrals of suspicious returns for follow-up
    examination. Examination staff assigned to district offices audit
    return preparers and may apply penalties for non-compliance with ``due
    diligence requirements.''
        OMB Program Assessment Rating Tool (PART) observations concluded
    that the IRS does not work enough collection cases with its current
    resources, work processes and technology to ensure fair tax
    enforcement. Each year IRS fails to work billions of dollars worth of
    collection cases. Consequently, the Budget includes a legislative
    proposal to allow IRS to hire private collection contractors to assist
    the IRS in addressing a significant number of cases. In addition to the
    increased resources requested, the IRS is making internal process
    improvements, including: developing models to better identify high
    priority work, better use of the predictive dialer, realigning the
    workforce to core hours and creating a performance support tool to
    provide employees with technical guidance while handling calls. The
    PART review also determined that IRS financial management systems
    remain weak. In response, the IRS plans to modernize its collection
    technology to improve effectiveness. New technology tools will be
    developed for collection employees (e.g., electronic Automated
    Collection System, contact recording, and desktop integration), which
    will improve program efficiency.

                   HEALTH INSURANCE TAX CREDIT ADMINISTRATION

        We are requesting $34,841,000 for expenses necessary to implement
    the health insurance tax credit included in the Trade Act of 2002. This
    appropriation provides operating funding to administer the advance
    payment feature of the Trade Adjustment Assistance health insurance tax
    credit program to assist dislocated workers with their health insurance
    premiums. The Trade Act of 2002 created the tax credit program and it
    became effective in August of 2003.

                              INFORMATION SYSTEMS

        We are requesting $1,641,768,000 for information systems. This
    appropriation is for necessary expenses of the Internal Revenue Service
    for information systems and telecommunications support, including
    developmental information systems and operational information systems.
        It provides for IRS information systems operations and maintenance,
    investments to enhance or develop business applications for the IRS
    Business Units and staff support for the Service's Modernization
    program.
        The appropriation includes staffing, telecommunications, hardware
    and software (including commercial-off-the-shelf), and contractual
    services. It also provides for Servicewide Information Systems (IS)
    operations, IRS staff costs for support and management of the Business
    Systems Modernization effort, and investments to support the
    information systems requirements of the IRS business units. It includes
    staffing, telecommunications, hardware and software (including
    commercial-off-the-shelf software), and contractual services.
        Staffing in this activity develops and maintains the millions of
    lines of programming code supporting all aspects of the tax-processing
    pipeline as well as operating and administering the Service's hardware
    infrastructure mainframes, minicomputers, personal computers, networks,
    and a variety of management information systems.
        In addition, the Information Systems ``Tier B'' modernization
    initiatives fund projects that modify or enhance existing IRS systems
    or processes, provide changes in systemic functionality, and establish
    bridges between current production systems and the new modernization
    architecture being developed as part of the Servicewide Business
    Systems Modernization efforts. Investment activities also include
    improvements or enhancements to business applications that support
    requirements unique to one of the IRS business units. These Tier B
    projects yield increased efficiency and allow the Service to
    progressively improve the quality of its interactions with the
    taxpaying public and its many other internal and external customers.

                         BUSINESS SYSTEMS MODERNIZATION

        We are seeking $285,000,000, for our Business Systems Modernization
    (BSM) efforts. This request is based upon the resizing efforts we began
    following the various internal and external reviews of BSM.
        This appropriation provides for the planning and capital asset
    acquisition of information technology systems, including related
    contractual costs of such acquisition and contractual costs associated
    with operations authorized by 5 U.S.C. 3109, to modernize IRS's
    antiquated business systems.
        The IRS collects $1.7 trillion in revenues annually through an
    assortment of computer systems developed over a 40-year period. The IRS
    developed the most important systems that maintain all taxpayer records
    in the 1960's and 1970's. These outdated systems do not allow the IRS
    to meet today's taxpayer and business needs. Failure to modernize IRS's
    tax administration business systems will result in a significant
    increase in resources required to maintain legacy systems--systems that
    no longer efficiently or effectively serve America's taxpayers.
        The BSM Appropriation provides for revamping business practices and
    acquiring new technology. The IRS is using a formal methodology to
    prioritize, approve, fund and evaluate its portfolio of BSM investments
    across the IRS Business Units and Modernization and Information
    Technology Services (MITS). This methodology enforces a documented,
    repeatable and measurable process for managing investments throughout
    their life cycle. The MITS Enterprise Governance (MEG) Committee, which
    includes the Chief Information Officer and other senior MITS
    executives, the Chief Financial Officer, and the heads of the Business
    Operating Divisions, approves investment decisions. This executive-
    level oversight ensures that products and projects delivered under the
    Business Systems Modernization program are fully integrated into IRS
    Business Units. The Department of the Treasury Investment Review Board
    also reviews the BSM expenditure Plan once the IRS executive-level
    oversight board approves the investment decisions. The plan is then
    cleared through OMB and submitted through the Appropriations
    Committees.
        The IRS has undergone an intensive servicewide portfolio
    prioritization effort, leading to a long-term modernization plan
    identifying selected modernization projects, a release sequence for
    each project, and estimated costs for each project. The effort is based
    on vision and strategy initiatives that created an enterprise-wide
    view, which unified the needs of the IRS Business Units. Fiscal year
    2005 resources will fund the infrastructure, program management, and
    releases of business applications to support the successful delivery of
    a modernized tax administration system. More complete details are
    provided in the BSM Expenditure Plan.
        A partial Fiscal Year 2004 BSM Expenditure Plan was submitted by
    the Department of Treasury for Congressional approval in January 2004,
    and the full-year revision incorporating current project information
    should be completed by this spring.

                              PROGRAM PERFORMANCE

        The IRS expects to achieve the following levels of performance
    after attaining full performance of the requested fiscal year 2005
    initiatives:
      --Examine an additional 30,000 investor returns in the Small Business
            and Self-Employed (SB/SE) business unit and increase coverage
            of high-income taxpayers, generating an additional $170 million
            in fiscal year 2006. SB/SE also anticipates closing an
            additional 50,000 taxpayer delinquent accounts, resulting in an
            estimated $215 million in additional revenue.
      --Hire and train over 2,000 new staff in the Examination, Collection
            and Document Matching programs. These increases will generate
            some $2.8 billion in direct enforcement revenue through fiscal
            year 2007. Additional audits of investor returns and high-
            income taxpayers, together with 55,000 correspondence
            examinations, will yield more than $1.0 billion during that
            same period. Collection closures will increase by 240,000 and
            taxpayer contacts through the Automated Underreporter Program
            by some 300,000 through fiscal year 2007--generating an
            additional $1.8 billion.
      --Increase the overall audit coverage rate in the Large and Mid-Sized
            (LMSB) business unit from 5.1 percent in fiscal year 2004 to
            9.6 percent in fiscal year 2007 and increase projected return
            closures by 63 percent from 16,067 returns in fiscal year 2004
            to 26,193 returns in fiscal year 2007. Enforcement revenue
            recommended for the 3 years fiscal year 2005 through fiscal
            year 2007 should increase by over $3 billion.
      --Complete 229 significant Corporate Fraud investigations through
            fiscal year 2007. Tax-related completed investigations will
            increase by approximately 20 percent over the fiscal year 2003
            level by fiscal year 2007. In addition, CI is striving to
            reduce elapsed time on completed investigations by 30 percent
            from fiscal year 2002 levels.

                               IMPROVING SERVICE

        We are improving service to the taxpayer. Let me give a broader
    picture of service and compliance, and how the President's budget will
    lead to more effective and fair collection of taxes.
        It was not long ago that IRS service was not all that it should
    be--some would even say it was poor. In many areas the service level we
    provided, or more accurately stated, failed to provide, frustrated
    taxpayers in their effort to understand and comply with the tax law.
        Regardless of the merits of some of the allegations directed
    against the IRS in the mid-1990's, there was a significant gap between
    the quality of service that the IRS was providing taxpayers and the
    quality of service that the public had a right to expect. This
    shortfall in services clearly warranted the fundamental improvements
    and reorganization established under RRA 98.
        The reorganization of the IRS along customer lines of business and
    the other changes brought about by RRA 98 were, taken as a whole, sound
    reforms. The twin themes of the legislation were improvement of service
    and protection of taxpayer rights.
        Through an almost single-minded focus on RRA 98 implementation, the
    IRS has demonstrated unmistakable progress in improving customer
    service and increasing its recognition of, and respect for, taxpayer
    rights. While we still aim to reach a higher level of customer service,
    our improvement and commitment with respect to these core goals is
    measurable.
        Last year 53 million individuals filed their returns
    electronically. Thus far this year, nearly 1 week away from ``tax
    day'', electronic filing is up again, by about 12 percent. Electronic
    filing is more reliable, both for the taxpayer and the IRS. And it is
    faster. Over three-quarters of Americans get refunds, and we issue the
    refund in about half the time when a taxpayer files electronically.
        Another challenge in the 1990's was getting through to the IRS at
    all. We now have a world-class telephone call routing system. A call is
    directed to the right person, someone who knows something about
    charitable contributions or IRA's--whatever the subject may be--and the
    system balances workforce planning against predictable workload
    patterns to reduce waiting time. By 2003, overflows to the telephone
    system, such as busy signals--the crudest indication of service
    failure--decreased 99 percent from its worst performance of 400
    million. We also reduced taxpayer call-waiting time by half since 2001,
    reduced the number of abandoned calls by half since 2002, and doubled
    the number of refund inquiries from our Spanish-speaking taxpayers.
        Meanwhile, we have delivered other applications that provide
    tangible benefits to taxpayers and improve the efficiency and
    effectiveness of our tax administration system. They include:
      --Where's My Refund?/Where's My Advance Child Tax Credit?, which
            gives taxpayers instant updates on the status of their tax
            refunds and advance child tax credits. Where's My Refund? has
            provided almost 11 millions services and Where's My Advance
            Child Tax Credit? has provided another 20 million services. By
            shifting a significant volume of customer demand to the
            Internet and automated telephone services, we have seen a
            measurable improvement in service for taxpayers who still need
            to talk with an IRS assistor.
      --e-Services, which includes preparer tax identification number (TIN)
            applications with instant delivery, individual TIN matching for
            third party payers, on-line registration for electronic e-
            Services, and on-line initiation of the electronic originator
            application (currently released to a controlled segment of
            external users). I am pleased to announce that we recently made
            the first part of e-Services available on our public website.
            The remaining parts will come out over the next several months.
      --Internet EIN, which permits small businesses to apply for, and
            receive, an Employer Identification Number on-line.
      --HR Connect, which allows IRS users to perform many personnel
            actions on-line. This technological advance will enable the
            Service to redirect hundreds of positions to enforcement
            activities by the time it is fully deployed, which we have
            planned for October 2005.
        Are we where we need to be on service? Not yet. As you know, I have
    been emphasizing enforcement, but I do not want this subcommittee or
    anyone to think the IRS will walk away from service. We still continue
    to maintain and improve service.
        Our objectives for improved taxpayer service are three-fold:
      --First, to improve and increase service options for the tax-paying
            public;
      --Second, to facilitate participation in the tax system by all
            sectors of the public; and
      --Third, to simplify the tax process.
        These are service objectives that recognize the dynamics of a
    rapidly changing world, one in which the Internet will be the dominant
    communications tool. Yet we realize there will remain a wide range of
    computer and technological literacy among individual taxpayers, and we
    must not fail to provide the same level of service to all taxpayers
    regardless of their technological sophistication. Our objectives also
    recognize an America with an increasingly diverse population, and that
    diversity will create challenges for us as tax administrators.
    Nevertheless, we are confident that we can and will serve all American
    effectively.
        Continued changes in traditional media will make it harder to cover
    the waterfront as we seek to educate taxpayers. Moreover, the
    complexity of our tax laws, along with the frequency of changes to
    these laws, is not only a challenge to taxpayers trying to comply with
    the tax laws, but a basis of cynicism about complying with the tax
    laws. The administration is committed to addressing this complexity.
    While it remains, we have an obligation to help taxpayers navigate
    these laws and make it as easy as possible for them to comply.
        In a world increasingly impatient for prompt and reliable
    information and transaction processing, all of these factors pose
    significant challenges to the IRS as it strives to improve the level of
    service provided to the American taxpayer.
        A good example of the challenges we will face is reconciling our
    desire to standardize our processes through electronic filing with the
    reality that some groups, such as immigrants and the elderly, will need
    different, targeted services. Electronic filing is important to the IRS
    and to taxpayers, but we cannot overemphasize it to the detriment of
    services to taxpayer groups who will not utilize it. Addressing
    competing priorities on the service side of the IRS will not be easy,
    but we will work diligently to provide a balanced, effective program.

                             EFFECTIVE ENFORCEMENT

        Our focus on the strong mandate of RRA 98 to improve IRS services
    to the taxpaying public made it difficult for us to balance both the
    service and enforcement elements that are so necessary to the success
    of our tax system. Improved taxpayer service enhances compliance and
    respect for our laws among the vast majority of Americans who do their
    best to pay their fair share. Improved taxpayer service also may help
    discourage those who might not otherwise do what is necessary to comply
    with our tax laws. Taxpayer service, however, does not address those
    who actively seek to avoid paying their fair share. I believe most
    people would agree that we achieved improvement of IRS taxpayer
    services in large part at the expense of needed enforcement activities.
        Over a 5-year period beginning in 1997, the IRS refocused its
    enforcement resources significantly. The number of revenue agents
    (those who conduct audits), the number of revenue officers (those who
    collect monies due), and the number of criminal investigators (those
    who prepare cases for possible prosecution by the Justice Department)
    each declined by over a quarter.
        In essence, we did not observe the wise admonition of President
    John F. Kennedy that ``Large continued avoidance of tax on the part of
    some has a steadily demoralizing effect on the compliance of others.''
        We are correcting our course and re-centering the agency. We are
    strengthening the IRS enforcement of the tax laws in a balanced,
    responsible fashion. And we will do so without compromising taxpayer
    rights. As the IRS enhances enforcement, we have four priorities:
        First, we are working to discourage and deter non-compliance, with
    emphasis on corrosive activity by corporations and high-income
    individuals. Attacking abusive tax shelters is the centerpiece of this
    effort. What is at stake is greater than many billions of dollars of
    lost tax revenues. Our surveys indicate that 80 percent of Americans
    believe it is very important for the IRS to enforce the law as applied
    to corporations and high-income individuals. Enforcing compliance in
    these sectors is critical to maintaining Americans' faith that our
    system is fair. The abuses of recent years have to a very real degree
    strained the credibility of our tax administration system.
        The IRS is moving aggressively to attack these transactions.
    Working with our partners in the Treasury Department, we have
    accelerated the issuance of guidance identifying abusive and
    potentially abusive transactions and improved disclosure requirements
    to provide greater transparency--sorely needed in today's complex
    world. And we have over 100 promoter audits underway, not to mention
    thousands of audits of high-income individuals and corporations who
    have entered into potentially abusive transactions. Where necessary,
    the Treasury Department, on behalf of the administration, has proposed
    legislation that would stop abusive transactions that we may not be
    able to fully or quickly address under existing law.
        However, we need to do better. We need to do more, and we
    particularly need to do it faster. The length of time it takes us to
    complete the audit of a large, complex corporation is 5 years from the
    date the return is filed, which in most cases is already 8\1/2\ months
    after year end. And these figures don't include the appeals process,
    which runs another 2 years before the matter is settled or goes to
    court. That means that half of our current inventory of large cases is
    from the mid 1990's or the early 1990's. In today's rapidly changing
    world, we might as well be looking at transactions from the Civil War.
        Simply stated, the IRS did not detect and deter the abusive
    transactions that spread during the 1990's on an adequate or timely
    basis because we did not have an informed view of current taxpayer
    behavior, only an historical understanding of events long past. And the
    challenge is becoming greater every day, as promoters of abusive tax
    transactions operate globally, without regard to national boundaries.
        The lessons we have learned make it imperative to get current in
    our audits, to identify transactions and shorten the feedback loop so
    that abusive transactions can be shut down promptly. I am convinced we
    can do it. Technology will help. Right now it takes 2 years on average
    before complicated corporate returns find their way into the hands of
    the assigned examiner. We are addressing this issue. Electronic filing
    by corporations will facilitate our analysis of data and help us
    calibrate risk. Through speedier audits we will provide better service
    to the compliant taxpayer by resolving ambiguity earlier, and hold
    accountable those who seek to game the system. And we are creating a
    web of disclosure, registration and maintenance of investor lists that
    will provide information about abusive transactions.
        Second, we are working to ensure that attorneys, accountants and
    other tax practitioners adhere to professional standards and follow the
    law. In recent decades, with an accelerated slide in the 1990's, the
    model for accountants and attorneys changed. The focus shifted from
    independent audit and tax functions, premised on keeping the client out
    of trouble, to value creation and risk management. The tax shelter
    industry had a corrupting influence. It got so bad that in some
    instances blue-chip professionals actually treated compliance with the
    law--in this case IRS registration and list maintenance requirements--
    as a business decision. They weighed potential fees for promoting
    shelters but not following the law against the risk of IRS detection
    and the size of our penalties.
        Our system of tax administration depends upon the integrity of
    practitioners. The vast majority of practitioners are honest and
    scrupulous, but even they suffered from the erosion of ethics by being
    subjected to untoward competitive pressures. The IRS is acting. We have
    augmented our Office of Professional Responsibility by doubling its
    size and appointing as its director a tough, no-nonsense, former
    prosecutor; we are tightening the regulatory scheme; and we are
    receiving excellent support from the Justice Department in our promoter
    and associated investigations. But we need the Congress to enact the
    tougher penalties proposed by the administration for those promoters
    who have not yet gotten the message.
        Third, we must detect and deter domestic and offshore-based
    criminal tax activity, our traditional area of emphasis, and financial
    criminal activity. Our Criminal Investigation Division is a storied and
    proud law enforcement agency. Their expertise comprises not just
    criminal tax matters but other financial crimes. Our investigators are
    the best in law enforcement at tracking and documenting the flow of
    funds. In addition to our tax investigations, the IRS has over 100
    agents assigned on an ongoing basis to support the President's
    Corporate Fraud Task Force. We will continue and intensify these
    important efforts.
        Two factors account in significant part for America's great
    economic vigor and success. They are our pervasive culture of
    entrepreneurship, on the one hand, and the stability and transparency
    of our markets on the other. The reputation and attractiveness of our
    markets have been compromised by the scandals of recent years. The
    President's Corporate Fraud Task Force and the President and Congress
    with Sarbanes-Oxley have taken important steps to restore confidence.
    Through these three enforcement initiatives, the IRS will do its part
    so that sound tax administration contributes to public confidence in
    our economic system.
        We have one more enforcement priority. The stakes for America in
    this area are also important. We will discourage and deter non-
    compliance within tax exempt and government entities, and the misuse of
    such entities by third parties for tax avoidance or other unintended
    purposes. Non-compliance involving tax-exempt entities is especially
    disturbing because it involves organizations that are supposed to be
    carrying out some special or beneficial public purpose. Enforcement in
    this area has suffered as IRS staffing in the exempt organizations area
    fell from 1996 through 2003. Enactment of the President's budget would
    allow us to gradually build up staffing in this important area and step
    up enforcement.
        If we do not act to guarantee the integrity of our charities, there
    is a risk that Americans will lose faith in and reduce their support
    more broadly for charitable organizations, damaging a unique and vital
    part of our Nation's social fabric.
        A case in point is credit-counseling agencies. These organizations
    have been granted tax-exempt status because they are supposed to be
    educating and assisting people who are experiencing credit or cash flow
    problems. Based on the information we have reviewed, we believe that a
    troubling number of these organizations, however, instead are operating
    for the benefit of insiders or in league with profit-making companies,
    such as loan companies, to generate income from lending to these
    distressed individuals and families. We are taking a close look at
    these organizations to ensure that they are operating within the bounds
    of the law.
        It is, of course, imperative as we reinvigorate the enforcement
    program that IRS employees maintain their respect for and diligence to
    all taxpayer due process rights and protections.
        We are making progress in our effort to reduce the annual tax gap.
    Our enforcement statistics for Fiscal 2003, released in early March,
    demonstrate that we have arrested the enforcement decline that began in
    the 1990's and worsened with the implementation of RRA 98. Audits,
    criminal investigations and monies collected were all up. In
    particular, the number of high-income taxpayer audits again increased
    by 24 percent. Moreover, audits of taxpayers with income over $100,000
    were up over 50 percent from 2 years ago. Overall audits of all
    taxpayers increased to 849,296, an increase of 14 percent from 2002.

                   BUSINESS SYSTEMS MODERNIZATION AT THE IRS

        While not as publicly visible as service or enforcement,
    modernization of IRS information technology is also a high priority.
    This effort is often referred to as Business Systems Modernization or
    BSM. Most of our tax administration systems are very old and difficult
    to keep current with today's fast paced environment--they must be
    modernized.
        We are committed to resizing our modernization efforts to allow
    greater management capacity and to focus on the most critical projects
    and initiatives. Last summer, we used comprehensive studies to help us
    identify opportunities to improve management, re-engineer business
    processes and implement some new systems and technology.
        As I have noted, the IRS has made progress on applications such as
    improved telephone service, electronic filing, and a suite of e-
    services to tax practitioners. But we have failed thus far to deliver
    several important projects with which taxpayers are not directly
    involved.
        The projects include replacing our master file system, implementing
    the on-line security features, and building the modernized
    technological infrastructure on which all of our future modernization
    applications will depend.
        Four studies completed last year consistently identified the
    following problems in delivering the large information technology
    efforts:
      --Insufficient participation in the technology program by IRS
            business units;
      --An overly ambitious portfolio;
      --Inadequate performance by the contractor.
        The IRS is responding by to this challenge by:
      --Increasing business unit ownership of projects;
      --Resizing the project portfolio and reducing the modernization
            program from $388 million this year to $285 million in the
            President's fiscal year 2005 request;
      --And revising our relationships with the contractor and ensuring
            joint accountability.
        While we have much work to do on modernization, I can assure you
    that it is one of my top priorities as Commissioner. We need to put in
    place the foundation upon which the tax system will build and rely for
    decades to come.
        Before I conclude my testimony, let me give you an update on the
    2004 filing season and what we are doing to make the tax season easier
    and more convenient for the American taxpayer.

                               2004 FILING SEASON

        Mr. Chairman, I have been on the job for not quite a year so I am
    still going through my first filing season. Each year at the IRS, we
    process billions of tax-related documents. We process well over 100
    million taxpayer returns. We send out about 100 million refunds. And we
    do a lot of other things as well.
        It all peaks, of course, on April 15, a little more than 1 week
    away.
        Here are some highlights as of March 26th (unless otherwise
    indicated):
    Return Receipts
        The IRS has received 74 million total individual returns. Twenty-
    nine million returns (39 percent) are paper and 45 million (61 percent)
    are e-file.
      --The number of online returns is at 10.5 million, a 22.9 percent
            increase from last year.
      --Through March 24th, 2.6 million Free File returns have been
            accepted, an increase of 24 percent from last year (2.1
            million).
    Refunds
        Refund measures continue to show an increase over 2003. Total
    refunds are up from 2003 by 3.9 percent. Total dollars paid are 9.26
    percent higher than last year, with an average refund of $2,113 paid.
    Telephone Measures
        As of March 28, assistor level of service, at 84.9 percent, is up
    1.9 percent compared to last year. Assistors have answered
    approximately 729,000 more calls than they did during the same period
    in 2003.
        Automated calls completed are 183,000 more than the same period in
    2003. A major contributor to this increase is Advanced Child Tax Credit
    (ACTC) related calls.
        We created automated ACTC applications for use in providing
    taxpayers the correct amount of ACTC to report on their 2003 tax
    return. These applications are available through telephone automation
    and interactive web applications.
    Telephone Quality Rates
        We measure telephone quality two ways: (1) customer account
    accuracy and (2) tax law accuracy. While our customer account accuracy
    estimates, as of February 29th are 89.76 percent, up 1.32 percent over
    the past year, our tax law accuracy has declined to 75.79 percent thus
    far in 2004 (down 6.69 percent from last year.)
        Fiscal Year 2004 Quality Review results indicate that two of our
    most frequent tax law defects are: incomplete research and applying tax
    law incorrectly.
        We are undertaking the following efforts to improve performance:
      --Identifying root cause of performance deficiencies and implementing
            corrective initiatives through analysis;
      --Establishing Quality Review Improvement Teams to determine the
            drivers of Customer Accuracy rates and to establish resolution
            priorities as needed; and
      --Strengthening accountability to the frontline managerial level to
            facilitate improvement in services provided.
    Taxpayer Assistance Centers (TAC's)
        The number of taxpayers walking into a TAC for assistance has
    decreased as a result of streamlined services in the TAC's and
    initiatives to educate taxpayers on alternate methods of obtaining
    services generally requiring a face-to-face contact. The advent of
    technological advances in irs.gov services such as ``Free File'' and
    ``Where's My Refund'', and the accessibility of forms online have all
    contributed to the decline in the number of customers walking into a
    TAC.

                                   CONCLUSION

        The IRS has lagged behind, for reasons that are understandable, in
    tax enforcement. But that is changing. We will continue to improve
    service and respect taxpayer rights. But we will also enforce the law.
    We won't relax until taxpayers who are unwilling to pay their fair
    share see that that is not a worthwhile course to follow.
        Mr. Chairman, the great majority of Americans honestly and
    accurately pay their taxes. Average Americans deserve to feel confident
    that, when they pay their taxes, their neighbors and competitors are
    doing the same.
        The President's budget request will help us enforce the tax law
    more fairly and efficiently. I am most grateful for your support of
    increased enforcement, and I look forward to working with you on this
    important budget request.
        Thank you very much. I'd be happy to take your questions.

        Senator Shelby. Ms. Gardiner.

                        STATEMENT OF PAMELA J. GARDINER

        Ms. Gardiner. Chairman Shelby, I appreciate the opportunity
    to appear before you today to discuss the Internal Revenue
    Service's budget and the related tax administration challenges.
        The IRS is critical to the functioning of our government.
    Each year the IRS collects over $2 trillion, processes over 200
    million tax returns, and issues nearly 100 million tax refunds.
    It provides service to millions of taxpayers by telephone,
    Internet and in person. Since the enactment of the IRS
    Restructuring and Reform Act of 1998, the IRS has made
    significant progress in identifying opportunities to improve
    its operations.
        For example, this filing season the IRS indicated it had
    received 43 million e-filed returns as of March 19, 2004, an
    increase of over 11 percent. The IRS has also made progress in
    providing information to taxpayers via its website, IRS.gov.
    Taxpayers have visited this website billions of times to obtain
    information. Just this tax season, the IRS stated taxpayers had
    made nearly 10 million visits by the end of February to obtain
    refund information from the ``Where's My Refund?'' section on
    this site.
        Even with this progress, the IRS faces significant
    challenges to meeting its mission. I will focus my remarks on
    two of these key challenges: systems modernization and customer
    service.
        The IRS's systems modernization program is in the sixth
    year of its effort to upgrade and modernize IRS information
    technology and business systems. This is an extremely complex
    effort and is expected to take up to 15 years at a cost of at
    least $7 billion. This program must be successful for IRS to
    reach its goals in customer service and tax compliance.
        Since 1999 about $1.5 billion has been appropriated and
    released for modernization. The Treasury Inspector General for
    Tax Administration (TIGTA) agrees with the IRS's recent moves
    to scale back its systems modernization efforts to focus on
    ensuring that the most critical systems are implemented. In
    fact TIGTA has recommended such reductions in the modernization
    projects in the past. Our concerns are based on the cost and
    schedule overruns in the modernization program, including
    significant delays in the most critical project, the Customer
    Account Data Engine (CADE). CADE will eventually replace the
    existing Master File of taxpayer accounts and will enable the
    implementation of other modernized systems.
        We believe the IRS and the PRIME contractor must address
    the following modernization challenges to be successful:
    implement planned improvements in key management processes;
    manage the increasing complexity and risks of the modernization
    program; maintain continuity with experienced leadership; and
    ensure PRIME contractor performance and accountability.
        Improving customer service has been a key focus at the IRS
    for the last few years. Taxpayers have several options from
    which to choose when they need assistance from the IRS. These
    options include toll-free telephone assistance, walk-in service
    at the taxpayer assistance centers, or TACs, and the IRS
    Internet website. Each of these systems potentially effects the
    taxpayer's ability and desire to voluntarily comply with the
    tax laws.
        The IRS's toll-free telephone system is the contact method
    most taxpayers choose when seeking answers to tax law questions
    or trying to resolve tax account issues. Taxpayers called the
    IRS toll-free telephone system over 50 million times during the
    2003 filing season. Access to the IRS's toll-free telephone
    system has significantly improved. In comparison to the prior
    filing season, for example, the level of service increased,
    more calls were answered, and fewer taxpayers abandoned their
    calls. We evaluated the toll-free system and found that 78
    percent of taxpayers received accurate answers to their account
    questions, and 73 percent of taxpayers received accurate
    answers to their tax law questions.
        The next most popular contact method is the taxpayer
    assistance centers which provide face-to-face assistance to
    taxpayers in meeting their filing and payment responsibilities.
    Significant improvements have occurred in the percentage of
    accurate answers to tax law questions that TAC employees
    provided to TIGTA auditors anonymously conducting visits during
    the past 2 years. IRS employees correctly answered 69 percent
    of the questions asked from July through December 2003,
    compared to only 57 percent during the same period in 2002.
        Although the IRS website has received billions of visits
    from taxpayers, most do not submit questions. Early statistics
    indicated approximately 75,000 questions had been received this
    year. Our past audit work indicated that over 80 percent of
    Internet questions were answered correctly.

                               PREPARED STATEMENT

        In conclusion, I believe the improvements in the levels of
    service the IRS has provided to taxpayers are impressive.
    However, challenges continue in the modernization effort. It
    must succeed if IRS is going to operate at a level that
    taxpayers expect and are entitled to receive from their
    government.
        I would be happy to answer any questions.
        [The statement follows:]

                    Prepared Statement of Pamela J. Gardiner

        Chairman Shelby, Ranking Member Murray, and distinguished Members
    of the subcommittee, I appreciate the opportunity to appear before you
    today to discuss the Internal Revenue Service's (IRS) budget, and the
    challenges the IRS continues to face in using its funds to improve the
    economy, efficiency, and effectiveness of tax administration.
        The mission of the IRS is critical to the functioning of our
    government. Each year, the IRS processes over 200 million tax returns
    and collects over $2 trillion. The IRS also issues nearly 100 million
    tax refunds, provides service to millions of taxpayers in person and
    via telephone calls and the internet, and applies complex tax laws to
    help ensure taxpayers meet their tax obligations.
        E-filing provides significant benefits to both taxpayers and the
    IRS including quick acknowledgement to taxpayers that the IRS received
    their tax returns, more accurately processed tax returns, and faster
    refunds. In addition, the IRS estimates that the processing of an e-
    filed tax return compared to that of a paper tax return results in cost
    savings of approximately $2.30 \1\ per tax return. Since the enactment
    of the IRS Restructuring and Reform Act of 1998 (RRA 98), the IRS has
    made significant progress in attracting taxpayers to e-file and
    continues to identify opportunities and create incentives for taxpayers
    to e-file. These efforts have resulted in individual taxpayers being
    able to electronically sign their tax returns, e-file their State tax
    returns with their Federal tax returns, pay their taxes using a credit
    card, e-file 99 percent of all tax forms, and e-file at no cost.\2\
    Furthermore, in an attempt to encourage paid preparers to submit tax
    returns electronically, the IRS offers specific support services and is
    in the process of providing incentives exclusive to e-file
    providers.\3\ These incentives include the ability to apply to become
    an e-file provider online, interact with the IRS by email, and obtain
    client transcripts online. This filing season, the IRS indicated it had
    received 43 million e-filed returns as of March 19--an increase of over
    11 percent.
    ---------------------------------------------------------------------------
        \1\ Cost savings relate to the costs saved to process a tax return
    and do not include Information Technology and Customer Service costs as
    the IRS is still in the process of computing these costs.
        \2\ This no cost e-filing option is the result of the IRS entering
    into an agreement with tax preparation software companies and is
    available for taxpayers that meet certain requirements.
        \3\ E-file providers may be electronic return originators,
    transmitters, software developers, tax practitioners, and States.
    ---------------------------------------------------------------------------
        The IRS has also made progress in providing information to
    taxpayers via its internet website IRS.gov. Taxpayers have visited this
    website billions of times to obtain information. Just this tax season,
    the IRS stated taxpayers had made nearly 10 million visits by the end
    of February to obtain refund information from the ``Where's My
    Refund?'' application which is featured on this site. This is almost
    double the number received last year at this time.
        Even with much progress, the IRS still faces significant challenges
    to meeting its mission. TIGTA has identified major management
    challenges in the following areas that could affect the IRS's ability
    to help taxpayers address their tax responsibilities:
      --Systems Modernization.
      --Tax Compliance Initiatives.
      --Security of Employees, Facilities, and Information Systems.
      --Integrating Performance and Financial Management.
      --Complexity of the Tax Law.
      --Providing Quality Customer Service Operations.
      --Erroneous and Improper Payments.
      --Processing Returns and Implementing Tax Law Changes During the Tax
            Filing Season.
      --Taxpayer Protection and Rights.
      --Human Capital.
        Although each of these areas presents its own unique challenges, I
    have chosen to focus the remainder of my remarks on two of these key
    areas, Systems Modernization and Providing Quality Customer Service
    Operations.

                             SYSTEMS MODERNIZATION

        The IRS's systems modernization program is in the sixth year of its
    effort to upgrade and modernize IRS information technology and business
    systems. It is expected that this program will take up to 15 years and
    cost at least $7 billion to complete. The modernization program is an
    extremely complex effort, since many of the IRS's current business
    systems are a mixture of technologies that date back to the 1960's.
    While difficult, the program must nevertheless be successful if the IRS
    is to meet its goals and commitments of improving its customer service
    and tax compliance activities. To facilitate the success of its
    modernization efforts, the IRS hired the Computer Sciences Corporation
    as the PRIME contractor and integrator for the modernization program,
    and created the Business Systems Modernization Office to guide and
    oversee the work of the PRIME contractor. Through March 2004, the IRS
    has received approximately $1.59 billion to support the systems
    modernization program, and the IRS plans to request an additional $142
    million for fiscal year 2004. Approximately $285 million has been
    included in the fiscal year 2005 budget to further fund systems
    modernization efforts.
        The Treasury Inspector General for Tax Administration (TIGTA)
    agrees with the IRS's recent moves to resize and scale back its systems
    modernization efforts to place additional focus on ensuring the most
    critical systems are implemented. In fact, TIGTA has been recommending
    such a reduction in the modernization projects based on the concerns we
    have raised with cost and schedule overruns in the modernization
    program. The IRS Commissioner recently launched a comprehensive review
    of the modernization program resulting in 21 recommendations for
    improvement. Many of those recommendations were similar to those made
    in TIGTA reports issued during the past 4 years.
        Over the last 2 fiscal years,\4\ TIGTA cited four challenges that
    the IRS and the PRIME contractor must overcome to be successful:
    ---------------------------------------------------------------------------
        \4\ Annual Assessment of the Business Systems Modernization Program
    (Reference Number 2003-20-208, dated September 2003). Annual Assessment
    of the Internal Revenue Service's Business Systems Modernization
    Program (Reference Number 2002-20-189, dated September 2002).
    ---------------------------------------------------------------------------
      --Implement planned improvements in key management processes and
            commit necessary resources to enable success.
      --Manage the increasing complexity and risks of the modernization
            program.
      --Maintain the continuity of strategic direction with experienced
            leadership.
      --Ensure PRIME contractor performance and accountability are
            effectively managed.
        The fourth challenge has recently become critical as oversight
    groups are starting to lose confidence in the PRIME contractor's
    ability to meet its commitments in modernizing the IRS's business
    systems and have raised concerns about future funding. In light of this
    concern, effective contract management, always difficult on a project
    of this magnitude, is becoming an increasingly important challenge that
    needs to be overcome.
        The IRS has made progress in defining the management processes and
    capabilities needed to effectively acquire and implement information
    technology systems. For example, it has deployed the infrastructure
    system on which future modernized applications will run. Establishing
    this infrastructure is a necessary prerequisite to introducing the
    business applications that are intended to provide benefits to
    taxpayers and the IRS. The IRS also deployed several applications that
    have immediately produced taxpayer benefits. The ``Where's My Refund''
    application, as described earlier, has assisted taxpayers with millions
    of online inquiries to obtain refund information. Other applications
    that have been implemented allow businesses and taxpayers to obtain
    employer identification numbers online, tax preparers to apply to
    become an electronic filer and obtain an identification number for use
    in filing clients' returns, and businesses to electronically file
    certain tax returns.
        In response to concerns of TIGTA and others, the revised fiscal
    year 2003 modernization spending plan submitted in March 2003 focused
    the program on a smaller portfolio of existing key projects. Although
    the IRS expressed high confidence in the practicality of the revised
    plan and assured the Congress that it could timely deliver the revised
    fiscal year 2003 project portfolio, all of the projects experienced
    schedule delays and most incurred significant cost increases from
    fiscal year 2002 estimates. Also, management decisions were made to
    delay some of the functionality that was originally planned for these
    systems until sometime in the future.
        These schedule delays, cost increases, and delayed functionality
    occurred, in part, because modernization project teams did not always
    follow defined management and project development processes. The IRS
    and the PRIME contractor have particularly struggled to develop
    adequate cost and schedule estimation techniques. As a result, delivery
    schedules and cost estimates were very aggressive and overly
    optimistic.
        Additionally, the IRS and the PRIME contractor had not fully
    implemented disciplined project testing processes and procedures.
    Testing processes have been substantially revised and refined based on
    lessons learned during the early testing efforts for modernization
    projects. However, TIGTA analyzed several key projects and found the
    project teams were not consistently following the established testing
    processes. We believe the inadequate implementation of the testing
    processes was the result of the modernization project teams attempting
    to meet overly optimistic project schedules.
        While progress has been made in the IRS's modernization efforts, it
    did not achieve its goals for fiscal year 2003. This underachievement
    is disappointing considering that the expectations for the year were
    scaled back in hopes of being able to successfully deliver several key
    modernization projects.
        The delays in implementing projects can clearly be seen in the most
    critical modernization project, the Customer Account Data Engine
    (CADE). CADE will eventually replace the existing Master File \5\ of
    taxpayer accounts, and will enable the implementation of other
    modernized systems that will improve customer service and compliance
    and allow the on-line posting and updating of taxpayer account and
    return data. Therefore, CADE will be the foundation for managing
    taxpayer accounts in the modernized IRS. The portion of CADE related to
    individual tax accounts will be incrementally deployed in five
    releases, each related to a specific taxpayer segment, over several
    years, as shown in the revised CADE release schedule below.
    ---------------------------------------------------------------------------
        \5\ The Master File is the IRS's database that stores various types
    of taxpayer account information and includes individual, business, and
    employee plans and exempt organizations data.

                                                                      CADE RELEASE SCHEDULE
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                               Release One             Release Two           Release Three           Release Four           Release Five
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Tax Return Types...................  1040EZ, Refund or Even  1040EZ, 1040 Sch A, B,  All 1040 Family and    All 1040 Family and    All remaining
                                           balance.               D, 1040A Sch 1, 3,      supporting forms,      supporting forms,      individual tax
                                                                  with Refund or Even     Refund or Full Paid.   Refund, Full Paid,     returns.
                                                                  Balance.               1040A Sch 2, Refund     and Balance Due.
                                                                 1040, 1040A 1040EZ,      or Balance Due.       941, 940, 720 Forms--
                                                                  Full  Paid.            1040ES Pmts..........   Payroll,
                                                                                                                 unemployment, and
                                                                                                                 Excise returns for
                                                                                                                 1040 taxpayers.
    Filing Status......................  Single................  (Single, Married--      All (including Head    All..................  All.
                                                                  Married once and no     of Household).
                                                                  dependents).
    Account Characteristics............  No account issues       No open account issues  No open account        No open account        All accounts not
                                          (Open or Closed).                               issues EITC.           issues.                included in previous
                                                                                                                                        releases.
    Est. Returns :\1\
        Original estimate..............  6 Million.............  29 Million............  41 Million...........  34 Million...........  12 Million.
        Revised June 2003..............  5 Million.............  33 Million............  57 Million...........  20 Million...........  15 Million.
    Est. Delivery:
        As of April 2000...............  January 2002..........  August 2002...........  July 2003............  July 2004............  July 2005.
        As of March 2001...............  January 2002..........  January 2003..........  January 2004.........  January 2005.........  January 2006.
        As of April 2003...............  August 2003...........  January 2005..........  TBD..................  TBD..................  TBD.
        As of Jan. 2004................  Rel 1.1 \2\.--August    TBD...................  TBD..................  TBD..................  TBD.
                                          2004.
                                         Rel 1.2/1.3.--January
                                          2005/January 2006.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Estimated tax returns (electronic and paper) are based on 1999 statistics.
    \2\ Release 1 has been divided up into three separate releases--1.1, 1.2, and 1.3.

                                CUSTOMER SERVICE

        One of the Congress' principal objectives in enacting the RRA 98
    was to mandate that the IRS do a better job of meeting the needs of its
    customers. In the RRA 98, the Congress directed the IRS to achieve a
    better balance between its post-filing enforcement efforts and pre-
    filing taxpayer assistance through education and service. To comply
    with this Congressional mandate, the IRS revised its mission statement
    to refocus its emphasis on helping taxpayers understand and meet their
    tax responsibilities. Additionally, the IRS has enhanced its focus on
    increasing the levels of electronic filing.
        Taxpayers have several options from which to choose when they need
    assistance from the IRS. These options include toll-free telephone
    assistance, walk-in service at the Taxpayer Assistance Centers (TAC),
    and the IRS internet website IRS.gov. The effectiveness of each of
    these services potentially affects a taxpayer's ability and desire to
    voluntarily comply with the tax laws.
    Toll-Free Telephone Assistance
        The IRS's toll-free telephone system is the contact method most
    taxpayers choose when seeking answers to tax law questions or trying to
    resolve tax account-related issues. Taxpayers called the IRS toll-free
    telephone system over 50 million times during the 2003 Filing Season.
    The IRS's strategy for handling this significant customer demand is to
    direct those taxpayers with less complicated issues to its automated
    services (i.e., recorded information and interactive applications) and
    allow its Customer Service Representatives (CSR) to assist taxpayers
    with more difficult issues. However, during fiscal year 2003, over 26
    million of the calls were from taxpayers who had questions about their
    accounts and who chose to speak with a CSR.
        The TIGTA and others have raised continuing concerns about the
    IRS's ability to effectively meet the significant annual taxpayer
    demand for access to its toll-free telephone system. Over the past
    several years, the IRS has made many technological changes, as well as
    organizational and process changes, to its toll-free telephone system
    in an effort to provide taxpayers with better access and improve the
    quality of its service.
        Many aspects of the taxpayer experience in accessing the IRS toll-
    free telephone system were significantly improved during the 2003
    Filing Season. This improvement was reflected in the measures the IRS
    uses to gauge the performance of its toll-free telephone system. In
    comparison to the prior filing season, for example, the level of
    service increased, more calls were answered, and fewer taxpayers
    abandoned (i.e., hung up) their calls before receiving assistance.
    Further, taxpayers that called with account- or refund-related
    questions had shorter wait times to receive service, and taxpayers that
    called with account-related questions were more likely to receive
    assistance when they reached a CSR assigned to an account application.
        Although taxpayer access to its toll-free telephone services
    improved, the IRS has opportunities to further enhance the taxpayer
    experience and reduce the costs of providing toll-free telephone
    services. A major improvement opportunity involves implementing
    enhancements to automated call routing solutions so that much of the
    need for call screeners can be reduced or eliminated. For the 2003
    Filing Season, using screeners to manually route calls cost the IRS
    almost $3.6 million in salaries and benefits that would not have been
    needed if the previously developed call routing solution had worked as
    planned. Another improvement opportunity involves reducing the high
    Assistor Availability levels \6\ that have existed for at least the
    past two filing seasons. The IRS had planned for a level of 5.5 percent
    in fiscal year 2003, but during the 2003 Filing Season, the rate was
    11.2 percent, and had further increased to 12.15 percent through the
    end of June. We estimate that this cost the IRS nearly $6.4 million in
    CSR salaries and benefits. Finally, the IRS needs a financial system
    that will accurately track its cost-per-call for various toll-free
    telephone services to provide management and key stakeholders
    sufficient information to make critical decisions.
    ---------------------------------------------------------------------------
        \6\ Assistor Availability is the measure the IRS uses to calculate
    how long its CSR's are available to take calls when none are coming in
    for their specific applications. Achieving the optimum Assistor
    Availability level is critical for effective and efficient call site
    operations.
    ---------------------------------------------------------------------------
        The IRS receives calls from taxpayers with account issues and
    questions about various aspects of the tax law. During the 2003 Filing
    Season, we reviewed both account assistance and tax law assistance
    calls for professionalism, accuracy, and timeliness.
        Account Assistance.--TIGTA evaluated the professionalism, accuracy,
    and timeliness of account assistance obtained through the Toll-Free
    program. From a judgmental sample of 191 calls monitored between April
    21 and May 16, 2003, we determined that CSR's treated taxpayers
    professionally for 99 percent of the calls and provided timely service
    for 83 percent of the calls. In addition, 78 percent of taxpayers
    received accurate answers to their account questions. Using a
    statistical sample during the same period we reviewed, the IRS reported
    rates of 100 and 97 percent, respectively, for professionalism and
    timeliness, and 88 percent for customer accuracy.
        Tax Law Assistance.--TIGTA monitored a judgmental sample of 294
    toll-free tax law calls between January 27 and March 13, 2003, and
    compared the results to records from an IRS statistically valid sample
    of 6,011 calls monitored during the same period. The 2 samples showed
    that CSR performance was professional and timely in 98 percent or more
    of the total number of calls monitored. Although our sample showed a
    customer accuracy rate of 73 percent as compared to the IRS' measured
    rate of 81 percent, the need for CSR's to fully probe the taxpayer for
    information was clearly evident as an ongoing issue requiring
    improvement in both of the samples taken. The primary reason incorrect
    responses were given was because CSR's were not effectively using the
    appropriate guidance. Without effective use of this guidance, CSR's are
    unable to fully understand the taxpayer's situation and may provide
    information that is incorrect or incomplete.
    Taxpayer Assistance Centers
        The primary emphasis of the TAC's is to provide face-to-face
    assistance to taxpayers in meeting their filing and payment
    responsibilities, including educating taxpayers, providing self-help,
    interpreting tax laws and regulations, securing forms, resolving
    notices, and providing needs-based complimentary tax return
    preparation. The IRS has over 400 TAC's that served over 8.5 million
    taxpayers in fiscal year 2003.
        Significant improvements have occurred in the percentage of
    accurate answers to tax law questions TIGTA auditors asked when
    anonymously conducting site visits to TAC's during the past 2 years.
    IRS employees correctly answered 69 percent of the questions asked and
    incorrectly referred only 2 percent to publications from July through
    December 2003, compared to correctly answering only 57 percent of the
    questions asked and incorrectly referring 12 percent to publications
    from July through December 2002. TIGTA commends the IRS for the
    improvements it has made in this level of accuracy.
        Auditors also had positive experiences when they visited the TAC's.
    IRS employees were professional and courteous in 97 percent of the 194
    TIGTA site visits to 105 TAC's. Wait time for service was 1 hour or
    less for 99 percent of the visits. In addition, 85 (81 percent) of the
    TAC's visited by our auditors had office hours listed on the IRS
    internet website IRS.gov, which matched the hours posted at the TAC's.
        Although improvements have occurred in accuracy of responses to
    taxpayer questions, the accuracy of tax return preparation at the TAC's
    needs improvement. Complimentary tax return preparation and electronic
    filing is provided to those taxpayers whose returns meet certain
    requirements and limitations. For Tax Year 2002, IRS employees at the
    TAC's prepared 293,242 tax returns that involved refunds and tax
    liabilities totaling approximately $330 million and $6 million,
    respectively.
        Returns prepared at the TAC sites, however, are often inaccurate.
    From February through April 2003, TIGTA auditors made 34 anonymous
    visits to 26 TAC's nationwide in an attempt to have a tax return
    prepared. IRS employees incorrectly prepared 19 of the 23 tax returns
    prepared during our visits. If these returns had been filed, the IRS
    would have inappropriately refunded $32,000 and inappropriately
    withheld $2,400 in tax refunds. IRS management has taken action to
    improve the accuracy of the tax returns prepared, and TIGTA has
    recommended additional actions to ensure taxpayers receive proper and
    accurate customer service when requesting assistance with tax return
    preparation.
    Service to Taxpayers via the Internet
        The use of the internet has increased dramatically. The latest
    statistics indicate that nearly 70 percent of the United States
    population are internet users. Since 1995, the IRS has administered a
    program to answer taxpayer questions submitted through its internet
    website IRS.gov. This program offers individual and business taxpayers
    an accessible and convenient alternative to using the telephone or
    visiting an IRS office to obtain answers to tax law questions.
    Taxpayers have the ability to submit tax law questions 24 hours a day,
    7 days a week. The IRS provides responses to taxpayer questions via an
    e-mail message.
        Past TIGTA testing indicated that the accuracy rate for the answers
    to the submitted questions was over 80 percent, which is higher than
    that received in TAC's or via the toll-free assistance telephone
    program. However, the IRS did not respond to several of the questions
    TIGTA submitted anonymously to the program. Additionally, the number of
    questions submitted dropped from over 200,000 questions in the 2000
    Filing Season to about 120,000 in the 2002 Filing Season. TIGTA
    encouraged management to provide clear instructions to taxpayers to
    help them locate the area to input tax questions on the internet
    website.
        Statistics obtained from the IRS indicated that for the 2003 Filing
    Season, 146,369 questions were received from taxpayers (a 23 percent
    increase over the prior year). However, the average response time for
    each question increased from 2.4 days to 4.2 days. Thus far, for the
    2004 Filing Season (through March 15, 2004), statistics indicate a
    reduction in the number of questions received--76,156 questions have
    been received (76 percent of the number received in the prior year
    during the same period) with an average response time of 3.6 days.
        In closing, I would like to reiterate that the improvements in the
    levels of service the IRS has provided to taxpayers are impressive. The
    IRS has made great strides in enhancing the level of electronic filing,
    providing information via its internet website, and improving the
    accuracy and availability of toll-free telephone service. The early IRS
    filing season statistics indicate a rise in electronic filing and an
    increase in the use of some of the services available via the internet.
    However, significant challenges remain to be addressed as the IRS
    strives to modernize its systems and provide world-class customer
    service to America's taxpayers.

                       ACCURACY OF TAX RETURN PREPARATION

        Senator Shelby. I have a number of questions. The Treasury
    Inspector General for Tax Administration (TIGTA) reported that
    the IRS employees incorrectly prepared 19 of 23 tax returns
    during a spot check of 26 taxpayer assistance centers around
    the country. Ms. Gardiner, what recommendations do you have to
    ensure taxpayers receive proper and accurate customer service
    when requesting assistance in the preparation of a tax return?
        Ms. Gardiner. The biggest problem that we see when mistakes
    are made, whether it is preparing tax returns or answering
    questions on the toll-free line or walk-in assistance, is that
    the IRS employees do not ask appropriate probing questions. For
    example, the earned income tax credit is a complicated law and
    there are so many different little pieces that make a
    difference in whether you qualify or not.
        Senator Shelby. I certainly would not be qualified----
        Ms. Gardiner. A common problem is just simply the number of
    months that a child resides with the taxpayer that would
    determine whether they do or do not get the credit, and that is
    a common mistake.
        Senator Shelby. There is a problem of verification, too, is
    it not?
        Ms. Gardiner. It is verification as well, but what we find
    is simply that they are not asking enough questions to get to
    the right answer.

                  IMPROVING THE ACCURACY OF RETURN PREPARATION

        Senator Shelby. Mr. Commissioner, what actions have you
    taken to improve the accuracy of tax returns prepared by the
    IRS personnel?
        Mr. Everson. I think that as Ms. Gardiner has suggested,
    this is an area that needs our concern, and that is a
    relatively recent set of findings. We have had recent
    discussions--in fact, I think the issues here, Senator, extend
    beyond returns we prepare. As you may be aware, there are up to
    about 2 million returns that are prepared through volunteer
    organizations that work closely with the Service, to which
    people are referred and they may go visit one of these
    volunteer sites.
        Senator Shelby. How accurate are those returns?
        Mr. Everson. I think we are seeing that there are some of
    the same issues. This comes back to what you spoke about, it
    comes back to the complexity of the code. That is a root cause
    here. I would just expand upon Ms. Gardiner's remarks, which I
    think hit it correctly. There are a couple things that are
    difficult here. One is the true desire of our employers or
    others to help. If they are sitting there with you and they
    think they understand the situation, they may fail to ask that
    next probing question. It is on a script that they are supposed
    to be using, but they have made an assumption, and they
    probably should not have made that assumption.
        The way the scoring that TIGTA uses works and that we use
    works, sometimes it holds against them the fact they just have
    not asked that next question. Now, they may actually have been
    right but they did not fully follow the procedure, so there is
    a real risk that they have got the wrong answer. We need to
    keep working on our training. We are doing that. I think that
    this area----
        Senator Shelby. Does a lot of it go to training?
        Mr. Everson. Training is it, and getting good scripts. The
    same thing applies to the tax law accuracy question where we
    made some changes earlier this filing season. Overall, our
    filing season results are excellent, but we did have a dip in
    tax law accuracy, and that was because we were making changes
    to actually get better. We were changing some of these scripts.
    They proved a little more difficult to use. And we were also
    having some people who worked in the account area, which Ms.
    Gardiner talked about, that is the area where you call in and
    you say, ``I cannot remember what my payment ought to be,'' if
    you are on an installment plan, or ``I got a notice from you,''
    or a question like that. We were taking some of those folks and
    having them work in the tax law area. Getting them properly
    trained and up to speed took a little more time than we
    thought.
        So this is an ongoing challenge. Whatever you can do to
    simplify the code, though, would really help us.
        Ms. Gardiner. Yes.
        Senator Shelby. I have tried.
        Mr. Everson. I know you have.

                             CORPORATE TAX SHELTERS

        Senator Shelby. Mr. Commissioner, I think we all know there
    have been a lot of abuse of tax shelters. We often hear of
    large corporations or high income taxpayers creating shelters
    that are obviously designed to avoid paying taxes. They do not
    have a real purpose, a business purpose, other than that. On
    top of that, these shelters are designed by a handful of
    attorneys, accountants, and tax practitioners whose standards
    and ethics are very, very questionable. You know this yourself.
    We have talked about it a little.
        Does the budget request reflect your plan for attacking
    these corporate shelters and the few unprofessional individuals
    who created them? I think you have got to go to the heart of
    this.
        Mr. Everson. Absolutely. If we could show the four
    enforcement priorities. We have very carefully constructed,
    through our planning process, four mutually reinforcing
    enforcement priorities. This issue is really at the heart of
    all four of these priorities.

                             ENFORCEMENT PRIORITIES

        Senator Shelby. Go over them.
        Mr. Everson. The first is to discourage and deter non-
    compliance, with emphasis on the corrosive activities of
    corporations and high income individuals. That is the meat of
    the shelter question.
        The second is to assure that----
        Senator Shelby. A lot of these people just exist to think
    of creative ways to beat the tax code, do they not?
        Mr. Everson. That is the second point here: assure that
    attorneys and accountants and other tax practitioners adhere to
    professional standards and follow the law. If you could indulge
    me for just a minute. I started out my career at Arthur
    Andersen in the mid-1970s. The firm had one of the best
    reputations, and the standard of any Big Eight accounting firm
    was clear, any good law firm: you make sure that your clients
    follow the law. This all changed over a period of decades to
    become about value creation and risk management, and now you
    have interlocking networks of investment banks, accounting
    firms, law firms, commercial brokerages.
        Senator Shelby. Trying to beat the tax code?
        Mr. Everson. They are working to do this. So this element
    of it is terribly important.
        The third priority, augmenting our criminal investigations,
    gets to it too. Some of this gets to a criminal level. We have
    active criminal investigations, including against
    professionals, that will hold people to account.
        Senator Shelby. You have to do this, do you not?
        Mr. Everson. We have to. We are getting excellent support
    from the Department of Justice. They have litigated for the
    first time, as you may have seen, against law firms who have
    acted as promoters. They are not providing traditional advice
    to clients. They are acting as promoters of generic tax
    products that have had a corrupting influence on the practice
    of law and accounting.

                           IRS ENFORCEMENT PRIORITIES

        Senator Shelby. A lot of this advice has no real business
    purpose, does it?
        Mr. Everson. That is exactly right. And it gets even to the
    fourth point here, which is about the abuse of tax-exempt
    entities. This is a very serious one, where we have seen some
    of these charities are being used. We just prohibited a
    transaction last week where people would take advantage of
    charitable organizations in order to actually promote a tax
    avoidance scheme. If I could just show you one chart as to the
    problem we have got ourselves into over a period of years, and
    then I want to address one thing you said in your statement.
        Senator Shelby. You go ahead.

                                  IRS STAFFING

        Mr. Everson. This green line, this is the growth over 6
    years starting in 1995 in total assets of 501(c)(3) entities.
    This is the number of returns filed, together with some
    projections. This is what happened to the staffing at the IRS.
    What happened, basically, was we maintained--as you said, we
    kept working on service, and that was good. We needed to do
    that. But the fallout in this was a dramatic decline across-
    the-board--but this is just the people working on tax-exempt
    groups. And if you adjust for this volume increase in terms of
    number of charitable entities, this shows you how far we are
    down.
        This is bringing it back up. We brought it back up in 2004.
    What I wanted to say here, the only correction I would have,
    and I agree with your statement, is that in 2004 after I got
    here, the first thing I did was direct my two deputies to make
    sure that as we dealt with funding shortfalls we did not just
    take it out of enforcement. We stopped that last year, so that
    the fiscal year we are in now, we do have the enforcement
    increment the President and you want us to follow.
        But this just shows, we are bringing this back. This is a
    terribly important area because of what you just said. It is
    also terribly important because of abuses, the credit
    counseling industry----
        Senator Shelby. How much money are we talking about in
    abuses, in your judgment?
        Mr. Everson. In this area, in tax-exempt entities I would
    not have a precise figure but what I would tell you, let me
    give you----
        Senator Shelby. Could you furnish something for the record?
        [The information follows:]

        We do not have data with which to provide a precise answer. Lost
    revenues would generally result from tax-exempt organizations that are
    not operating in accordance with their exempt status, and therefore
    should be subject to tax. The market segment studies we are currently
    undertaking will enable us to better estimate revenue losses in
    particular segments or industries, but will not provide data that can
    be extended to exempt organizations generally.

        Mr. Everson. Let me tell you one statistic on this. There
    is a $1 billion credit counseling industry that is operating as
    not-for-profit, calling around to people, taking advantage of
    the fact that they are exempted from the do-not-call list
    because they are a charity, taking advantage of the fact that
    they are not regulated by your State or others for consumer
    protection laws. They are preying, many of these entities are
    preying on good average Americans who have found themselves in
    trouble with debts, and they are no longer providing counseling
    and educational services, which is their mission under tax-
    exempt status.
        So we are going after them. We may very well lift some of
    the tax exemptions, and I believe there may very well be
    criminal referrals on some of these entities.
        Senator Shelby. That is what you ought to do.
        Mr. Everson. This is all what needs to be done. To get back
    to your statement, I want to give you my personal commitment
    that as we go forward--I am obviously asking for the
    President's full request. I am not asking for a penny more, but
    I am asking for the full request. I want to be crystal clear
    with you and your colleagues that we will protect that
    enforcement build and be very responsible at addressing
    shortfalls, should there be across-the-board rescissions and
    things like there have been in the past, or other gaps.
        Senator Shelby. You have got to have the money to do your
    job. What percentage, and you might want to furnish this for
    the record, of 501(c)(3) tax-exempt groups are abusing their
    status?
        Mr. Everson. That is a very difficult question, and I would
    tell you, we have fallen so far behind----
        Senator Shelby. A lot of them are very clean, very
    straight-up.
        Mr. Everson. Yes. Most of them are. What is really at stake
    here, Senator, is that Americans could lose faith in the
    integrity of charities and stop supporting our charitable
    institutions, which are so important to our way of life.
        [The information follows:]

        Currently, we do not have data that would yield a meaningful
    statistic. The 501(c) exempt organization community is made up of many
    different kinds of charities and other exempt organizations, with
    diverse activities and needs and correspondingly diverse compliance
    challenges. To address this diversity, we have divided the exempt
    organization community into several dozen market segments, and in
    fiscal year 2002 we began to conduct market segment studies. To date,
    we have begun studies looking at labor unions, business leagues, social
    clubs, community trusts, hospitals, colleges and universities, social
    services organizations, religious organizations (other than churches),
    private foundations, 509(a)(3) supporting organizations, fraternal
    organizations, elder housing organizations, arts & humanities
    organizations, as well as others. Although the results of these studies
    will allow us to make generalizations about compliance levels in
    particular segments or industries, we do not expect that they will
    allow us to make generalizations about the percentage of organizations
    that are not operating in accordance with their tax-exempt status.
        Recently, we have devoted more of our limited resources to
    enforcement areas with known or suspected compliance problems, such as
    donor advised funds, credit counseling organizations, excessive
    compensation issues, and others. Although we will continue with market
    segment studies, we anticipate that fewer resources will be devoted to
    new studies as we increasingly concentrate on existing areas of
    noncompliance.

                            EARNED INCOME TAX CREDIT

        Senator Shelby. Absolutely.
        Let us now focus on the earned income tax credit. As we all
    know, there is an estimated $8 billion to $10 billion of annual
    fraud. This is a lot of money. We were talking about $1 billion
    a minute ago, or $260 million, which is still a lot of money.
    But there is an estimated $8 billion to $10 billion dollars of
    annual fraud that occurs in the earned income tax credit
    program. What is the IRS doing currently to crack down on this?
    What is the status of your five-point initiative to improve the
    administration of the earned income tax credit (EITC)? And how
    and when does the IRS plan to determine whether the earned
    income tax credit pilot initiative, including the qualifying
    child certification filing status and income report, will be a
    success? Because we know a lot of people who receive the
    benefit do not abuse it. But we also know that there is a high
    rate of erroneous payments to people who should not receive it.
    It looks like it is a question of correlating information
    before you pay out, if you are double paying in areas. Do you
    want to respond?
        Mr. Everson. Certainly, Senator.
        Senator Shelby. This is important.
        Mr. Everson. It is very important. We want to make sure
    that everybody who qualifies for this program takes advantage
    of this program. That is our first objective. But the second
    one is, we want to, obviously, make sure that we are not paying
    out monies to people who legitimately do not qualify. As was
    indicated before, Ms. Gardiner indicated, there is some
    complexity in the program, so I would not want anybody to draw
    the impression that it is all fraud in there.
        Senator Shelby. No, it is not all fraud, but there is a lot
    of fraud.
        Mr. Everson. There is a legitimate error rate that accounts
    for a good chunk of what you talked about. Our studies have
    indicated an error rate somewhere between 25 and 30 percent,
    which is the highest in government.
        Let me draw the distinction, because your statement made
    reference to some things I said in my prior life over at OMB
    and this is something I looked at when we were there. The
    difference between this program and food stamps, or housing
    subsidies, is there is no front-end application process. In a
    lot of benefits programs, the government, either the Federal
    Government or a State entity, or somebody is going through an
    application process to determine whether you or I qualify for a
    benefit. That does not exist in the EITC. It is treated like it
    is embedded in the tax code. It is the largest means-tested
    program we have, so it is an odd animal.
        Senator Shelby. How much money, overall, is involved in the
    Earned Income Tax Credit?
        Mr. Everson. Last year I believe it was about $36 billion
    with about 21 million filers who took advantage of the program.
        Senator Shelby. A $36 billion program and, say, 25 percent
    of it's more or less questionable?
        Mr. Everson. Yes, 25 percent of it. So let me come back
    directly to your question. We do have the five-point program
    which is geared to hit those objectives, to help people
    participate, simplify forms. We are working on all that. We are
    bringing in a backlog of the old audits. The core of this
    though is this certification pilot. Right now we have got a
    certification--

                  EARNED INCOME TAX CREDIT CERTIFICATION PILOT

        Senator Shelby. How does that work?
        Mr. Everson. We are asking people to demonstrate their
    eligibility this year at the time that they are filing for the
    credit, rather than getting--if they were in a high-risk
    category, rather than automatically getting their----
        Senator Shelby. Preapproval, in a sense?
        Mr. Everson. It is not quite preapproval, but in lieu of
    getting their refund held. What would happen in the past is,
    they might go down a corridor where if their return looked
    suspect--I will give you an example where you typically might
    see a problem. You see the same address for a husband and wife,
    but they are filing as head of household and splitting their
    kids. That is not the right thing to do, obviously, because the
    presumption would be that since they are living together that
    it is one family. That would be something--and there are other
    indicators where you might end up holding the refund.
        What we are doing here with this pilot group is we are
    looking, in a real-time basis, and asking them to complete the
    paperwork so that then their refund does not get held. I do not
    have the results for that yet. That is underway right now. My
    impression, and it is just an impression, is that so far, so
    good. But we are going to have an independent evaluation of
    this pilot done. We will not know until, I would tell you later
    in the summer, later in the year, how it has gone.
        Senator Shelby. Will you let us know how it is going?
        Mr. Everson. Of course we will. We want to ramp this up,
    but only if we prove that it works and that it gets us a good
    answer, that it does not dampen the participation of those who
    qualify, and that it does the job that it is supposed to do,
    which is reduce the error rate.

                     ADDRESSING FRAUD AT ALL INCOME LEVELS

        Senator Shelby. But you can have fraud at the highest
    level, the richest people, and you can have big fraud, as you
    pointed out, in the Earned Income Tax Credit. It is our job to
    root it out in both places, is it not?
        Mr. Everson. Absolutely correct. It is our job to run a
    balanced program. That is what I am seeking to do with this
    budget increase. But I do emphasize that where we start is at
    the high income and the corporate in the criminal area, because
    the basic sense of fairness of Americans is that the big guy
    should not get away with something here.
        Senator Shelby. Absolutely. And the little guy should not
    get away with it either.
        Mr. Everson. We want everybody to be compliant.
        Senator Shelby. Both of them. Because you cannot have fraud
    by anybody, can you?
        Mr. Everson. You cannot.
        Senator Shelby. Ms. Gardiner, what are your thoughts about
    the pilot and other initiatives in this area?
        Ms. Gardiner. We have been looking at the pilot concept,
    the design of the original test, and it looked pretty good. We
    made some suggestions that in the early stages of planning for
    it, because they did not seem to have good measures on how they
    would determine whether the pilot was a success or not. They
    have improved that.
        Senator Shelby. Does the pilot relate to a software program
    that can correlate all this information?
        Ms. Gardiner. No, it really is examining a sample of
    returns and related documentation, that would support the
    eligibility. So it is manual. The results could go into a
    database, of course.
        Senator Shelby. But this is a lot of money involved, as the
    Commissioner has pointed out, over time. There is a lot of
    money involved here in cheating. There is a lot of money
    involved in these fraudulent tax shelters, too.
        Mr. Everson. Yes, sir.
        Senator Shelby. If you could cut down on both tremendously
    it would mean a lot of savings to the IRS. It would mean a lot
    more revenue, legitimate revenue coming in, would it not, sir?

                                    TAX GAP

        Mr. Everson. Senator, what you are getting to here is of
    great concern. It is what we call this tax gap. Our estimates
    are that this combination of non-filing, underreporting and
    underpayment is north of $250 billion a year. Now that number
    is not very precise and that is because it is based on a model
    that was last updated in the late 1980s, and adjusted for
    changes in demographics and economics. We are just now doing
    the research, through a new series of more in-depth audits,
    that will give us a basis for updating that number.
        My fear is that it might well be greater than the $250
    billion a year because of these shelters, the changes in
    behavior, and this change in compliance attitudes. So this is a
    serious problem, but anything that we do--and this is why I am
    so anxious to get the money--we help out on the deficit, we
    help out States, because when we get a dollar for the Federal
    Government, on average the blended rates across the country is
    that the States get 20 cents. So it is important everywhere.
        Senator Shelby. What are the current spending plans and
    changes the IRS has made to the Earned Income Tax Credit
    initiative as a result of the merger of appropriations with Tax
    Law Enforcement?
        Mr. Everson. Last year we had an increase from the previous
    year in the EITC, and if you look at 2004 versus 2005, the
    spending actually goes down. It is not going to affect this
    program that we are talking about or our ability to do more
    audits, because we were making some one-time investments as we
    got ready to do these pilots and some of the other educational
    data requirements. So that number has gone down from about $201
    million in 2004, to, I believe, it is $176 million. But it will
    not hurt our ability to move forward and do just what we were
    talking about.

                                FUEL TAX EVASION

        Senator Shelby. Mr. Commissioner, part of my duties as an
    appropriator of this subcommittee is transportation, as you
    know. Fuel tax fraud creates a drain on the Highway Trust Fund
    revenues which the Federal Highway Administration estimates
    could cost at least $1 billion a year. In testimony before this
    subcommittee, the Secretary of the Department of
    Transportation, Secretary Mineta, stated that he was not
    satisfied with the IRS's effort to combat evasion of Federal
    motor fuel taxes.
        Mr. Commissioner, does the IRS agree with the Federal
    Highway Administration's estimate of the loss; in other words,
    a loss of $1 billion or more, from the fuel tax?
        Mr. Everson. I have not looked at that specific number.
        Senator Shelby. Can you furnish that information?
        Mr. Everson. I have no reason to challenge it. I understand
    that there is a legislative fix pending that would actually
    provide the Service more resources to go after this important
    area. When I was recently traveling, I went to a fuel depot, a
    tank farm, and saw the testing procedures we have. This is a
    big issue, and it comes down to fairness again. If the fellow
    who is running a gas station sees the guy across the corner
    mixing his fuels, he has got a competitive advantage that is
    not fair. So we need to do more. I am hopeful that the fix that
    I have talked about will get the extra agents to keep on this
    issue.
        Senator Shelby. Will that be a collaborative effort with
    the States?
        Mr. Everson. I think that is more our own area. I could be
    wrong about that, but I believe--these are our folks that do
    the work themselves, and the fellows I met were just Service
    employees.
        Senator Shelby. It is still a lot of money involved.
        Mr. Everson. It is a lot of money and it goes into, again,
    business fraud. We need to be attentive, not just to
    individuals, but to the businesses here.

                             WORKFORCE REALIGNMENT

        Senator Shelby. Mr. Commissioner, following the IRS's
    reform legislation of 1998, the IRS realigned significant
    levels of resources out of tax enforcement and compliance
    activities to customer service, telephone assistance, and
    submission processing activities. How do your fiscal 2005
    realignment proposals and new funding initiatives compare to
    the pre-reform legislation levels for the tax enforcement and
    compliance programs?
        Mr. Everson. Maybe I could show a chart on that.

        This just shows you what happens. I am not quibbling with
    RRA 1998. I want to be clear about that. The reforms that were
    contemplated were necessary to improve services. We were not
    doing everything we needed to do on service. I want to be clear
    about that. But as the IRS worked in a single-minded fashion to
    improve services--these are our service and infrastructure
    personnel--it kept those resources stable and invested in phone
    services, restructured the agency, did a lot of things to get
    things better.
        But what fell out was a decline in enforcement. This red
    dotted line represents FTEs as dollars turned into bodies for
    revenue agents, people who do audits, revenue officers, people
    who collect monies due, and criminal investigators. Over a
    period of time they fell by over a quarter.
        Now we have turned that back in 2004, as I indicated to
    you, by absorbing some of the shortfalls in congressional
    spending. Last year, you know we ended up $250 million short at
    the end of the day, plus the pay raise, plus the child credit;
    a series of factors. But for the first time what we did was,
    for this year, forced an allocation of these cuts in a way that
    protected enforcement, the enforcement initiative.
        We will bring this back further. There will be another
    several thousand FTEs that we will get through the 2005
    increment and about 4,000 positions. So this will make a
    difference in 2005. It does not bring us all the way back.
        Senator Shelby. It is progress, though.
        Mr. Everson. My commitment to the Secretary and to Josh
    Bolten at OMB is we will look at this on an ongoing basis to
    see that we run a balanced system. We are also improving our
    processes so that we get more leverage. You do not always have
    to have more money, but in this case we felt that we needed the
    money to improve our processes.

                        IRS SERVICE AND STAFFING LEVELS

        Senator Shelby. Mr. Commissioner, does your fiscal year
    2005 request reflect a belief on your part that sufficient
    service and staffing levels have been achieved for the customer
    service and processing program areas?
        Mr. Everson. As a general rule, I would suggest that I
    would like to continue to maintain and improve services with a
    relatively stable resource commitment on the service. We are
    near inflation, if you look at what we have got in the 2005
    request. I think that is appropriate.
        We need to challenge our people to get the same kind of
    productivity gains that you get in the private sector. That
    sometimes results in some painful adjustments in the workforce.
    You probably read of some of the actions we are taking. But I
    believe that it is difficult for me to come and ask you for
    money in this resource-starved environment, and time of
    deficits, if I have not done everything I can to run the agency
    efficiently. So we are asking our people to look at that
    productivity, and I think that we can continue to run our
    services and improve them at a relatively stable investment
    level.

                          TAX LAW ENFORCEMENT FUNDING

        Senator Shelby. Has the IRS invested all the resources
    appropriated by the Congress in recent years for tax law
    enforcement or have some of the new resources been reallocated
    to other areas?
        Mr. Everson. No, this is what we were just saying. The
    standing rule until I got here was that when there was a
    shortfall you took it out of enforcement to protect services. I
    have reversed that.
        Senator Shelby. That would be a mistake.
        Mr. Everson. I am not in the business of challenging the
    past. I am not sure there was a great deal of choice, given the
    overall environment and the absolute imperative to improve
    services. But, clearly, now we need to rebuild the enforcement
    side and that is what I have started to do in the last year and
    I am asking your support for going down the road.
        Senator Shelby. Mr. Commissioner, why has the IRS been
    unable, if this is true, to hire the revenue agents and revenue
    officers requested and funded in prior fiscal years? Is this
    about not competing in the market? Is there not enough money to
    hire people? Are the salaries too low or what?
        Mr. Everson. It has been, I would tell you, primarily a
    funding question. It is dependent, obviously, on the overall
    economy and the desirability of Federal employment. Right now
    we are doing very well, as we look at this enforcement build.
    We are very pleased with the caliber and the interest we are
    getting. We are doing some creative things.
        Senator Shelby. But you cannot do it overnight, can you?
        Mr. Everson. You cannot. This is why it is so important to
    get strong, continued support from you and your colleagues
    because what the IRS did, it stopped and started on its hiring.
    You do not develop a relationship with a good university to
    draw in accountants if you are there once and then you do not
    come back for 7 years. You have got to be there every year,
    develop a reputation as a good employer and then you get good
    people.
        Senator Shelby. Continuity is important.
        Mr. Everson. Continuity is important, and I think that we
    will be able to address demographics. The only other thing I
    would say on this is: in the group that works with our large
    and mid-size businesses, corporations over $10 million in
    assets, for the first time we are hiring outside the IRS from
    mid-career people; folks who have been 10, 15 years at
    companies or accounting firms. This is a good, helpful thing
    too, because as you know, people in America, they do not tend
    to stay with the same employer for their whole career any more.
    Why shouldn't we in the government be able to take advantage of
    that a little bit too?
        Senator Shelby. I think you can and you are.

                        RETURN ON ENFORCEMENT INVESTMENT

        What benefits does the IRS expect to derive from the
    additional $300 million that you have requested for 2005 in tax
    law enforcement?
        Mr. Everson. As we have looked at this, we think will get
    about a 6 to 1 return. That is a blended return in terms of the
    dollars that we are asking for. It will increase audit rates.
    Let me just give you one example.
        We will increase the penetration on corporations, largely
    mid-size corporations where we are not very active, from 7
    percent up to 13 percent. That is one area where we do not have
    adequate coverage, in my opinion, right now. This will get us
    more dollars, and it will also then have a derivative effect on
    behaviors.
        Same thing, we are going to be adding 350 special agents,
    plus support staff, to go after the crooks. Across the board
    there will--the chart that I showed before, for the first time
    in many years we will be adding to our agents in the tax-exempt
    area so they can look at these charities that have problems.
        Senator Shelby. Ms. Gardiner, is the IRS headed in the
    right direction, and can the Service execute the plan to
    improve the tax law enforcement without jeopardizing advances
    in taxpayer service? In other words, how do you balance that?
        Ms. Gardiner. I believe they are, because the areas in
    customer service where we find deficiencies rarely have
    anything to do with resources anymore. I would say several
    years ago that that was a problem. But now the phones are being
    answered, there are people available, the wait times are less
    than an hour. So there are people available to provide the
    customer service, so I would agree with the Commissioner's
    conclusion that keeping a steady resource level there is
    appropriate.
        On the flip side, with enforcement, clearly, the volume and
    complexity of returns is growing. Those resources have
    declined. I share the Commissioner's concern that the average
    American's perception has grown that you can cheat on your tax
    returns. That needs to be addressed, so I think it is the
    appropriate thing to increase enforcement.

                        RESOURCES FOR TAX ADMINISTRATION

        Senator Shelby. Mr. Commissioner, in recent testimony on
    Capitol Hill, you indicated that Congress has not provided you
    with the resources you need to meet your tax administration
    responsibilities. A review of your request by the subcommittee
    and independently confirmed by the General Accounting Office
    (GAO) shows that at least 98 percent, not all, but 98 percent,
    of the request has been funded. The GAO has estimated that even
    if this Subcommittee on Appropriations gives you every dime of
    your enforcement request, the IRS would have already spent at
    least one-third of any increase on unbudgeted expenses. Is this
    correct, or is the GAO wrong?
        Mr. Everson. The figure that we have overall is that--you
    know this. We are not the kind of agency that gets topped up in
    the appropriations process. If you look back over a 10-year
    period, the average shortfall to the President's request, that
    could be President Bush or President Clinton, is about 3
    percent. Now last year's shortfall was $250 million. Now that
    has got a bunch of things in it. It has got things that you do
    here in the subcommittee or the full committee, and then it has
    got the overall, end-of-the-day rescissions that go across-the-
    board.
        That gets compounded further by a gap. Seventy percent of
    our costs are in the pay area. So that if the administration
    proposes a civilian pay raise at one level and the Congress
    funds it more generously, then of course we do have an
    additional handicap.
        What I would suggest to you, Senator, is I very much want
    100 percent of the President's request. If we end up in a
    situation where there are issues like that I think it is
    reasonable for me to challenge my organization to find those
    levels.
        What happens is, if you work to absorb 1 percent or 2
    percent and then you get further whacked by another 2 percent
    or 3 percent, then it gets a lot harder to redress some of the
    problems you have got.
        Senator Shelby. To do your job.
        Mr. Everson. To do the job, yes, sir.

                       COMMITMENT TO ENFORCEMENT FUNDING

        Senator Shelby. Mr. Commissioner, would you commit to this
    Subcommittee on Appropriations that any enforcement resources
    that we allocate to you will be used for the purpose it was
    appropriated for? In other words, for the enforcement
    initiatives which you have been pushing?
        Mr. Everson. Yes, sir, I will. The only exception I would
    give you is that if this problem you just talked about was so
    severe that if I had to take cuts, I will take them. I commit
    to you that I will take them across-the-board. I would take
    them at the service side, infrastructure, and I might have to
    touch some of the enforcement base. But we will make this
    build, the new programs on enforcement, we will do.

                            DELINQUENT TAX INVENTORY

        Senator Shelby. Every year the IRS fails to collect
    billions in delinquent tax obligations. What headway will the
    IRS make in curbing the growing delinquent tax inventory that
    exists? Do you anticipate another large write-off of delinquent
    taxes as was the case last year?
        Mr. Everson. Collections are an important element of this
    enforcement build. The revenue officers that I mentioned, those
    are the folks that actually go out and work to collect the
    dollars owed. We will add many collection officers through
    this.
        The other thing you may be familiar with that is important
    to us, is pending legislation to get private collection
    agencies to do some of the work here. This is somewhat more
    controversial, but frankly, over 40 States have this, in terms
    of their own tax programs. We will run this with full
    protection of taxpayer rights.
        Senator Shelby. But collection agencies would help you
    collect money that is owed to the government.
        Mr. Everson. Absolutely, and what it will enable us to do,
    sir, is focus on the more complicated matters, the ones--there
    was a hearing up here not too long ago on monies owed by
    defense contractors that we are not fully getting after. This
    initiative will enable us to work on things like that, if we
    have relatively more simple matters being attended to by some
    of the private collection agencies.
        Senator Shelby. Ms. Gardiner, has your office, the Treasury
    Inspector General for Tax Administration, reviewed the efforts
    of the IRS to collect outstanding tax debts? Would you comment
    on the proposal to improve the collection case management?
        Ms. Gardiner. We actually did an audit some time ago of the
    original pilot for using outside contractors, and then we
    looked at what IRS was proposing in this newer effort and
    believe it is an appropriate effort. I would guess that if IRS
    is not going to get the money to collect it themselves then we
    do believe that using outside debt collection agencies is a
    good move.
        Our only concern there would be that IRS still would need a
    sufficient level of staffing themselves to provide proper
    oversight, because it would be a little tricky in terms of just
    monitoring the accounts that are turned over to the private
    collection agencies, ensuring that they do the work
    appropriately, protect taxpayers' rights, and those issues.

                             WORKFORCE REALIGNMENT

        Senator Shelby. Mr. Commissioner, you announced a
    realignment of your workforce in January. You also expect
    savings from a related initiative to close some facilities,
    such as the Brookhaven service center. How much do you expect
    to save from these cost-reduction efforts?
        Mr. Everson. Through a variety of programs, Senator, we
    would expect to save over $100 million on an annual basis. What
    these actions do is enable us to free up a couple thousand
    folks that would work on the enforcement side of the house. A
    lot of this is due to the tremendous success we have in
    electronic filing. As electronic filing increases--it was 53
    million last year, up again 12 percent so far this year--you
    obviously do not need as many people opening the mail and doing
    the data entry.
        At the same time what we are doing is consolidating some of
    our processing operations where after we realigned the Service
    around four lines of business, we did not fully realign all of
    the support efforts, which a business would have done. Some of
    this is consolidation of activities, administrative activities
    that businesses did 10 and 20 years ago. We are doing this
    because--I think, again, it goes back to our earlier dialogue--
    it is responsible that we be as efficient as possible.
        Senator Shelby. Ms. Gardiner, how likely are the
    anticipated savings the IRS is talking about to materialize?
        Ms. Gardiner. Some things are tied to you just working
    smarter, not harder. The National Research Program is an
    example of that. As IRS can devote its resources, the limited
    resources in a smarter way, then they really should have
    savings. Modernization should bring about savings too.
        For these particular efforts, we would have to look into
    them to see if the savings actually materialized.

                                TAX LAW ACCURACY

        Senator Shelby. The TIGTA testimony indicates that the
    telephone access rate for the IRS is steadily increasing. At
    the same time, the accuracy rate on tax law questions declined
    to 73 percent. Do you have a plan to bring that rate up? Does
    the telephone staff receive enough training? Are there specific
    questions that should not be answered by the telephone staff?
    How do you work all that?
        Mr. Everson. This comes back, Senator, to the conversation
    we had a little while ago about how we are continually trying
    to improve tax law accuracy both at the phones and also for the
    walk-in centers. It comes down to training. We did some things,
    as I mentioned, earlier this year that we believe in the long
    term will actually increase the accuracy rate, but because of
    training some people who had been working on the accounts side
    of it, and rewriting the scripts, there was a short-term
    degradation and the accuracy went down about 6 percent.
        Our figures are just a little bit different from TIGTA's,
    but they are basically consistent. They do show that decline. I
    think over time they will get better. We assess this on a
    weekly basis. We have real-time monitoring of conversations
    where supervisors are sitting in and listening randomly to the
    workers' calls. So we are continually trying to improve this.
        But again, work on the simplification; it will help us too.

                         BUSINESS SYSTEMS MODERNIZATION

        Senator Shelby. On the subject of modernization, the
    Congress has appropriated approximately $1.7 billion for the
    Business Systems Modernization (BSM) program. The IRS has
    requested an additional $285 million in this year's fiscal year
    2005 submission. This substantial investment is on top of
    almost $4 billion we provided and was lost by BSM's
    predecessor, TSM. The investment in TSM was a total loss. That
    was before your time, I have to say that to both of you. After
    serving a year as Commissioner of the IRS, what is your
    assessment on the progress of BSM at this time?
        Mr. Everson. This is a very important question. I
    established three themes, as I testified before the Finance
    Committee before my confirmation, and I continue to believe
    that they are the correct themes. They are to continue to
    improve service and implement the reorganization that former
    Commissioner Rossotti and his team did a splendid job on before
    I got here. They are to augment the enforcement efforts, as we
    have been discussing. But it is also to successfully execute
    the modernization of the IRS. That is fundamental to achieving
    the first two. We will not be able to continue to improve
    service and help taxpayers, we will not be able to enforce the
    law adequately, if we do not modernize the IRS. So it is
    terribly important.
        After I arrived, we commissioned a series of studies last
    summer to look at this basket of projects. I would say to you
    that, first of all, it is not all bad news. I give the Service
    a mixed grade here. There are many successes. It is true, some
    of them have cost more than they should have. As a taxpayer,
    you can check the status of your refund on the Internet, and
    you can file electronically. Practitioners now can get employer
    identification numbers. There is a whole suite of products
    where I would suggest to you the IRS has improved its services
    to the taxpayer--I would be hard-pressed to find another
    government agency that has made the dramatic leaps that we have
    made largely through technology. So that is a lot of good news.
        Where we have failed, though, is on these big ticket
    projects, like CADE that you discussed, that are at the core of
    our master files. Or also another one that you did not
    mention--
        Senator Shelby. We cannot afford to fail this time.
        Mr. Everson. We cannot afford to fail. The other one was
    the financial system we have been struggling to put in.
        These studies indicated three problems. The first was that
    the IRS business units did not have adequate ownership of the
    projects. They were running as independent technical solutions,
    so that the businesses were not involved in setting
    specifications or the testing and development schedules.
        The second observation was we were trying to do too much.
    GAO had said this, and as we studied this I concurred with all
    those observations.
        The third was that we were getting uneven performance from
    the vendor. We are working on each of these. We have got the
    business units much more involved. They are participating every
    step of the way. We have resized the portfolio, as you
    indicated. I am comfortable with this. It will provide more
    focus. I believe in the long run we will actually get more done
    because as we change our work processes and hold people
    accountable to get things done, I think we will actually move
    faster.
        We are working with the contractor. I meet with the
    president and chief operating officer of CSC--a big company,
    Computer Sciences Corporation runs the consortium--every month
    and we go over the deliverables. We will see. Later this summer
    we will have that long-delayed first step of CADE, which works
    on a section of the 1040EZ filers. The feedback I am getting is
    pretty optimistic at this stage. It is not done till it is
    done. And the same thing is true on the financial system. I
    will report back to you. We will know for sure what is
    happening here.
        Just to close I would say, we have held the contractor
    accountable in a way that I would say is fairly unusual in
    government. I sent a letter after they missed their last
    deadline and I said, look, for the next big piece of work we
    are going to do, which is a filing and payment compliance
    system, we are going to not automatically award that to this
    PRIME alliance. We are going to open it up to competition. That
    is a strong statement, very strong statement because it hurts
    them financially, and I think it got their attention.
        Senator Shelby. When do you expect BSM to be completed?
        Mr. Everson. I will have to get back to you on that. That
    is a big, complicated project.
        Senator Shelby. It is an important question.
        Mr. Everson. It is important. I think we will have a much
    better idea as we adjust our programs here. If we are
    successful with CADE, this first section of CADE, I will tell
    you that in about a year we will have a better capability of
    giving you a longer term projection.
        [The information follows:]

        The hallmark application of the Business Systems Modernization
    Program (BSM) is the Customer Account Data Engine (CADE), which is the
    application we are building to eventually replace the existing
    Individual Master File (IMF) and the Business Master File (BMF). CADE
    is now in service and handling its first filing season. Currently CADE
    is only handling a subset of Form 1040EZ filers, with the expectation
    that it will process approximately 1.9 million returns this calendar
    year. Our plans for CADE are now set for the next 2 years, with the
    expectation that CADE will handle 33 million returns in calendar year
    2007. It is not possible, however, for us to predict when CADE will be
    fully implemented, since timing is based on a variety of unknown
    factors, including BSM funding levels, insertion of new technology to
    improve development productivity on CADE, and policy decisions
    regarding the extent to which CADE will need to handle returns from
    prior years. As a point of comparison, former Commissioner Charles
    Rossotti stated that he expected BSM implementation to last 10 years.
    Progress anticipated in the first 4 years of the project, however, fell
    far short of our goals for reasons that we have publicly stated. In
    addition, we based that plan on extremely robust funding levels for
    fiscal year 2005 and fiscal year 2006. Because of steps we have taken
    to streamline and focus the work we are doing on BSM, we requested and
    received lower funding levels than Commissioner Rossotti anticipated
    when he provided his estimate.
        Additionally, given the size and complexity of the IRS's IT assets,
    modernization must be an ongoing endeavor. Modernization programs at
    the IRS have been difficult, mainly due to the fact that we did not
    have a program of continual modernization of its IT assets. This
    deficiency has led to a situation of increasingly antiquated software
    applications that are not well documented, are difficult to maintain
    and upgrade, and are difficult with which to interface. Given that the
    heart of our IT efforts is to increase the effectiveness and efficiency
    of tax administration, modernization will always be an ongoing activity
    at the IRS.

                 RESOURCES NECESSARY TO COMPLETE MODERNIZATION

        Senator Shelby. Ms. Gardiner, I want to ask you a few of
    these questions since you are the Inspector General. How much
    more is needed to complete this effort to modernize the IRS's
    outdated systems and processes? And how is the IRS's 2005
    budget request consistent with that vision?
        Ms. Gardiner. As far as what is needed, the estimates are
    that it would be $7 billion to complete the whole----
        Senator Shelby. Say it again.
        Ms. Gardiner. Seven billion dollars to complete the whole
    effort, and those are the estimates.
        Senator Shelby. How many years?
        Ms. Gardiner. A total of 15, and I believe that includes
    the 6 that have already passed.
        Senator Shelby. That is a continuous modernization.
        Ms. Gardiner. Correct. Even with that, I am not sure that
    you will ever get to a point where you will say, okay, we are
    all done and we do not have to spend--you know, there will be
    upgrades and changes as time goes on.
        Senator Shelby. You will have to continue to do that to
    keep up.
        Ms. Gardiner. But I agree with the Commissioner that
    getting CADE, the first release accomplished, that has to occur
    before you can make any projections on anything else.
        Senator Shelby. When do you think that will be?
        Ms. Gardiner. I think everybody is giving it about 60 to 70
    percent odds that the first part will be rolled out this year
    in August.
        Senator Shelby. What do you think? You said everybody.
        Mr. Everson. I am interested in this answer.
        Ms. Gardiner. Actually I could answer it for IFS. I am not
    as sure for CADE.
        Senator Shelby. Give me your best judgment.
        Ms. Gardiner. It does appear that the testing and
    everything is going well. Certainly, the contractor is on
    notice that they need to do this. I would say it is probably a
    very good bet that in August they will be----
        Senator Shelby. Who is the main contractor here?
        Ms. Gardiner. CSC is the one that is overseeing the whole
    effort.
        Senator Shelby. What about the total cost overruns so far
    on this project? Does that bother you, Ms. Gardiner? You are
    the Inspector General.
        Ms. Gardiner. It does. We have been making recommendations
    for the past 2 years that we think have all been incorporated
    in these recent studies too, which is good, that it has
    validated what we have said and I think that that is getting
    the attention of Treasury and IRS and others. Some of the cost
    overruns were changing requirements. These projects are hard
    projects. They are totally new, and they are huge and complex.
    It would be one thing if you were just starting today to say,
    okay, let us create a master file. But the problem is they have
    to interface and talk to the old system. That is the biggest
    piece----
        Senator Shelby. Plus, you are doing business every day as
    you are doing this.
        Ms. Gardiner. That is right.
        Mr. Everson. Let me just expand, if I could, for a second
    on that last remark. This tie back to the legacy systems is
    very difficult because the IRS did a lousy job over a period of
    decades of keeping documentation of all the multitude of
    changes it made to the systems each year when the tax code
    would change. So when people have done the work, they developed
    a road map, but then all of a sudden when they get into doing
    the work they find it is much, much more complicated than they
    had contemplated. That, together with governance issues, too
    many changes in overall requirements, they all contributed to a
    very bad cocktail, I would suggest.

                               BSM COST OVERRUNS

        Senator Shelby. How much money are we talking about in
    overruns, hundreds of millions of dollars?
        Ms. Gardiner. I would have to get back to you on that. We
    do know that information and we keep track of it.
        [The information follows:]

        Through BSM spend plans, the IRS requests funding for program level
    activities (e.g. MITRE Corporation assistance, PRIME Program Management
    Office, etc.) and modernization projects (e.g. Infrastructure Shared
    Services (ISS), Customer Account Data Engine (CADE), etc.). As of
    February 2002, we determined that 20 BSM projects had experienced costs
    increases of approximately $75 million.\1\
    ---------------------------------------------------------------------------
        \1\ Analysis of Business Systems Modernization Cost, Schedule, and
    Functionality Performance (Reference Number 2003-20-007, dated October
    2003).
    ---------------------------------------------------------------------------
        At the time of our analysis, the majority of the projects were in
    the planning phases. IRS officials responded that the reliability of
    costs estimates for the development and deployment phases would be much
    greater than that for the planning phases. This belief has not proven
    to be true. Most projects have now moved into the development and
    deployment phases and cost increases have risen, partially due to the
    fact that projects require more funds during the development and
    deployments phases.
        The GAO testified in February 2004 that the IRS had experienced
    cost variances of approximately $290 million for 10 completed or
    ongoing projects.\2\ The chart below is reprinted from the most recent
    data available (GAO testimony).
    ---------------------------------------------------------------------------
        \2\ Business Systems Modernization: Internal Revenue Service Needs
    to Further Strengthen Program Management (GAO-04-438T, dated February
    2004).

    ------------------------------------------------------------------------
                                                                 Reported/
                                               Cost Variance      Revised
                  Project Name                (In Thousands)  Estimated Cost
                                                              (In Thousands)
    ------------------------------------------------------------------------
    Completed Projects:
        Security and Technology                      +$7,553         $41,287
         Infrastructure Release 1...........
        Customer Communications 2001........          +5,310          46,420
        Customer Relationship Management              -1,938           7,375
         Exam...............................
        Human Resources Connect Release 1...            +200          10,200
        Internet Refund/Fact Of Filing......         +12,923          26,432
    Ongoing Projects (as of 09/30/2003):
        Modernized e-File...................         +17,057          46,303
        e-Services..........................         +86,236         130,281
        CADE Release 1......................         +36,760          97,905
        Integrated Financial System Release          +53,916         153,786
         1..................................
        Custodial Accounting Project Release         +72,058         119,219
         1..................................
                                             -------------------------------
          TOTAL.............................        +290,075  ..............
    ------------------------------------------------------------------------

        Senator Shelby. Mr. Commissioner, we hold the American
    taxpayers to a high standard: file your return by April 15 or
    face stiff penalties and interest payments. Why should we not
    hold the IRS acquisition process and the Service's contractor
    to a similar standard and enforce penalties when deadlines are
    missed and costs are increased? Ms. Gardiner, what steps have
    been taken or would you recommend that the IRS take to improve
    acquisition and management and discipline?
        Ms. Gardiner. We actually have suggested that
    disincentives, or penalties so to speak, are built into
    contracts and that has not been looked on that favorably by the
    Service.
        Senator Shelby. Who has not looked on it favorably? I know
    the contractors never look on it favorably.
        Ms. Gardiner. IRS as well. The folks that do the
    contracting have not really accepted those types of
    recommendations. They have accepted another, and that is that
    we have recommended early on that IRS use firm fixed-price
    contracts as often as possible. When we looked at it in the
    first year they were used very infrequently, and now they are
    using them more. So that puts the burden on the contractor and
    we think that certainly is a step in the right direction.
        Mr. Everson. If I could, the other thing I would note on
    this is--after the contractor missed this deadline on the
    financial system, I did take that action of saying, we will
    open this up to competition for the next enforcement module.
    That is a very strong action because they contemplated, they
    had built their----
        Senator Shelby. That is a strong message.
        Mr. Everson. They built their business on a projection of
    how much work they were going to get over a period of years,
    and I just said, wait a minute, you have just potentially lost
    this piece of work. They can compete for it, but it is very
    different. I have run businesses, and when you have a 100
    percent account, that is different than running an account
    where there are other players in there. So that is a strong
    statement.
        I have also communicated that these upcoming deliverables
    for CADE and IFS are critical to the maintenance of our
    continued relationship. So I think the stakes are very clear at
    this point.

                                 BSM MANAGEMENT

        Senator Shelby. Good. Mr. Commissioner, what is the IRS's
    plan and schedule for fully implementing and institutionalizing
    all management processes and controls needed to effectively
    manage the BSM program? I know that is a big job.
        Mr. Everson. This goes back to the point a few minutes ago
    of first and foremost getting an overall business sensitivity
    to this project. After I arrived at the Service I created a
    second deputy. It follows a model that we put in over at
    Homeland where we consolidated all of the support functions,
    CFO, CIO, human resources, in our case, mission assurance,
    which is security. We have cyber-security and physical
    security, people security, all of that, plus facilities
    management under one individual. He was our senior career
    official--came out of the business units--so that we would get
    proper attention to the long-term needs of the Service in our
    functions including the CIO function. I appointed our CFO,
    moved him over to be the CIO, to shake this up and to make sure
    that we are addressing this on a long-term basis.
        I would suggest to you that--you mentioned earlier the $4
    billion that had been squandered in the early 1990s. One of the
    reactions to that was the way this BSM project was done,
    perhaps too much was actually given to the PRIME alliance. We
    are taking a careful look at where we need to augment our own
    skills. It comes back to what Ms. Gardiner was saying before,
    it does not do us any good to just have contractors if you do
    not have enough people inside who are monitoring and working
    and understanding. So we are looking at that as well.
        Senator Shelby. Ms. Gardiner, do you view BSM's current
    problems as resource related, management related, or both?
        Ms. Gardiner. One of the big, broad issues was just
    matching the capability in-house with the portfolio of
    projects. That would be somewhat resource related because they
    tried to take on more than they really could. But I would say
    probably the bigger part is management. Things like, if your
    process says that you are going to clearly define requirements
    and you are going to follow certain steps before you go to the
    next stage of the project, that you have to stick with that,
    and that has been a problem. Or for testing, in order to move
    the project on to the next stage the same thing applies, that
    you have to test and make sure that defects are identified and
    fixed, and they really have had some problems with that. But
    they do recognize those problems and are addressing them.
        Senator Shelby. As far as modernization is concerned, we
    both noted that $4 billion was lost, squandered or misused.
    Could you assure this subcommittee that your current refocus
    can put the program back on track so it will not go the way of
    TSM? That is important. In other words, we do not want it to go
    the way of TSM. TSM money was squandered or wasted, and it was
    $4 billion.
        Mr. Everson. Senator, I can tell you that this is getting a
    lot of my attention. I am doing my level best to make sure it
    is being done responsibly, and we will reach a very real
    decision point. If this first piece of CADE and the financial
    system do not roll out correctly now, I will have to very
    seriously reassess it because we would run the risk of going
    down that corridor. I do not expect that will be the case, but
    we are not home free until we make sure we get that far. I give
    you my commitment that this will not leave my attention.

                          CUSTOMER ACCOUNT DATA ENGINE

        Senator Shelby. The Customer Account Data Engine (CADE), is
    the first major component of BSM and will replace the IRS's
    Master Files with a modern database management system. That is
    the goal. It will serve as the foundation for the rest of the
    BSM initiative. Thus far, the delivery of the first of CADE's
    five phases--I believe there are five phases--has already been
    delayed by at least 3 years. I think it has gotten off to a
    poor start. When will CADE be delivered, if you can say within
    some time frame? The first phase?
        Mr. Everson. It is our expectation that this first phase
    will be delivered this summer. So far the testing is proceeding
    according to plan.
        Senator Shelby. How much will CADE cost over the original
    estimate?
        Mr. Everson. I would want to respond for the record. It is
    many tens of millions of dollars. There are functions of
    complexity, also delay that have contributed to that problem.
        Senator Shelby. Do you have a figure on that, Ms. Gardiner?
        Ms. Gardiner. No.
        Senator Shelby. Can you give us a figure for the record?
        Mr. Everson. We will certainly do that. Let me say this
    though, we have just recently negotiated a cap on what this
    first module will cost, and that is responsive to what Ms.
    Gardiner was saying a few minutes ago about a change in
    philosophy in the last months that we have brought in, and we
    have worked very well with the vendor to do that. So that
    protects the Government's interest a lot more.
        [The information follows:]

        While we do not have current cost figures from the Automated
    Financial System (AFS) for the CADE, the following chart represents the
    funding that has been requested and received for the CADE project (all
    releases).

    ------------------------------------------------------------------------
                                                  Amount          Amount
                 BSM Spend Plan                  Requested       Received
    ------------------------------------------------------------------------
    Spend Plan #1...........................      $3,500,322      $3,500,322
    Emergency Funding Release #1............       1,616,000       1,616,000
    Spend Plan #2...........................      15,312,000      15,312,000
    Emergency Funding Release #2............       1,400,000       1,400,000
    Spend Plan #3...........................  ..............  ..............
    Spend Plan #4...........................      40,038,000      40,038,000
    Spend Plan #5...........................      53,974,000      53,974,000
    Spend Plan #6...........................      27,683,000      27,683,000
    Spend Plan #7...........................      62,800,000      62,800,000
                                             -------------------------------
          TOTAL.............................  \1\ 206,323,32  \1\ 206,323,32
                                                           2               2
    ------------------------------------------------------------------------
    \1\ This amount includes $15,574,000 that was requested in spend plan 5,
      but never spent on the CADE.

        As shown in the response to Question 1, the CADE Release 1 has
    experienced a $36,760,000 cost variance.
        Future releases of the CADE have also experienced cost variances of
    $25,723,000. Please see the table below.

    ----------------------------------------------------------------------------------------------------------------
                                                                                          Current
                                                                          Amount       Estimate (As
                           Release or Activity                          Originally     of September      Variance
                                                                         Requested         2003)
    ----------------------------------------------------------------------------------------------------------------
    Release 2.......................................................     $38,400,000     $44,755,000      $6,355,000
    Business Rules Management (Phase 1).............................  ..............       8,300,000       8,300,000
    Business Rules Management (Phase 2).............................      17,000,000      17,000,000  ..............
    Release 3.......................................................       9,779,000      20,837,000      11,058,000
                                                                     -----------------------------------------------
          TOTAL.....................................................  ..............  ..............      25,713,000
    ----------------------------------------------------------------------------------------------------------------

        According to the CADE Baseline Business Case from March 2001, the
    overall estimated cost of CADE is $982 million over its life cycle.
                 CADE Cost Overrun (From the Original Estimate)
        The description below explains the costs that GAO reported in their
    Audit of the fiscal year 2004 Expenditure Plan:
        (1) Design work from September 2000 to July 2001:
      --$15.3 million.--Initial estimate in March 2000 Expenditure Plan;
      --$19.3 million.--Actual cost;
      --$4.0 million.--Variance due to design period being extended by 3
            months to add detail in some areas and to bridge to
            Development.
        (2) Development work from July 2001 to March 2004:
      --$40.0 million.--Initial estimate in March 2001 Expenditure Plan;
      --$53.6 million.--Actual cost;
      --$13.6 million.--A 2-month extension for a pilot using real tax
            returns (cost of $5.3 million) and the addition of capacity at
            the Martinsburg Computing Center to support Development and
            Testing (cost of $4.0 million) created $9.3 million of this
            variance. We incurred the cost of the delays outlined below,
            creating the remaining variance of $4.3 million.
        (3) Cost impact of 2-year delay in delivering CADE:
      --$2.4 million.--Hiring of non-PRIME contractors to support our IRS
            testing;
      --$1.9 million.--Establishing a CADE Program Office (work to build an
            organizational framework to support multiple CADE releases
            simultaneously);
      --$18.0 million.--Cost to apply tax law and other changes for 2003
            and 2004 filing season.
        These costs do not reflect any changes since the GAO audit of the
    fiscal year 2004 Expenditure Plan.

                       IRS ACTIONS IN REGARD TO THE PRIME

        Senator Shelby. Let me ask you a tough question. What steps
    will the IRS take, Mr. Commissioner, if the PRIME contractor
    fails to deliver?
        Mr. Everson. I have made it very clear through the action
    to date----
        Senator Shelby. You are on top of them.
        Mr. Everson [continuing]. That we will hold them
    accountable. And I have also said that we will have to reassess
    the very continuance of the relationship if we cannot do what
    we have said we will do.
        Senator Shelby. You would change that if the effort
    continues to flounder?
        Mr. Everson. We will have to consider that, absolutely.
        Senator Shelby. Would you change if you thought you needed
    to?
        Mr. Everson. I retain that latitude, yes.
        Senator Shelby. What is your view, Ms. Gardiner, for the
    slowness of this program?
        Ms. Gardiner. I think some of it, as I mentioned, it
    certainly is complex. It is unique.
        Senator Shelby. It is complex.
        Ms. Gardiner. But I do think a big part of it too is just
    the whole cost and scheduling process was flawed. It gave much
    more optimistic deadlines than it should have in the first
    place, so it caused people's expectations to be higher than
    they should have been.
        For example, even just in simple segments of it for
    testing, they were so optimistic and they did not build in time
    for recovery in terms of if certain defects occurred, or there
    were failures, to fix those and then to start over again. So to
    some degree it is that, and then the rest is that it is very
    complex, and then also changing requirements. So I think
    everybody is disappointed, and we are too, as far as how long
    it is taking.
        Senator Shelby. But your modernization program is
    essential.
        Mr. Everson. We cannot back away from this effort. We have
    to do it. We have got aging technology right now and we have
    got an aging workforce. I liken this, as I have said before, to
    the movie ``Space Cowboys'', if you ever saw that, where they
    send Clint Eastwood out into outer space because they have got
    these old guys who are the only ones who understand the
    technology. We have a bunch of people who want to retire, but
    they are still helping us because we have got 1960s and 1970s
    technology that we are running. We cannot keep doing that
    forever.

                         PERFORMANCE OF THE CONTRACTOR

        Senator Shelby. Do you believe that the contractor is up to
    the challenge here? This is a very complex undertaking, but it
    has to be done. You are spending a lot of money here to
    modernize the IRS, which we think is important.
        Mr. Everson. I feel that I have seen an improvement in the
    attitude and the work that is being done in the year that I
    have been involved with the Service, and I very much appreciate
    the leadership of Mike Laphen, is the president of the company.
    He has been in my office once a month. That is quite a devotion
    of resources for someone who is running, I think it is a $13
    billion business. We have got a relationship that I believe is
    starting to improve. We had to let it all out, if you will.
    There had to be this accountability of what most recently
    happened. So I am cautiously optimistic that they can do this.
        Senator Shelby. But you are also guarded because you know
    what happened to $4 billion with TSM.
        Mr. Everson. This is the old Ronald Reagan, ``trust but
    verify'', attitude.
        Senator Shelby. We hope you will, and we wish you every
    success, and we will continue to help you.
        Mr. Everson. Thank you, sir.

                         ADDITIONAL PREPARED STATEMENT

        Senator Shelby. The subcommittee has received a statement
    from the Internal Revenue Service Oversight Board which will be
    included in the record.
        [The statement follows:]

       Prepared Statement of the Internal Revenue Service Oversight Board

                                  INTRODUCTION

        The IRS Oversight Board thanks the Chairman for the opportunity to
    submit this statement to the Subcommittee on Transportation/Treasury
    and General Government of the Committee on Appropriations. The Internal
    Revenue Service (IRS) Oversight Board is required by 26 U.S.C. Section
    7802(d) to review and approve the budget request prepared by the IRS,
    submit a request to Treasury, and ensure that the approved budget
    supports the annual and long-range strategic plans of the IRS.
        This year, the IRS drafted a special report presenting its
    recommended fiscal year 2005 IRS budget, comparing it to the
    administration's request, and explaining why the Board believes its
    recommended budget is needed to support the annual and long-term needs
    of the IRS. This statement discusses that report. The complete version
    is available on the Board's website at www.irsoversightboard.treas.gov
    and the Board asks that this report be entered into the record as well.

                 THE IRS OVERSIGHT BOARD BUDGET RECOMMENDATION

        The IRS budget is more than dollars and cents. It represents the
    choices that we as a Nation make about the future of our tax
    administration system and how we help over 100 million American
    taxpayers deal with an increasingly complex tax code while ensuring
    that everyone pays his or her fair share of taxes.
        The IRS Oversight Board acknowledges that the IRS's budget has
    increased in each year of President Bush's Administration, and that the
    administration's request for fiscal year 2005 is significant against
    other non-defense, non-homeland security discretionary funding. That
    commitment is commendable, and the Board recognizes and thanks
    Secretary Snow for his efforts, especially at a time when the Nation
    must balance many important and competing priorities.
        However, the Board believes that now is a critical time for our tax
    system to be strengthened, not merely maintained at current levels.
    Enforcement activities are still at unacceptable levels. Our Nation's
    tax gap is estimated at $311 billion,\1\ leaving billions of dollars on
    the table simply because the IRS does not have the resources to do its
    job.\2\
    ---------------------------------------------------------------------------
        \1\ Nina Olson, National Taxpayer Advocate's 2003 Annual Report to
    Congress, (Washington, DC: December 31, 2003) p. 20-21. This is based
    on a July 2001 IRS Office of Research report.
        \2\ Charles O. Rossotti, Report to the IRS Oversight Board:
    Assessment of the IRS and the Tax System (Washington, DC: September
    2002), p. 16.
    ---------------------------------------------------------------------------
        The Board's own research shows that each year, more Americans
    believe it is acceptable to cheat on their taxes. At the same time, our
    already complex tax code continues to be a changing, tangled mystery to
    most honest taxpayers--and an asset to those intent on skirting the
    law. Every effort must be made to provide quality service to honest
    taxpayers who want to comply with the law.
        In crafting its fiscal year 2005 budget for the IRS, the Board
    addressed these concerns head on by reinvesting in the IRS to produce
    tangible benefits and results for America's taxpayers and our Nation.
    It is a sensible and pragmatic budget that reflects the real world in
    which the IRS must operate and be funded.
        The Board recommends a 10 percent increase in funding from fiscal
    year 2004 to $11.204 billion, with a significant increase of 3,315
    full-time equivalents (FTEs) to boost enforcement efforts. If enacted,
    the Board's budget would increase our Nation's revenue by approximately
    $5 billion each year once the IRS has hired and trained additional
    enforcement personnel.\3\
    ---------------------------------------------------------------------------
        \3\ These estimates are based upon the projected revenue
    anticipated by hiring and training full-time employees who would audit
    or collect owed taxes in known cases of taxpayers who did not file or
    pay, or who substantially underreported their taxes, as described in
    former IRS Commissioner Charles O. Rossotti's Report to the IRS
    Oversight Board: Assessment of the IRS and the Tax System, p. 16.
    ---------------------------------------------------------------------------
        Under the Board's budget, the IRS would have the additional
    resources to:
      --Close over an additional 1,000 cases involving high risk/high-
            income taxpayers and promoters who avoid paying income taxes by
            using offshore credit cards and abusive trusts and shelters.
      --Boost audit rates by 42 percent from fiscal year 2004 to examine
            companies that use aggressive tax avoidance tactics, such as
            offshore transactions and flow-through entities.
      --Contact an additional 200,000 taxpayers who fail to file or pay
            taxes due; a 40 percent boost from fiscal year 2004 and a 27
            percent increase from the administration's request. This alone
            will allow the IRS to collect $84 million more in revenue owed
            than the administration's request would allow.
      --Sustain the one-on-one assistance that millions of Americans rely
            on at tax time. The Board's budget will ensure that the IRS
            will be able to maintain its improved service to taxpayers by
            answering eight out of ten phone calls.

                  IRS MUST STAY THE COURSE ON CUSTOMER SERVICE

        Mr. Chairman, the vast majority of Americans want to file their
    returns and pay their fair share, yet our Nation's tax code continues
    to become more complex. Resources must be available so the IRS can
    answer taxpayers' questions and promptly and accurately, whether it is
    over the phone, through the IRS website, by mail, or at walk-in center.
        Under the board's proposed budget, customer service funding will
    remain at about the same level as fiscal year 2004; however, service
    should improve due to the deployment of self-service technology.
        For taxpayers, that means eight out of ten phone calls will be
    answered. For tax practitioners calling the IRS toll-free hotline to
    resolve problems regarding clients' accounts, hold-time will remain at
    current levels.
        The IRS call-routing systems as well as website applications that
    allow taxpayers to check the status of their tax refunds have already
    shown dramatic benefits in speeding service to taxpayers. New systems,
    such as e-Services, will soon be available, providing additional
    automated services to tax practitioners.
        Clearly, service to taxpayers has improved in the past 5 years.
    Such improvements make it all the more imperative that we sustain them
    and not allow this positive trend to languish, or worse, decline. The
    agency must stay the course.

                DAYS OF ``OUTMANNED AND OUTGUNNED'' IRS MUST END

        The IRS is doing a better job of identifying egregious
    noncompliance--now it needs the resources to fight back. In the past 2
    years, the IRS sharpened its compliance focus to identify and pursue
    promoters and participants of abusive tax shelters and tax evasion
    schemes. For example, the agency is now targeting its resources on
    promoters of illegal tax schemes that are often marketed to high-income
    individuals, but are also finding their way to middle-market
    businesses.
        Despite this focus, enforcement activities are still at an
    unacceptable level simply because the IRS does not have the resources
    needed to accomplish its mission. It continues to be outmanned and
    outgunned. In fiscal year 2003, the agency was able to pursue only 18
    percent of known cases of abusive devices designed to hide income,
    leaving an estimated $447 million uncollected.\4\
    ---------------------------------------------------------------------------
        \4\ Rossotti, p. 16.
    ---------------------------------------------------------------------------
                         TAX CHEATING: ALARMING TRENDS

        Public attitudes towards tax cheating show some alarming trends,
    particularly among young Americans. The Board's 2003 Survey on Taxpayer
    Attitudes found that support for total tax compliance diminished by
    four points over the previous year to 81 percent. In other words,
    nearly one out of five Americans now believe that it is acceptable to
    cheat at least a little on their taxes. Almost one-third (30 percent)
    of young adults age 18-24 age are among those most likely to feel that
    any amount of cheating is acceptable, an increase of six points since
    last year. Yet ironically, ``fear of being audited'' has the greatest
    impact on these non-compliers at a time when actually being audited is
    near historic lows.\5\
    ---------------------------------------------------------------------------
        \5\ Roper ASW, 2003 IRS Oversight Board Annual Survey on Taxpayer
    Attitudes, September 2003, p.17.

        The IRS must prove to the public that it can and will identify and
    pursue those who show contempt for the tax code. The Board's proposed
    budget allows the IRS to begin to reverse this disturbing trend.
        The Board's recommendation would increase our Nation's revenue by
    almost $5 billion each year once the IRS has hired and trained
    additional enforcement personnel. The Board believes the additional
    revenue achieved makes a strong business case for the recommended
    additional enforcement resources. While this is a modest boost in
    closing our compliance gap, it will also send a message to those
    contemplating tax avoidance: the IRS's hands are no longer tied.

                  MODERNIZATION CRITICAL TO TAX ADMINISTRATION

        In December 2003, the Oversight Board released an independent
    analysis of the IRS Business Systems Modernization (BSM) program. The
    Board called for nine specific recommendations for turning around the
    critical but troubled program that has experienced significant and
    unacceptable delays and cost overruns.
        However, the Board still believes that the overall Modernization
    plan is sound and well-designed. Moreover, it is critical to the future
    of tax administration. As a Nation, we must remain committed to the
    IRS's computer modernization program. The Board testified before the
    House Ways & Means Subcommittee on Oversight on Feb 12, 2004:

        ``The IRS Oversight Board firmly believes that the IRS
    Modernization program cannot be allowed to fail. The IRS cannot
    continue to operate with the outmoded and inefficient systems and
    processes it uses today. Over time, the existing systems will become
    impossible to maintain and at that point, the ability to administer our
    country's tax system will be in grave danger. Such a risk to our nation
    is unacceptable. We remain convinced that the overall Modernization
    plan is sound and well-designed. The challenge is executing that plan.
    The IRS and the Prime must get it right this time.''\6\
    ---------------------------------------------------------------------------
        \6\ Larry R. Levitan, IRS Oversight Board Testimony before House
    Ways and Means Oversight Subcommittee Hearing on IRS BSM Program,
    February 10, 2004.

        The Board's proposed budget provides the stable resources needed to
    focus and stabilize the steady stream of funding for the IRS's computer
    modernization initiative. Special controls are in place to ensure that
    no funding in this account is spent until the IRS has the capability to
    spend it effectively. If the IRS does not correct the weaknesses in the
    BSM program by fiscal year 2005, the Board advocates that the funds
    earmarked for modernization should not be spent. However, the Board
    does not believe the IRS should plan for failure. The agency must be
    poised to move forward with BSM once it has demonstrated that it has
    corrected the program's weaknesses. The funding level recommended by
    the Board sets the foundation for genuine progress for the program in
    fiscal year 2005.
        The Board expects that the Customer Account Data Engine (CADE)
    Release 1 will occur in 2004. Over the next year, the IRS will test and
    build upon that system. The IRS should continue to strengthen its
    ability to manage the program and the Prime to deliver projects on
    budget and on time. By the end of fiscal year 2005 and early fiscal
    year 2006, the IRS should be able to proceed with the remaining
    releases of CADE as quickly as possible. This will minimize future risk
    and the long-term cost of modernization while providing a basis to
    deliver tangible results for taxpayers.
        If the IRS's fiscal year 2005 BSM funding is reduced to $285
    million, as it is in the administration's budget, future funding likely
    will be adversely affected. If that happens, the projects will drag on,
    risk will increase, and ultimately, the program will cost taxpayers
    much more.
        For that reason, the Board believes fiscal year 2005 BSM funding
    should be set at $400 million, with only $285 million put into the
    fiscal year 2005 spend plan. This will allow the IRS's Business Systems
    Modernization fund to operate like a multi-year fund, as originally
    envisioned by Congress and as the Board has recommended each year since
    its inception.
        Further, as its archaic, tape-based computers begin to give way to
    modern business systems, the IRS must plan for a smooth transition. The
    Board's budget recognizes that need. As new systems are incorporated,
    the IRS must plan to operate both the old and new systems in parallel
    for some time. The IRS must also retain employees with critical skills
    while training existing and new employees to use new systems. This will
    allow the IRS to reduce the risk of a catastrophic disruption to the
    system.
        In addition, the Board believes that the transition to
    modernization is a real cost that must be incurred. There are no short
    cuts to successful modernization--the IRS's budget must reflect the
    real cost of maintaining legacy systems while simultaneously supporting
    modernized systems. Accordingly, the Board recommends an additional $25
    million to cover these costs. The administration's budget fails to
    acknowledge them.

              THE ADMINISTRATION'S FISCAL YEAR 2005 BUDGET REQUEST

        By comparison, the Board believes the administration's fiscal year
    2005 budget cannot achieve its stated goal to add almost 2,000
    personnel to bolster the IRS's enforcement efforts, and will threaten
    hard-earned improvements in customer service. This year's request will
    lead to a $230 million shortfall in the IRS budget because it fails to
    budget adequately for the anticipated $130 million of congressionally-
    mandated civilian pay raises, rent increases, and at least $100 million
    of unfunded expenses.
        In its fiscal year 2005 budget recommendation, the Board
    anticipates a 3.5 percent pay raise for civilian employees, which
    achieves parity with the administration's call for a 3.5 percent
    military pay raise. The administration, but contrast, calls for a 1.5
    percent civilian pay raise. While discussions are now underway in
    Congress regarding parity, the Board believes that the 1.5 percent
    civilian pay increase fails to recognize recent history.
        In fact, fiscal year 2005 is the fourth year in a row in which the
    administration has called for IRS staff increases, while not covering
    pay raises or required expenses.
        As a result, the administration's proposed increase in the IRS's
    fiscal year 2005 budget will erode before new employees can be hired,
    more taxpayer phone calls can be answered, or new audits of possible
    tax cheats can be conducted.

                          IMPACT OF $230 MILLION BUDGET SHORTFALL ON THREE MAJOR IRS FUNCTIONS
    ----------------------------------------------------------------------------------------------------------------
                                                                                        Fiscal Year
                                                                                           2005        Revised Goal
                       Function                            Performance Measure          Performance     After $230
                                                                                           Goal         Million Cut
    ----------------------------------------------------------------------------------------------------------------
    Field Collection..............................  Number of tax deliquent account          981,000         463,000
                                                     cases resolved.
    Toll-free Telephone Level of  Service.........  Calls answered..................      32,000,000      17,000,000
    Field Exam....................................  Exams of individual taxpayers            118,840          73,000
                                                     <$100,000 AGI.
    ----------------------------------------------------------------------------------------------------------------

                   BOARD CITES COMPLEXITY AS FUNDAMENTAL FLAW

        The IRS Oversight Board is precluded by law from addressing tax
    policy issues, but it would be remiss not to address the cost of our
    Nation's complex tax system; a cost ultimately borne by taxpayers and
    the IRS. The administration's legislative proposals contained in its
    budget request only begin to address the problems caused by complexity.
    The approach so far to tax simplification fails to address a
    fundamental flaw in our tax system: its costly, confusing, and
    debilitating complexity. The administration has, however, requested
    that Congress provide some relief in fiscal year 2005 on the
    Alternative Minimum Tax, but has not yet identified a long-term
    solution.\7\ In her annual report, IRS National Taxpayer Advocate Nina
    Olson recommended repeal of the AMT, saying:
    ---------------------------------------------------------------------------
        \7\ Recent public remarks by Treasury Secretary Bodman noted that
    the President's budget extends through 2005 the temporary increase in
    the AMT exemption and the provision that allows certain personal
    credits to offset the AMT. These temporary provisions will keep the
    number of taxpayers affected by the AMT from rising significantly in
    the near-term. More importantly, they will allow the Treasury
    Department the time necessary to develop a comprehensive set of
    proposals to deal with the AMT in the long-term. Treasury Press Release
    JS-1250 contains the full statement of his remarks.

        ``The AMT is extremely and unnecessarily complex and results in
    inconsistent and unintended impact on taxpayers . . . [T]he AMT is bad
    policy, and its repeal would simplify the Internal Revenue Code,
    provide more uniform treatment for all taxpayers, and eliminate the
    oddity of dual tax systems. AMT repeal would also allow the IRS to
    realign compliance resources to facilitate more efficient overall
    administration of the tax code.'' \8\
    ---------------------------------------------------------------------------
        \8\ Olson, p. 16.

        The Board fully concurs with her assessment, and urges the
    administration and Congress to consider accepting this recommendation
    in future legislation.

                                   CONCLUSION

        The Board was established to bring to bear its collective expertise
    and familiarity with private sector best practices on the IRS's
    problems. To the private-life Board members, investments in enforcement
    pay for themselves many times over, not only in revenue dollars but by
    the deterrence value of reinforcing the belief that all taxpayers are
    paying their fair share. A strong business case can be made for
    providing the IRS with several hundred million dollars so it can
    collect billions in revenue. At a time when Federal revenue as a
    percentage of the economy has shrunk to 1950s levels and we face a $500
    billion deficit, the Board believes it imperative that we strengthen
    our tax collection system.
        For that reason, the Board recommends that both Congress and the
    administration reevaluate their methodology by including the revenue
    value to the country when estimating budget requests for the IRS.
    Indeed, considering the positive impact of additional resources
    provides a better framework for making informed decisions and will lead
    to a more effective IRS.
        In conclusion, the Board calls for Congress to stay the course it
    set more than 5 years ago with the passage of the IRS Restructuring and
    Reform Act. The IRS has made progress in carrying out the spirit and
    letter of the Act; we must now give it the resources to finish the job.
                                     ______

        Attachment 1.--IRS Oversight Board Fiscal Year 2005 IRS Budget
     Recommendation and Administration Request: Program Summary Comparison

                             ADMINISTRATION FISCAL YEAR 2005 BUDGET REQUEST PROGRAM SUMMARY
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                                                 Increase
                                                        Fiscal Year     Fiscal Year  -------------------------------
                   Appropriation Title                 2004 Enacted       2005 OB       Enacted vs.
                                                                          Request         Request         Percent
    ----------------------------------------------------------------------------------------------------------------
    Processing, Administration and Management.......          $4,009          $4,148            $139             3.5
    Tax Law Enforcement.............................           4,171           4,564             393             9.4
    Information Systems.............................           1,582           1,642              60             3.8
    Business Systems Modernization..................             388             285            -103           -26.5
    Health Insurance Tax Credit Administration......              35              35  ..............  ..............
                                                     ---------------------------------------------------------------
          Appropriation.............................          10,185          10,674             490             4.8
    ----------------------------------------------------------------------------------------------------------------

                           IRS OVERSIGHT BOARD FISCAL YEAR 2005 BUDGET REQUEST PROGRAM SUMMARY
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                                                 Increase
                                                        Fiscal Year     Fiscal Year  -------------------------------
                   Appropriation Title                 2004 Enacted       2005 OB       Enacted vs.
                                                                          Request         Request         Percent
    ----------------------------------------------------------------------------------------------------------------
    Processing, Administration and Management.......          $4,009          $4,291            $282             7.0
    Tax Law Enforcement.............................           4,171           4,770             598            14.3
    Information Systems.............................           1,582           1,708             126             8.0
    Business Systems Modernization..................             388             400              12             3.1
    Health Insurance Tax Credit Administration......              35              35  ..............             0.3
                                                     ---------------------------------------------------------------
          Appropriation.............................          10,185          11,204           1,019            10.0
    ----------------------------------------------------------------------------------------------------------------

            Attachment 2.--Unfunded IRS Costs, Fiscal Year 2002-2003

                    UNFUNDED IRS COSTS, FISCAL YEAR 2002-2004
                         [Dollars in millions, rounded]
    ------------------------------------------------------------------------
                                             Fiscal      Fiscal      Fiscal
                    Detail                  Year 2002   Year 2003  Year 2004
    ------------------------------------------------------------------------
    Labor Inflation:
        Unfunded Pay Raise Increase             $42.3      $128
         (President's Request to
         Congressional Action)...........
                                          ==================================
                                                 42.3       128
    Non-Labor Inflation:
        Rent Shortfall...................        32          54
        Postage..........................        16          53
        Corporate & Electronic Contracts.  ..........        23
        Health Service Contract..........         3           2
        Interpreter's Contract...........         0.5         0.3
        Child Care Subsidy...............         1    ..........
        Increased Department of Labor             2    ..........
         EFAST Contract Processing Costs.
                                          ----------------------------------
          TOTAL..........................        55         132
                                          ==================================
    Added Requirements:
        Background Investigations........  ..........         4
        Increase Cash Awards from 1.24            8          16
         percent to 1.42 percent.........
        Competitive Sourcing.............  ..........         8
        Campus Security Response.........        15    ..........
        Congressional Mandates...........         5    ..........
        Guard Services...................        20          16
        Public Transportation Subsidy....         9    ..........
                                          ----------------------------------
          TOTAL..........................        56          44
                                          ==================================
          Total..........................       153         304
                                          ----------------------------------
          Total Less Pay Raise and Rent..        79         122
    ------------------------------------------------------------------------

                                  Attachment 3

                                 WHERE THE ADDITIONAL ENFORCEMENT RESOURCES ARE APPLIED
                                             [Dollars in thousands, rounded]
    ----------------------------------------------------------------------------------------------------------------
                                                       Oversight Board       Administration          Difference
                                                       Recommendation        Recommendation    ---------------------
                Enforcement Initiatives            --------------------------------------------
                                                      Budget      FTE       Budget      FTE       Budget      FTE
    ----------------------------------------------------------------------------------------------------------------
    SBSE-2 Curb Egregious Non-Compliance..........   $159,264      1,408    $90,161        874    $69,103        534
    SBSE-3 Select High-Risk Cases for Examination.      5,500  .........  .........  .........      5,500  .........
    SBSE-7 Savings through Consolidation--Case         16,085        200     14,469        144      1,616         56
     Processing...................................
    SBSE-8 Savings through Consolidation--              7,656         69      5,531         65      2,125          4
     Insolvency Processing........................
    WAGE-2 Increase Individual Taxpayer Compliance     46,406        521     15,469        175     30,937        346
    WAGE-9 Improve ITIN Application Process.......     15,484         50  .........  .........     15,484         50
    WAGE-10 Eliminate Erroneous EITC  Payments....     18,000  .........  .........  .........     18,000  .........
    LMSB-1 Combat Corporate Abusive Tax Schemes...     60,017        394     36,100        207     23,917        187
    TEGE-1 Combat Diversion of Charitable  Assets.      3,914         44      3,914         44  .........  .........
    TEGE-5 Stop Abusive Transactions in the TEGE       11,140        100     11,140        100  .........  .........
     Community....................................
    CI-1 Combat Financial Fraud in the Corporate       25,600         98     25,600         98  .........  .........
     Sector.......................................
    CI-2 Dismantle International and Domestic          12,208         80  .........  .........     12,208         80
     Terrorist Financing..........................
    CI-3 Reinforce Core Mission Tax Enforcement        34,086        130     34,086        130  .........  .........
     Resources....................................
    CI-7 Forensic Electronic Evidence Acquisition       3,104          4      3,104          4  .........  .........
     and Analysis.................................
    CI-10 Leverage/Enhance Special Agent                2,500         28      2,500         28  .........  .........
     Productivity.................................
    APPEALS-1 Resolve Appeals.....................     13,945        112      7,000         56      6,945         56
    COUNSEL-1 Combat Abusive Tax Avoidance........     10,852         75      5,426         38      5,426         37
    NHQ-2 Deliver Strategic Compliance Data.......      2,712          2  .........  .........      2,712          2
                                                   -----------------------------------------------------------------
          Fiscal Year 2005 Enforcement  Increases.    448,472      3,315    254,500      1,963    193,972      1,352
    ----------------------------------------------------------------------------------------------------------------

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Shelby. There are some additional questions that
    will be submitted in writing for your response.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
              Questions Submitted to the Internal Revenue Service

                Questions Submitted by Senator Richard C. Shelby

        Question. Following the IRS Reform legislation of 1997, the IRS
    realigned significant levels of resources from Tax Enforcement and
    Compliance activities to customer service, telephone assistance, and
    submission processing activities.
        How do the fiscal year 2005 realignment proposals and the new
    funding initiatives proposed for 2005 compare to the pre-reform
    legislation levels for those programs?
        Answer. The proposed fiscal year 2005 realignment proposals and new
    funding initiatives strive to better balance service and enforcement.
        The IRS's service lagged in the 1990's. In response to the IRS
    Restructuring and Reform Act of 1998 (RRA 98), the IRS took important
    and necessary steps to upgrade service--significantly improving the
    answering of taxpayer telephone inquiries and electronic filing.
    Unfortunately, improvement in service coincided with a drop in
    enforcement activity. Since 1996, the number of IRS revenue agents,
    officers, and criminal investigators has dropped.
        The President's fiscal year 2005 budget--if approved by Congress--
    will help with IRS efforts to continue strengthening enforcement
    activities while maintaining and enhancing levels of service. The
    submission requests an enforcement increase of $300 million over the
    fiscal year 2004 consolidated appropriations level. This increase will
    allow a partial recovery in the numbers of enforcement personnel, but
    will not fully restore the workforce.

    ----------------------------------------------------------------------------------------------------------------
                                                                FTE        FTE      FTE Fiscal     FTE        FTE
                     Enforcement Workforce                     Fiscal     Fiscal    Year 2005     Fiscal    Percent
                                                             Year 1997  Year 2004  Initiatives  Year 2005    Change
    ----------------------------------------------------------------------------------------------------------------
    Revenue Agents.........................................     14,592     12,172         841      13,387         -9
    Revenue Officers.......................................      7,333      5,238         332       5,734        -28
    Criminal Investigators.................................      3,244      2,553         160       2,739        -22
    ----------------------------------------------------------------------------------------------------------------

        Question. Will IRS essentially restore those realignments from
    1997, or does the request make real advances in tax compliance efforts?
        Answer. As in the past 2 years, the IRS has identified efficiency
    improvements that could generate resources to be applied to high
    priority areas. These resources will be applied to enforcement in
    fiscal year 2005. However, they are not sufficient to completely
    reverse the decline in enforcement performance. The IRS needs the
    increase in enforcement resources requested in the fiscal year 2005
    budget to carry out an appropriate level of activity in the enforcement
    arena.
        The primary goal in the fiscal year 2005 budget request is to
    continue restoring the strength of the enforcement function. Staffing
    devoted to compliance and enforcement operations declined in the 1990's
    as the IRS focused on customer service; it is just beginning to
    recover. The number of revenue agents, revenue officers, and criminal
    investigators each declined by over a quarter from fiscal year 1997 to
    fiscal year 2003. Annual growth in return filings and additional work
    related to RRA 98 have contributed to a steady decline in enforcement
    presence, audit coverage, and case closures in front-line compliance
    programs.
        This budget has an increase of $300 million for a more vigorous
    enforcement of the tax laws. This strong commitment to tax
    administration will provide a significant augmentation of enforcement
    resources, but will not completely restore enforcement personnel to
    1997 levels. Improvements will also come from productivity increases
    (e.g. reeningeering, better audit targeting).
        Question. Are the realignment proposals recognition that sufficient
    service and staffing levels have been achieved for IRS customer service
    and processing program areas?
        Answer. While the ultimate desired level of taxpayer service
    remains to be reached, the IRS has improved and increased recognition
    of, and respect for, taxpayer rights. The IRS has made steady gains in
    better serving American taxpayers. Each filing season and year is
    appreciably better than the previous one and the IRS continues to build
    on those successes.

     FISCAL YEAR 2004 FILING SEASON SUCCESSES--DATA AS OF APRIL 23 COMPARED
                       TO SAME PERIOD IN FISCAL YEAR 2003
    ------------------------------------------------------------------------
                                         Fiscal Year  Fiscal Year   Percent
                 Service\1\                  2003         2004       Change
    ------------------------------------------------------------------------
    Free Filed Returns.................          2.7          3.4         26
    Where's My Refund..................          9.5         12.4         31
    Telephone Level of Service                  83           85            2
     (Percent).........................
    E-Filing From Home.................         11.7         14.2         21
    ------------------------------------------------------------------------
    \1\ Service usage in millions, except percentages.

        The IRS is doing a better job; however, much more remains to be
    done. The objectives for improved taxpayer service are three-fold:
      --improve and increase service options for the taxpaying public;
      --facilitate participation in the tax system by all sectors of the
            public;
      --simplify the tax administration process.
        Although the IRS is not requesting increases in fiscal year 2005
    for taxpayer service initiatives, the IRS will be able to build upon
    its experience over the past 6 years and will continue to improve
    taxpayer service. In recognition of the need to rebalance service and
    enforcement activities, consistent with the formula of service plus
    enforcement equals compliance, the only increases the IRS requested in
    fiscal year 2005 are for enforcement.
        Question. What headway will IRS's request make in the growing
    delinquent tax inventory that exists, or do you still anticipate large
    write-offs of delinquent taxes similar to this past year, even with the
    resource requests in the fiscal year 2005 budget?
        Answer. Delinquent tax write-offs declined by 35 percent from
    818,000 in fiscal year 2001 to 533,000 in fiscal year 2003. The dollar
    value of this inventory declined from $10.5 billion in March 2001 to
    $7.4 billion in March 2004. The fiscal year 2005 budget staffing
    increase will enable the IRS to continue this progress in reducing the
    delinquent tax inventory. Passage of the administration's proposed
    Private Collection Agent legislation would further reduce delinquent
    inventory.
        Question. A continuing priority of the IRS has been to maintain and
    improve the Tax Fraud and Criminal Investigations program area. This
    committee has supported IRS requests in this area.
        Has IRS invested all the resources granted by the Congress in
    recent years for the Criminal Investigations area or have some of the
    new resources been reallocated to other areas in the IRS?
        Answer. The IRS has directed all the resources provided by the
    Congress for the Criminal Investigation area to the Criminal
    Investigation division (CI). None of the resources have been
    reallocated to other areas in the IRS; however, the IRS has applied any
    across-the-board rescissions or unfunded pay raises to CI
    proportionally. The IRS has protected all new CI initiatives.
        Question. The IRS, in recent testimony, indicated that Congress has
    not provided the resources it needs to meet tax administration
    responsibilities. A review of IRS requests by GAO has shown that more
    than 98 percent of IRS's requests have been funded since fiscal year
    2002, with most reductions relating to across-the-board reductions and
    absorptions beyond the control of this committee.
        What is the basis of IRS's assessment on Congress' review of your
    requests?
        Answer. The IRS has based its budget strategy on increasing
    productivity in current operations from reengineering, modernization,
    and increases in electronic filing to free up resources for
    reinvestment in taxpayer service and enforcement. The administration
    also has sought modest FTE increases in the last few years. If
    successful, this strategy would have enhanced taxpayer service and met
    the demands of increased return workload. However, this strategy has
    not been as effective as anticipated due to unexpected cost increases.
    For example, the IRS absorbed $97 million to fund a portion of the
    fiscal year 2004 pay raise, in addition to an appropriation reduction
    of $252 million from the President's Budget.
        The IRS absorbed these costs across the agency, protecting only the
    new fiscal year 2004 enforcement initiatives from reduction.
    Nevertheless, although the IRS protected these enforcement initiatives,
    the enforcement base absorbed a prorated share of these unexpected cost
    increases discussed above, and this resulted in FTE reductions in
    enforcement activities.
        Question. Does IRS's assessment imply that the administration did
    not request sufficient resources for the IRS in past years' budgets?
        Answer. The IRS has received the administration's full support, and
    funding requests have been sufficient. However, unfunded expenses
    absorbed throughout the agency have negatively affected budget goals.
    These unfunded expenses have been driven primarily by pay raises higher
    than those proposed by the administration.
        Question. What is IRS's assessment of the request for fiscal year
    2005? Is it adequate to support IRS tax administration
    responsibilities?
        Answer. The proposed fiscal year 2005 budget takes a balanced,
    measured approach to the challenges facing the American tax system,
    with a needed emphasis on strengthening enforcement. The goal is to
    ensure that the tax system is fair for all while protecting taxpayer
    rights.
        The request, if funded, is adequate to support IRS tax
    administration responsibilities. However, the fiscal year 2005 budget
    request includes a 1.5 percent increase for the pay raise, as proposed
    by the administration. If Congress approves the 3.5 percent increase
    proposed by some members, it would result in a shortfall of $109
    million.
        Question. What is IRS's assessment of long term requirements?
        Answer. The vision of the IRS is to re-center the agency with the
    proper balance of service and enforcement poised to quickly meet
    technological and demographic changes, new challenges of taxpayer
    compliance, and customer expectations.
        The IRS's goals remain the same--to improve taxpayer service,
    enhance enforcement through uniform application of the law, and improve
    the IRS infrastructure and modernize technology. The IRS's working
    equation is that service plus enforcement equals compliance. The IRS is
    maintaining high levels of taxpayer service, while focusing on
    corrosive areas of non-compliance. Ensuring fairness will help maintain
    the taxpaying public's faith in the Nation's tax system.
        Question. How is the IRS's fiscal year 2005 request consistent with
    that vision?
        Answer. The IRS will enforce the law and it will continue to
    improve service and respect taxpayer rights. The administration's
    fiscal year 2005 budget request will help the IRS restore the balance
    between service and enforcement envisioned in the IRS's Strategic Plan.
        The fiscal year 2005 request allocates $300 million toward
    enforcement initiatives designed to curb abusive tax practices, end the
    proliferation of abusive tax shelters, improve methods of identifying
    tax fraud, identify and stop promoters of illegal tax schemes and
    scams, and increase the number and effectiveness of audits to ensure
    compliance with the tax laws. This budget will allow the IRS to apply
    resources to areas where non-compliance is greatest: promotion of tax
    schemes, misuse of offshore accounts and trusts to hide income, abusive
    tax shelters, underreporting and non-reporting of income, and failure
    to file and pay large amounts of employment taxes. The administration
    also has proposed a number of legislative changes to significantly
    enhance current enforcement programs and prevent the promotion of
    abusive tax avoidance transactions. The goal of these initiatives is to
    ensure that the tax system is fair for all, while protecting taxpayer
    rights.
        Question. Besides the across the board reductions, what other
    expenses did the IRS pay that were not budgeted?
        Answer. Examples of the expenses incurred that were not budgeted
    include $97 million for a portion of the unfunded pay raise, and
    unanticipated rent increases causing a shortage of $40 million. The IRS
    is working to manage our space inventory to minimize future rent
    increases to the extent possible.
        Question. The GAO states that IRS has requested more enforcement
    staff to be funded partly by budget increases and partly through
    internal savings.
        Please provide, for fiscal year 2002 and fiscal year 2003, a
    detailed breakout of the anticipated internal savings and the actual
    amount saved.
        Answer. In fiscal year 2002, the IRS intended to offset projected
    non-labor inflation of $57 million by reducing travel and contractual
    services and improving purchasing power through interdepartmental
    consolidation of procurements. Actual results of those actions in
    fiscal year 2002 were:

    ------------------------------------------------------------------------
                                                                Obligations
                                                               Variance From
                          Object Class                          Fiscal Year
                                                                 2001-2002
    ------------------------------------------------------------------------
    Temporary Space Leases..................................   ($19,765,165)
    Management and Professional Support Services............    (10,462,898)
    Contractual Labor--Private Sector.......................    (10,052,952)
    Training/Travel.........................................     (4,114,005)
    Misc Expenses, Foreign Posts--Government................     (3,151,254)
    Printing, Reproduction, & Related Services--Commercial..     (1,900,000)
    Support Services--Private Sector........................     (1,711,693)
    Local Telephone Service.................................     (1,280,417)
    Services and Maintenance to Buildings and Space.........     (1,088,284)
    Administrative Mail Costs...............................     (1,042,750)
    Telecommunications Equipment, Capitalized...............       (912,880)
    Communication, Telephone Service--EE....................       (811,571)
    Travel of Experts & Witnesses...........................       (577,566)
                                                             ---------------
          Total.............................................    (56,871,435)
    ------------------------------------------------------------------------

        The IRS highlighted specific initiatives for savings in fiscal year
    2003. Actual results of those reductions were:

                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                        Budgeted            Realized, EOY           Difference
              Savings--Fiscal Year 2003          -------------------------------------------------------------------
                                                   Dollars      FTE      Dollars      FTE       Dollars       FTE
    ----------------------------------------------------------------------------------------------------------------
    CI--Narcotics Program.......................      $14.6         85       $4.0         33     ($10.6)        (52)
    CI--Realigned Attrition.....................      $11.6         80       $9.7         80      ($1.9)  ..........
    COUNSEL--Reduced Tax Court Cases............       $0.6          5       $0.6          5  ..........  ..........
    WAGE--E-File................................      $18.5        490      $12.0        475      ($6.5)        (15)
    WAGE--Reengineering/Quality  Improvements...      $67.4      1,044  .........  .........     ($67.4)     (1,044)
    WAGE, SBSE--e-services release..............       $4.0         69       $0.3          6      ($3.7)        (63)
    LMSB--Customer Relationship Management (CRM)      $11.9        119       $1.2         12     ($10.7)       (107)
     Exam.......................................
    MITS--Selected Tier B Projects..............       $3.3         57  .........  .........      ($3.3)        (57)
    SBSE--Reduced Field Innocent Spouse.........      $13.8        184       $7.7        103      ($6.1)        (81)
    SBSE--Reduced Filing Season Support.........      $12.1        154      $17.9        230       $5.8          76
                                                 -------------------------------------------------------------------
          GRAND TOTAL...........................     $157.8      2,287      $53.4        944    ($104.4)     (1,343)
    ----------------------------------------------------------------------------------------------------------------

        Question. The GAO states that the IRS realized only 32 percent of
    its claimed internal savings in fiscal year 2003. Is this correct? If
    so, does this point to a weakness in budget formulation at the IRS?
        Answer. The actual figure is 34 percent. The fiscal year 2003
    budget submission is the first such submission to identify specific
    reduction initiatives that could be used to fund high priority
    initiatives. Since then, the IRS has been improving. For example, in
    fiscal year 2004, the IRS expects to achieve 68 percent of the
    projected savings. The savings result either from modernization
    projects or reengineered systems that generate productivity increases.
    Because the IRS starts development of budget estimates over 15 months
    prior to execution year, the assumptions made can change, and any
    changes in assumption will affect the actual savings realized. In many
    cases these savings have been delayed, but will eventually be realized.
        Question. Does it point to a lack of conviction to realize the
    savings promised to promote change at the IRS? If the IRS does not
    realize the savings assumed in its budget requests, how does it make up
    for the shortfall?
        Answer. The IRS's prior experience in realizing specific reduction
    initiatives, particularly with respect to fiscal year 2003, in no way
    reflects a lack of commitment by the IRS to achieve cost savings and
    efficiencies.
        In most cases, the savings generated are used to fund other high
    priority areas in the same business unit. Therefore, there is an
    incentive to ensure that the reengineering actions are taken so that
    the new work can be done. However, if for some reason the savings are
    not generated at the time expected, then the business unit must either
    scale back its hiring plans, and, therefore, projected performance, or
    reduce non-labor costs in other areas to maintain its performance
    level. Part of the problem experienced in fiscal year 2003 and 2004 was
    that the IRS did not use generated savings to fund higher priority
    work, as planned in the budget, but used the savings mainly to fund
    unfunded mandates and unexpected costs.
        Question. Congress has appropriated approximately $1.7 billion for
    the Business Systems Modernization program. IRS has requested an
    additional $285 million in this year's fiscal year 2005 budget. The
    current program is showing mounting delays in project milestones, with
    few results to show for the taxpayer.
        What is the current status of this program?
        Answer. The BSM program is--without a doubt--one of the largest,
    most visible, and most sensitive modernization programs ever undertaken
    in the world.
        The results have been mixed; but first, the good news. The IRS
    built a strong technical infrastructure and designed and implemented
    stringent security and control mechanisms into the infrastructure. The
    IRS also developed a rigorous enterprise life cycle methodology. Over
    the past 2 years, the IRS has been working toward instituting and
    integrating established streamlined governance and management
    processes. The IRS has made progress, but a major thrust now focuses on
    sustaining a solid balance of business commitment, accountability, and
    scope management. Finally, the IRS has achieved a great deal of success
    with the projects delivered to date.
        The IRS has fully deployed all e-Services Release 1.0 products and
    made them available over the Internet, including: registration and
    online address change access for third parties and IRS employees
    through secure user portals; Preparer Tax Identification Number (PTIN)
    online application; interactive Taxpayer Identification Number (TIN)
    matching; secure Electronic Return Originator (ERO) application
    processing; and access to e-Services registration and application
    processes by Modernized e-File (MeF) participants.
        E-Services Release 2.0 products are also now in production and
    available for use by IRS staff and taxpayers, including: Application
    for e-Filing (external); Electronic Account Resolution (EAR);
    Electronic TIN Bulk Matching (Bulk Requests); Disclosure Authorization
    (DA); and infrastructure support for outbound facsimile service.
        In March 2004, James D. Leimbach appeared before the Ways & Means
    Oversight Subcommittee on behalf of the National Association of
    Enrolled Agents (NAEA) and said, ``This new capability is truly going
    to revolutionize the way we conduct future business with the IRS. The
    ultimate beneficiary is the American taxpayer. We are truly amazed and
    thrilled beyond description at this way of doing business with the IRS,
    and we would like for you to understand why we feel as we do.''
        The IRS delivered several additional applications that are
    providing tangible benefits to taxpayers and improving the efficiency
    and effectiveness of the tax administration systems such as Where's My
    Refund?, Where's My Advance Child Tax Credit?, Internet EIN, Modernized
    e-File, HR Connect, etc. The following chart highlights the
    applications the IRS has delivered, as well as the measurable business
    benefits being realized.

                                BSM DELIVERS REAL BUSINESS VALUE (RESULTS AS OF 6/15/04)
    ----------------------------------------------------------------------------------------------------------------
                  Project                             Description                         Recent Statistics
    ----------------------------------------------------------------------------------------------------------------
    Internet Refund Fact of Filing       Improves customer self-service by      --17.9 million inquiries in 2003; 22
     (2002).                              providing instant refund status        million inquiries to date in 2004
                                          information and instructions for       (1/1/04-6/6/04).
                                          resolving refund problems to          --32 percent of all real time IRS
                                          taxpayers with internet access.        assistance calls come from IRFoF.
                                                                                --Modest reduction of
                                                                                 telecommunications costs (about
                                                                                 $250,000).
                                                                                --Every 1,000 IRFoF contacts
                                                                                 eliminate 1,500-2,000 refund
                                                                                 assistance calls.
    Advanced Child Tax Credit (2003)...  Modifies the Internet Refund           --15.5 million inquiries in 2003;
                                          application to provide taxpayers       11.9 million inquiries to date in
                                          with Advance Child Tax Credit refund   2004 (10/1/03-6/13/04).
                                          status on the internet.               --Peak date 1.1 million interaction.
    Customer Communications (2001).....  Improves communications                --68,000 calls in one 3-minute
                                          infrastructure, including telephone    period during initial week
                                          call management, call routing and      (coincided with start of Advanced
                                          customer self-service applications.    Tax Refund of 2001).
                                                                                --50 percent reduction in waiting
                                                                                 time for assistor to answer call.
                                                                                --50 percent reduction in abandoned
                                                                                 calls.
                                                                                --Number of Spanish calls doubled.
                                                                                --More accurate pre-routing of
                                                                                 calls.
    Internet Employee Identification     Allows businesses and taxpayers to     --1.37 million internet EIN
     Number (2003).                       apply for and receive employer         applications received to date (as
                                          identification numbers over the        of 6/5/04).
                                          internet.
    HR Connect (2002)..................  Delivers an enterprise solution to     --75,000 internal users.
                                          allow IRS employees to access and     --Cited by Commissioner Everson as
                                          manage their human resources           an enabling factor in the
                                          information online.                    redirection of approximately 750
                                                                                 staff years to enforcement.
                                                                                --Treasury was selected as 2004
                                                                                 ComputerWorld Honors Laureate for
                                                                                 HR Connect development and
                                                                                 implementation.
    e-Services R1 (2003-2004)..........  Creates a web portal and value adding  --Over 69,624 PTIN applications
                                          e-Services services to promote the     (W7P) entered to date, data entry
                                          goal of conducting most of the IRS's   productivity doubled (from 8/15/03-
                                          transactions with tax practitioners    6/10/04).
                                          electronically.                       --Over 58,201 e-File applications to
                                                                                 the Third-Party-Data-Store (TPDS)
                                                                                 entered to date (from 8/15/03-6/10/
                                                                                 04).
                                                                                --Approximately 24,939 Registered
                                                                                 (and confirmed) User Portal (RUP)
                                                                                 to date (from 10/1/03-6/10/04).
    Customer Relationship Management     Provides standard tax computation      --Deployed to almost 4,000 Revenue
     Exam (2001).                         software to Large & Mid-Sized          Agents.
                                          Business Revenue Agents.
    Modernized e-File (2004)...........  Provides e-filing to large businesses  --Went live on 2/23/04.
                                          (1120 family) and tax exempt          --Over 35,090 returns (1120 family)
                                          organizations (990 family).            accepted as of 6/13/04.
                                                                                --Over 3,287 participating
                                                                                 Electronic Return Originators as of
                                                                                 6/13/04.
                                                                                --Winner of Government Solutions
                                                                                 ``Best-of-the Best'' Pioneer
                                                                                 Solutions.
    ----------------------------------------------------------------------------------------------------------------

        The bad news, however, is major. Significant cost overruns and
    repeated schedule delays have plagued critical projects, such as the
    Customer Account Data Engine (CADE), the Integrated Financial System
    (IFS), and the Custodial Accounting Project (CAP). CADE replaces the
    current master files that are the IRS's repository of taxpayer
    information. IFS will be the IRS's new core accounting system. CAP
    provides an integrated link between tax administration (revenue) and
    internal management (administrative) financial information.
        The IRS has delayed the CADE program four times. It originally
    planned to deliver the first release of CADE in December 2001. The IRS
    then rescheduled it for August 2003, and later rescheduled it for April
    2004. The IRS recently finalized the re-planning effort for CADE and
    set the latest delivery date for September 2004. While CADE is farther
    along than the IRS has ever been in replacing a component of the master
    file, there are still major hurdles to overcome. The CADE delays
    stemmed from infrastructure upgrades, initial poor software quality
    during the startup of systems integration testing combined with the
    failure to understand the complexity of balance and control, and the
    resolution of operational and performance issues that occurred during
    Phase 3 of the Release 1.0 pilot.
        Like CADE, IFS has been plagued with schedule delays. The IRS
    originally planned to deliver the first release of IFS in October 2003.
    The IRS then rescheduled it for January 2004. The IRS later rescheduled
    it for April 2004. The IRS has subsequently scheduled Release 1.0 for
    October 2004. The IRS delayed the first release of IFS because of the
    need to make technical changes to comply with the enterprise
    architecture, the inability to resolve key design and integration
    issues in a timely manner, the identification of the health coverage
    tax credit interface requirement late in the development process, and
    delays experienced in integration testing due to poor application
    quality and interface testing issues.
        IFS Release 1.0 will cover core accounting functions such as budget
    preparation, general ledger, accounts payable, accounts receivable,
    financial reporting, and purchasing. Problems continue to seriously
    jeopardize the scheduled delivery of this first release of IFS. The IRS
    is 2 weeks behind schedule on testing, which puts the data conversion
    schedule at risk. The IRS is negotiating a fixed price contract for the
    October delivery.
        The IRS is also encountering delays on the first release of the
    Custodial Accounting Project (CAP), which provides an integrated link
    between tax administration (revenue) and internal management
    (administrative) financial information. The first release of CAP will
    address revenue from individual taxpayers on initial tax payments.
    Later releases of CAP will address businesses and collections. CAP
    delays resulted from unstable CADE and IFS interface definitions,
    needing additional testing time due to a much larger than anticipated
    volume of data anomalies discovered during the conversion of data from
    the current Individual Master File (IMF), and the time required
    resolving system performance issues.
        In addition, though not directly responsible for CAP delays to
    date, the IRS has made some adjustments to the functionality that it
    needs to have in CAP Release 1 to support the GAO financial audit as
    well as internal accounting and management. These adjustments will
    increase the cost of later sub-releases of CAP Release 1. The IRS has
    now completed all testing for CAP Release 1, and is adding changes to
    reflect IMF changes from the start of the 2004 filing season (Release
    1.1). The IRS plans to start production, which includes the initial
    load of IMF data, in mid-August. The IRS negotiated a fixed price
    contract for Release 1 and Release 1.1 in May 2004.
        Question. Are the current problems resource-related or management-
    related?
        Answer. The current problems experienced by the IRS are a
    combination of both. The IRS needs a more versatile team of seasoned
    executives to provide long-term stability to the program. The IRS is
    complementing the skills of experienced IRS tax executives with outside
    seasoned technology executives who have experience managing large-
    scale, complex IT projects. As such, the IRS is hiring two Associate
    Chief Information Officers to join the MITS organization, and an
    executive search firm is conducting searches for five senior executives
    with a wide range of diverse experience in developing and implementing
    large modernization systems. As a result of missing CADE and IFS key
    deliverables last summer, the Commissioner and Computer Sciences
    Corporation (CSC) commissioned external assessment studies from outside
    experts. The studies produced no major surprises; but, the IRS now
    understands more about the issues. All of the assessments confirmed
    that the IRS modernization effort is a massive, highly complex, high-
    risk program that is confronting a number of critical management and
    technological challenges. These studies also made it clear that the IRS
    should not turn back, but rather make a series of changes to strengthen
    the BSM program.
        While all of these studies assessed different components of the
    modernization program, three major recommendations emerged, including:
      --Scaling back the modernization portfolio to better align with IRS
            and CSC's capacities;
      --Engaging IRS business units to drive the projects with a business
            focus; and,
      --Improving contractor performance on cost, scheduling, and
            functionality.
        The assessments also raised a number of other key improvement
    opportunities, including:
      --Adding outside expertise to help manage the program and to
            complement IRS skills;
      --Strengthening human resources capacity management;
      --Adhering to methodologies in areas such as configuration
            management, cost and schedule estimating, and contract
            management;
      --Reducing the burden from oversight organizations;
      --Simplifying the budget process; and,
      --Initiating the testing of the business rules engine on CADE.
        Question. How much more is needed to complete this effort and
    modernize IRS's outdated systems and processes and is the fiscal year
    2005 budget request consistent with that projection?
        Answer. It is virtually impossible to estimate how much more is
    needed to complete the modernization effort and modernize IRS's
    outdated systems and processes. There are just too many unknown
    variables at this time. The IRS has a BSM Expenditure Plan in the
    approval process that includes a proposal on how it plans to allocate
    the $285 million in the administration's fiscal year 2005 budget
    request for the BSM program. This is the first time that the Business
    Systems Modernization Office (BSMO) has forecast so far ahead in an
    Expenditure Plan. The purpose of providing a 2-year plan is twofold.
    First, the goal is to provide key stakeholders with a comprehensive
    understanding of the sequencing of activities and to show the impact of
    changes to the plan across multiple years. Second, the objective is to
    provide enough information in advance so that funding for future fiscal
    years can be made available earlier in the fiscal year. The IRS will
    provide an updated BSM fiscal year 2005 Expenditure Plan in the summer
    of 2004, reflecting any adjustments made during the upcoming months.
        A key component to delivering on the challenge of modernizing
    America's tax system is for the IRS to establish credibility with key
    stakeholders that it is identifying and addressing barriers to
    achieving business modernization success, and to show its constituents
    that it can and will get modernization done ``right.'' The IRS must
    gain the trust of its stakeholders by consistently delivering systems
    on time and within budget, and significantly improving its
    productivity, quality, and effectiveness in building modernized
    systems.
        Getting modernization ``right'' means building systems that meet
    the business needs of tax administration, while delivering tangible
    benefits to taxpayers. The right balance of IRS business leaders are
    now engaging with the modernization technology team to help determine
    how to best apply technology in order to improve service to taxpayers,
    support enforcement activities, and improve compliance.
        Sharing leadership roles requires clarifying responsibilities,
    empowering managers with decision making authority, and holding
    individuals (both contractors and employees) accountable for delivering
    measurable results on time and within budget. The IRS has implemented
    processes and procedures to enable and enforce accountability, such as
    establishing a governance structure, clearly defining roles and
    responsibilities, and defining project milestone requirements.
        Scope growth and unresolved issues can easily derail the best laid
    plans for developing and implementing large, complex, high-risk
    systems. The IRS resized the business systems modernization project
    portfolio, adopted policies to support the prompt escalation of issues,
    and reached an agreement to significantly control discretionary change
    requests. Maturing management processes, strategically driven business
    requirements, and improved project life cycle methodologies will define
    and drive the modernization initiative going forward.
        The IRS has placed an emphasis on increasing the timeliness and
    accuracy of BSM communications to ensure that key stakeholders are well
    informed of program goals and the status of projects against schedule
    and cost targets.
        There is much more work to do, but the Commissioner is committed to
    modernizing the IRS's archaic computer systems. While progress to-date
    has been decidedly mixed, the IRS owes it to taxpayers to stay the
    course and put a solid foundation in place upon which the IRS can build
    for decades to come.
        Question. Please provide an update of all core systems being
    developed. In the update, please provide the original estimated cost of
    each program, the current cost estimate, the original estimated date of
    completion and the new completion date.
        Answer. Response is combined with the response to the subsequent
    question.
        Question. Please provide a list of any core system of the BSM
    program that the IRS has delivered on time and within the original
    budget estimate?
        Answer. The IRS and PRIME have not delivered any BSM projects on
    time and within the original budget estimate. The following describes
    the major projects and includes a table detailing cost and schedule
    variances to date.
    Modernized e-File (MeF)
        Modernized e-File Release 1.0, which provides electronic filing for
    the first time ever to large corporations and tax exempt organizations,
    went live in February 2004. MeF provides 53 forms and schedules for
    1120/1120S (corporations) and 990 (tax exempt organization) e-filing.
    It also provides the functionality to support those forms including:
      --applicable interfaces;
      --validation;
      --retrieval and display options;
      --the capability for large taxpayers to file using the internet; and,
      --the capability to use Adobe files.
        Release 1.0 has exceeded project volume for the year after only 2
    months of operation. The project won the Government Solutions Pioneer
    Award from Federal Computer Week Magazine (1 of 15).
        Modernized e-file release 2.0 will include 36 additional forms and
    schedules that are filed with Forms 1120/1120S (corporations) and 990
    (tax exempt organizations). The IRS exited Release 2.0 Milestone 3
    System design in March 2004. The IRS plans deployment for the summer of
    2004. The IRS provides a chart listing the cost and schedule variances
    at the end of this response.
    E-Services
        The e-Services project focuses on providing electronic account
    resolution and fostering easy-to-use electronic products and services
    targeted at specific practitioner segments that will inform, educate,
    and provide service to the taxpaying public. In addition, e-Services
    will provide electronic customer account management or Indirect Channel
    Management capabilities to all businesses, individuals, and other
    customers in a safe and secure manner. This project will help the IRS
    move toward the Congressional goal of receiving 80 percent of tax
    returns and information filings by electronic transaction, while
    achieving a 90 percent customer and employee satisfaction rate by 2007.
    Taxpayers who e-file will have the benefit of quicker refunds, more
    accurate transaction processing, and access to an array of new
    electronic services. The IRS has made noticeable improvements in the
    2003 and 2004 filing seasons, with considerable improvement resulting
    from a series of strategic enhancements resulting from a series of
    planned releases late in 2003.
        The IRS has delivered electronic services to tax practitioners, and
    other third parties such as banks and brokerage firms that report
    1099's. The IRS deployed all Release 1.0 and Release 2.0 initial
    operations functionality by the end of April 2004, except for
    Transcript Delivery System (TDS), which will be available in June 2004.
    The IRS conducted additional pilot and performance testing of both
    releases prior to deployment to the broad practitioner community.
        The IRS fully deployed, and made available over the Internet, all
    e-Services Release 1.0 products, including: registration and online
    address change access for third parties and IRS employees through
    secure user portals; Preparer Tax Identification Number (PTIN) online
    application; interactive Taxpayer Identification Number (TIN) matching;
    secure Electronic Return Originator (ERO) application process; and,
    access to e-Services registration and application processes by
    Modernized e-file (MeF) participants.
        E-Services Release 2.0 products are now in production and available
    for use by IRS staff and taxpayers, including: Application for e-Filing
    (external); Electronic Account Resolution (EAR), Electronic TIN Bulk
    Matching (Bulk Requests); Disclosure Authorization (DA); and
    infrastructure support for outbound facsimile service. A chart listing
    cost and schedule variances for the e-Services program is provided at
    the end of this response.
    Customer Account Data Engine (CADE)
        The IRS has delayed the CADE program four times. The IRS originally
    scheduled the first release of CADE for delivery in December 2001. The
    IRS then rescheduled it for August 2003 and again for April 2004. The
    IRS recently finalized the re-planning effort for CADE--under a fixed
    price contract--and set the latest delivery date for September 2004.
        While CADE is farther along than the IRS has ever been in replacing
    a component of the master file, there are still major hurdles to
    overcome. The CADE delays stemmed from:
      --Infrastructure upgrades;
      --Failure to understand the complexity and control function combined
            with poor software quality during the startup of systems
            integration testing; and,
      --Resolution of operational and performance issues that occurred
            during an initial release of the pilot.
        The delivery of the CADE project is particularly important because,
    for the first time, it moves taxpayer data from the outdated tape-to-
    tape reels into an updated tax administration data and processing
    system that can be accessed and updated in real time. Like the new
    online technical infrastructure that the IRS deployed, CADE is a core
    fundamental component of the modernized systems. As such, CADE is the
    IRS's highest priority technology project. As of May 14, 2 weeks
    remained on 2004 filing season release pilot (Reprocesses cycles 4-8
    from earlier this year). The pilot has gone well. The IRS recently
    signed a fixed-price contract through initial operating capability
    (IOC) and has started work on the 2005 filing season release.
    Integrated Financial System (IFS) Release 1
        Like CADE, IFS has been plagued with schedule delays. The IRS
    originally planned to deliver the majority of the first release of IFS
    in October 2003, and the balance in January 2004. The IRS later
    rescheduled it for April 2004. The IRS has subsequently scheduled
    Release 1.0 for October 2004. Delay of the first release of IFS
    occurred because of:
      --The need to make technical changes to comply with the enterprise
            architecture;
      --The inability to resolve key design and integration issues in a
            timely manner;
      --Identification of the health coverage tax credit interface
            requirement late in the development process; and
      --Delays experienced in integration testing due to poor application
            quality and interface testing issues.
        IFS Release 1.0 will cover core accounting functions such as budget
    preparation, general ledger, accounts payable, accounts receivable,
    financial reporting, and purchasing. Problems continue to seriously
    jeopardize the scheduled delivery of the first release of IFS.
        The IRS is currently negotiating a fixed-price contract for October
    delivery. Testing is behind schedule by 2 weeks and data conversion is
    at risk within the scheduled 6-week window. The IRS lists IFS cost and
    schedule variances in the chart at the end of this response.
    Custodial Accounting Project (CAP) Release 1
        The IRS has encountered delays on the first release of the
    Custodial Accounting Project (CAP). This project provides an integrated
    link between the tax administration (revenue) and internal management
    (administrative) financial information. The first release of CAP will
    address revenue from individual taxpayers on initial tax payments.
    Later releases of CAP will address businesses and collections. CAP
    delays resulted from unstable CADE and IFS interface definitions.
    Additional testing time is necessary due to a much larger than
    anticipated volume of data anomalies discovered during the conversion
    of the data from the current individual Master File (IMF), and the time
    required resolving system performance issues.
        In addition, though not directly responsible for CAP delays to
    date, the IRS has made some adjustments to the functionality that it
    needs to have in CAP Release 1 to support the GAO financial audit, as
    well as its internal accounting and management. These adjustments will
    increase the cost of later sub-releases of CAP Release 1. The IRS has
    now completed all testing for CAP Release 1, and is adding changes to
    reflect IMF changes from the start of the 2004 filing season (Release
    1.1). The IRS plans to start production, which includes the initial
    load of IMF data, in mid-August.
        The IRS has scheduled the completion of negotiations of a fixed
    price contract for Release 1.0/1/1 for no later than the end of June.
    Once those negotiations are complete, the IRS will begin negotiating a
    fixed price contract for Release 1.2 (mid-year 2004 changes). The IRS
    lists cost and schedule variance information in the chart at the end of
    this response.

    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                     Initial Est.   Actual/Revised                     Initial Est. Completion        Actual/Revised Est.         Schedule
                Project                  Cost          Est. Cost     Cost Variance               Date                   Completion Date           Variance
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Customer Communications (CC)       $41,110,000     $46,420,000     +$5,310,000   5/31/01....................  2/26/02 (Full Deployment)..  +9 mo.
     2001.
        Improves communications
         infrastructure, including
         telephone call
         management, call routing,
         and customer self-service
         applications.
        Recent Statistics:
            --68,000 calls in one
             3-minute period
             during initial week
            --50 percent reduction
             in waiting time for
             assistor to answer
             call
            --50 percent reduction
             in abandoned calls
            --Number of Spanish
             calls doubled
            --More accurate pre-
             routing of calls
    Customer Relationship               $9,313,000      $7,375,000     $(1,938,000)  6/30/02....................  9/30/02 (Full Deployment)..  +3 mo.
     Management Exam (CRM Exam).
        Provides standard tax
         computation software to
         Large & Mid-Sized
         Business Revenue Agents.
        Recent Statistics:
            --Deployed to almost
             4,000 Revenue Agents
            --Software meets 91
             percent of LMSB
             requirements
            --Average case time
             reduced due to new
             automated tax
             computation
            --Improved accuracy in
             computing corporate
             taxes
    Security and Technology            $33,734,000     $41,287,000     +$7,553,000   8/31/01....................  1/31/02 (Initial Operation)  +5 mo.
     Infrastructure Release (STIR)
     Release 1.
    Internet Refund/Fact of Filing     $13,509,000     $26,432,000    +$12,923,000   7/31/02....................  9/26/03 (Full Deployment)..  +14 mo.
     (IR/FoF).
        Improves customer self-
         service by providing
         instant refund status
         information and
         instructions for
         resolving refund problems
         to taxpayers with
         Internet Access.
        Recent Statistics:
            --17.9 million
             inquiries in 2003,
             19.2 million to date
             in 1994 (1/1/04-4/25/
             04)
            --32 percent of all
             real time IRS
             assistance calls come
             from IR/FoF
            --Modest reduction of
             telecommunications
             costs (about
             $250,000)
            --Every 1,000 IR/FoF
             contacts eliminate
             1,500-2,000 refund
             assistance calls
    Human Resources (HR) Connect       $10,000,000     $10,200,000       +$200,000   12/31/02...................  12/31/02 (Initial            N/A.
     Release 1.                                                                                                    Operation).
        Delivers an enterprise
         solution to allow IRS
         employees to access and
         manage their human
         resources information
         online.
        Recent Statistics:
            --75,000 internal
             users
            --Cited by
             Commissioner Everson
             as an enabling factor
             in the redirection of
             approximately 750
             staff years to
             enforcement
            --Treasury was
             selected as 2004
             Computerworld Honors
             Laureate for HR
             Connect development
             and implementation
    E-Services....................     $44,045,000    $130,281,000    +$86,236,000   10/31/03...................  4/30/05 (Full Deployment)..  +18 mo.
        Creates a web portal and
         value adding e-Services
         services to promote the
         goal of conducting most
         of the IRS's transactions
         with tax practitioners.
        Recent Statistics:
            --Over 57,000 PTIN
             applications (W7P)
             entered to date; data
             entry productivity
             doubled (from 8/15/03-
             4/21/04)
            --Over 56,000 e-file
             applications to the
             Third-Party-Data-
             Store (TPDS) entered
             to date (from 8/15/03-
             4/15/04)
            --Approximately 23,000
             Registered (and
             confirmed) User
             Portal (RUP) to date
             from (10/14/03-4/21/
             03)
            --4.7 million Bulk TIN
             requests
    Modernized e-File (MeF)            $29,246,000     $46,303,000    +$17,057,000   ...........................  ...........................  +4.5 mo.
     Release 1.
        Provides e-filing to large  ..............  ..............  ...............  11/3/03: Assurance Testing.  11/04/03: Assurance Testing  +1 day.
         businesses (1120 family)                                                    12/22/03: Web-Filing.......  2/9/04: Web-Filing.........  +7 weeks.
         and tax exempt                                                              1/9/04: Production.........  2/23/04: Production........  +6 weeks.
         organizations (990
         family).
        Recent Statistics:
           --Went live 2/23/04
           --Over 30,600 returns
            (1120) family accepted
            as of 4/25/04
           --Over 3,109
            participating
            Electronic Return
            Originators as of 4/25/
            04
    Customer Account Data Engine       $61,145,000     $97,905,000    +$36,760,000   12/31/02...................  September 2004.............  +21 mo. \1\
     (CADE)--Individual Master
     File (IMF) Release 1.
        Creates authoritative
         computations and stores
         data for individual
         taxpayer accounts and tax
         return information; it
         provides timely complete,
         accurate taxpayer
         information to IRS
         employees.
    Custodial Accounting Project       $47,161,000    $119,219,000    +$72,058,000   1/31/03....................  August 2004................  20 mo.
     (CAP) Release 1.
        Provides integrated,
         reliable tax operations
         and internal management
         information to support
         evolving decision
         analytics, performance
         measurement, and
         management information
         needs.
    Integrated Financial System        $99,870,000    $153,786,000    +$53,916,000   3/31/04....................  October/November 2004......  7-8 mo.
     (IFS) Release 1.
        Modernizes IRS financial
         management systems by
         providing a single
         general edger for
         custodial and financial
         data and a platform to
         integrate core financial
         data with budget,
         performance, and cost
         accounting data.
    Customer Account Management        $57,578,000         TBD \2\         TBD \2\   10/31/04...................  TBD \2\ (Initial Operation)  TBD. \2\
     (CAM) Release 1.
        Delivers an enterprise
         solution to support
         access to tax account
         data, contact management,
         case management, outbound
         correspondence
         management, and workflow
         management.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ CADE, CAP and IFS project schedules are currently under review.
    \2\ CAM project work suspended following completion of preliminary design activities ($15,452,000 expended). No further work planned until at least
      fiscal year 2005.

    Source: GAO analysis of IRS data contained in Business Systems Modernization (BSM) Expenditure Plans.

        Question. The budget contains an initiative related to Private
    Collection Agencies. Please provide some detail justifying this
    initiative.
        How will taxpayer privacy rights be protected?
        Answer. Private Collection Agencies (PCAs) will be required to
    comply with all taxpayer protections with which IRS employees are
    required to comply, including the provisions of RRA98, and would be
    prohibited from threatening or intimidating taxpayers, or otherwise
    suggesting that enforcement action will, or may be taken, if a taxpayer
    does not pay the liability.
      --In no case would a PCA be permitted to take enforcement action
            against a taxpayer.
      --PCAs will be required to comply with the Fair Debt Collection
            Practices Act.
      --Under the proposal, taxpayers would be permitted to seek damages
            from PCAs and their employees who violate the protections
            provided.
      --The IRS will approve PCA operational plans that will detail the
            actions a PCA will take to resolve IRS accounts.
      --The IRS will establish an oversight group with responsibility for
            managing case referrals, monitoring and evaluating PCA
            performance against the approved operations plan, and reviewing
            and approving PCA actions.
      --The IRS oversight function will use live phone monitoring, recorded
            phone monitoring, review of PCA systems for adherence to
            operation plans, and on-site reviews to ensure taxpayer rights
            are fully respected.
        Question. The IRS implemented a similar pilot program in 1996. What
    lessons were learned from that pilot?
        Answer. Implementation Period.--The IRS was required to implement,
    almost from scratch, the pilot program within the year of the
    appropriation legislation.
      --Funding.--The pilot program was funded from the IRS's Tax Law
            Enforcement appropriation.
      --Processing and Communications.--At the time of the pilot program,
            IRS computer and communication systems were not adequate for
            the processing, delivery, and updating of liabilities being
            handled by the PCAs.
      --Selection of Accounts.--The pilot program required the IRS to place
            accounts where the IRS had previously made attempts to collect.
            Consequently, the pilot program involved the referral of many
            outstanding liabilities to PCAs that did not have realistic
            collection potential. This resulted in wasted effort by both
            the PCA and the IRS.
      --Taxpayer Information.--The pilot program overly restricted the
            amount of information that could be provided to PCAs for
            purposes of collecting outstanding liabilities. As a result,
            many debts had to be returned by the PCAs to the IRS due to the
            PCAs' inability to respond to often-straightforward questions
            about a taxpayer liability.
      --Contract Structure.--The pilot program involved a fixed-price
            contract with incentive payments.
        Question. Have those lessons been implemented in the new
    initiative?
        Answer. The administration's proposal reflects the lessons learned
    from the pilot program. The primary issues affecting the success of the
    pilot program, and the manner in which this proposal addresses those
    issues, are set out below.
      --Implementation Period.--In contrast, this proposal has been
            developed over the past 2 years and has involved discussions
            between the IRS, Treasury Department, Office of the National
            Taxpayer Advocate, Department of Justice, and prospective
            contractors. Moreover, even if authorizing legislation were
            enacted in the next 6 months, this proposal contemplates that
            an additional ramp-up period of over a year would be required
            before the PCA program could begin. This additional time would
            be required to ensure that the business processes, security and
            oversight measures, and taxpayer protections are brought on-
            line and fully tested before the program begins.
      --Funding.--The pilot program conducted in 1996/1997 was funded from
            IRS's Tax Law Enforcement appropriation. Funding in this manner
            resulted in a net reduction to the IRS compliance resources. In
            contrast, the administration's proposal to fund PCA activities
            from proceeds would allow PCAs to supplement, not displace,
            existing IRS resources.
      --Processing and Communications.--The IRS will invest in modernized
            Collection Decision and Inventory Management Systems to ensure
            the successful integration of PCA activities into the IRS
            collection process.
      --Selection of Accounts.--The IRS, under the administration's
            proposal, would focus on ensuring that the outstanding
            liabilities referred to PCAs are those that not only are within
            the authority of the PCA to resolve but also represent cases
            with the greatest likelihood of payment if a PCA were to handle
            the liability.
      --Taxpayer Information.--Under the administration's proposal, PCAs
            would have access to specific information regarding an
            outstanding tax liability (e.g., type of tax, tax years
            affected, dates of assessment, whether the assessment is based
            on a taxpayer's own balance due return or an IRS notice, prior
            payments, and application of prior payments) in order to answer
            basic, but important, questions that a taxpayer may have
            regarding the liability. The taxpayer information that would be
            provided to PCAs would be strictly limited to the information
            required for the collection of the specific tax liability at
            issue. PCAs would not receive, for instance, information
            regarding a taxpayer's total or adjusted income, sources of
            income, delinquency history for liabilities not being handled
            by the PCA, or employer information.
          All existing restrictions imposed by section 6103 of the Code
            would apply to the PCAs, and taxpayers would have the right to
            assert a claim against PCA employees who violate those
            protections.
      --Contract Structure.--The administration's proposal would involve a
            competitive, fee-for-service, performance-based, incentive
            contract structure. The performance evaluation would be based
            on a balanced scorecard that would look to quality of service,
            taxpayer satisfaction, and case resolution, in addition to
            collection results.
          The allocation of accounts among the PCAs participating in the
            program would be based on this performance evaluation, thereby
            providing a further incentive for PCAs to respect all taxpayer
            rights and protections. This compensation structure is modeled
            on the successful FMS and Department of Education contracts.
      --Oversight.--The administration's proposal would involve extensive
            IRS oversight of the PCAs participating in the program. This
            IRS oversight would ensure that procedures are followed, and
            that any issues are identified and resolved early.
        Question. How much outstanding tax debt owed to the Federal
    Government is likely to be collected if this initiative moves forward?
        Answer. The Treasury Department has estimated net revenue will
    total $1.5 billion over 10 years. The gross revenue collected in the
    Treasury calculations is $1.9 billion over 10 years.
        Question. The Customer Account Data Engine (CADE) is the
    centerpiece of the modernization effort. It holds the promise of moving
    the IRS from the tape driven system of the 1960's to a modern reliable
    database.
        What needs to occur to make this plan a reality for the IRS?
        Answer. As you have so appropriately noted, the delivery of the
    CADE project is particularly important because--like the new online
    technical infrastructure that the IRS deployed--CADE is a core
    fundamental component of the modernized systems. As such, CADE is the
    IRS's highest priority technology project.
        The first release of CADE is scheduled for delivery in September
    2004. The IRS has 2 weeks remaining on the fiscal year 2004 filing
    season release pilot. The pilot has gone well. The IRS is scheduled to
    go into initial production operation sometime in July or August under a
    fixed price contract through initial operating capacity.
        Question. What has caused the 30-plus month delay in the delivery
    of Phase 1 of this system?
        Answer. The CADE delays stemmed from infrastructure upgrades,
    initial poor software quality during the startup of systems integration
    testing combined with the failure to understand the complexity of
    balance and control, and the resolution of operational and performance
    issues that occurred during Phase 3 of the Release 1.0 pilot.
        Question. Why has the estimated cost gone from $61,145,000 to
    $97,905,000? When can the committee expect a delivery of Phase 1? What
    is the IRS doing to control the massive cost increases to this system?
        Answer. CADE Cost Overrun (from the original estimate of
    $61,145,000 to $97,905,000).--The description below explains the costs
    that GAO reported in their Audit of the fiscal year 2004 Expenditure
    Plan:
    Design Work from September 2000 to July 2001
        $15.3 million--initial estimate in March 2000 Expenditure Plan.
        $19.3 million--actual cost.
        $4.0 million--variance due to design period being extended by 3
    months to add detail in some areas and to bridge to Development.
    Development Work from July 2001 to March 2004
        $40.0 million--initial estimate in March 2001 Expenditure Plan.
        $53.6 million--actual cost.
        $13.6 million--$9.3 million of the variance was due to a 2-month
    extension for a Pilot using real tax returns (cost of $5.3 million) and
    the addition of capacity at the Martinsburg Computing Center to support
    Development and Testing (cost of $4.0 million). The remaining variance
    of $4.3 million was due to incurring the cost impact of delays (see
    first two items outlined below).
    Cost Impact of 2-Year Delay in Delivering CADE
        $2.4 million--hiring of non-PRIME contractors to support IRS
    testing.
        $1.9 million--establishing a CADE Program Office (work to build an
    organizational framework to support multiple CADE releases
    simultaneously).
        $18.0 million--cost to apply tax law and other changes for 2003 and
    2004 filing season.
        These costs do not reflect any changes since the GAO audit of the
    fiscal year 2004 Expenditure Plan.
        Question. Please provide the committee with an update of the
    review.
        Answer. The IRS used the results from independent studies
    commissioned during the summer of 2003 to create a BSM Challenges Plan
    comprised of 40 some action items. Given the strategic importance of
    the plan, the Commissioner appointed an IRS business unit deputy
    commissioner to oversee the implementation of the plan.
        As a first step, the BSM project team developed a crosswalk to
    ensure that the BSM Challenges Plan's definition of the issues
    addressed and/or satisfied all of the recommendations from the four
    commissioned studies as well as the recommendations submitted by the
    IRS Oversight Board, and the Software Engineering Institute (SEI) study
    of CADE.
        While the deputy commissioner made significant progress in
    implementing the plan, the full closure of all actions items was
    unrealistic within the elapsed timeframe of the 6-month appointment.
    Concurrently, the CIO created a new direct report position for
    modernization management and assigned responsibility for implementing
    the plan to the individual recently hired into this newly created
    position.
        Under the leadership of the deputy commissioner, the IRS and CSC
    team brought closure to several key actions items, including:
    clarifying the roles of committees as advisory, identifying
    ``blockers'' on contracting issues, appointing business leaders to each
    project, establishing a risk-adjusted schedule and new baseline for
    CADE Releases 1.0 and 1.1, and increasing the frequency of CADE reviews
    with the business owner to twice monthly. The majority of the action
    items are still works-in-progress, some of which will take time to
    fully complete. Others will span the life of the BSM program.
        For example, strengthening systems engineering capabilities by
    hiring external candidates will take time since it involves conducting
    the searches, interviewing the candidates, and negotiating the new
    hires to come on board. The IRS and CSC developed ground rules for
    escalating issues, but they will need to be continually enforced
    throughout the life of the program. The IRS rewrote the charters of the
    governing committees to reflect their advisory role and clearly
    articulated their responsibilities, however, it will probably take a
    year to truly evaluate and measure their effectiveness.
        As stated, the IRS has made progress toward closing all the action
    items, but it has much more work to do in critical areas. For example,
    the IRS needs to religiously follow the proper methodologies and hold
    people accountable if they do not. The IRS must start ``doing things
    right'' as opposed to ``doing things fast'' such as exiting milestones
    prematurely. An ongoing challenge will be balancing the scope and pace
    of projects consistent with capacity, ensuring that the right people
    are in place before launching a project, and setting realistic delivery
    schedules and cost estimates. The IRS is committed to staying-the-
    course and delivering on its promise to modernize America's tax
    systems, but it is important for everyone to acknowledge this is a
    monumental effort.
        The magnitude and evolution of the BSM program dictates that the
    IRS will always be going through an evolution of assessment and
    improvements. In that regard, the BSM Challenges Plan is still evolving
    and the IRS is using certain action items to continuously improve the
    program.
        Question. What changes need to be implemented to get this mission
    critical system back on track?
        Answer. As a result of missing CADE and IFS key deliverables last
    summer, the Commissioner and CSC commissioned external assessments
    studies from outside experts. The studies produced no major surprises;
    but the IRS now understands more about the issues. All of the
    assessments confirmed that the IRS modernization effort is a massive,
    highly complex, high-risk program that is confronting a number of
    critical management and technological challenges. These studies also
    made it clear that the IRS should not turn back, but rather make a
    series of changes to strengthen the BSM program.
        While all of these studies assessed different components of the
    modernization program, three major recommendations emerged including:
      --Scaling back the modernization portfolio to better align with IRS
            and CSC's capacities;
      --Engaging IRS business units to drive the projects with a business
            focus; and
      --Improving contractor performance on cost, scheduling, and
            functionality.
        The assessments also raised a number of other key improvement
    opportunities, including:
      --Adding outside expertise to help manage the program and to
            complement IRS skills;
      --Strengthening our human resources capacity management;
      --Adhering to methodologies in areas such as configuration
            management, cost and schedule estimating, and contract
            management;
      --Reducing the burden from oversight organizations;
      --Simplifying the budget process; and
      --Initiating the testing of the business rules engine on CADE.
        The Software Engineering Institute (SEI) will periodically review
    the CADE program, and a third party (MITRE) will regularly assess the
    overall health of the modernization program reporting directly to the
    CIO.
        The IRS committed to scaling back the modernization efforts to
    better match its management capacity as well as the PRIME's, and to
    focus on the most critical projects and initiatives. The IRS reduced
    the size and scope of the modernization program considerably, and has
    initially developed a human resource capacity planning model to help
    ensure the right people, with the right skills, are dedicated for the
    right amount of time to each IT project it undertakes.
        The Commissioner is holding IRS senior business unit managers
    accountable for the success of modernization efforts as it relates to
    defining, developing, and controlling business requirements. For
    example, the involvement and leadership of the Deputy Commissioner for
    Wage and Investment played a key role in the successful delivery of
    Modernized e-File.
        It was evident that CSC, as the PRIME contractor, needed to
    significantly improve their performance. While CSC has improved their
    performance somewhat, delays and cost increases persist, as evidenced
    by the continual delays in delivering CADE, IFS, and CAP. As a result,
    the IRS will expand the competition for the new enforcement projects
    that it plans to start later this year and next year. The IRS is also
    moving to capped or fixed price contracts for development work to
    balance the financial risk between the Government and the contractor in
    modernization projects.
        The IRS needs a more versatile team of seasoned executives to
    provide long-term stability to the program. It is complementing the
    skills of experienced IRS tax executives with outside seasoned
    technology executives who have experience managing large-scale, complex
    IT projects. As such, the IRS is hiring two Associate Chief Information
    Officers to join the MITS organization, and an executive search firm is
    conducting searches for five senior executives with a wide range of
    diverse experience in developing and implementing large modernization
    systems.
        The IRS has placed an emphasis on increasing the timeliness and
    accuracy of BSM communications to ensure that key stakeholders are well
    informed of program goals and the status of projects against schedule
    and cost targets.
        There is much more work to do, but the IRS is committed to
    modernizing its archaic computer systems. While progress to-date has
    been decidedly mixed--the IRS owes it to the taxpayers to stay-the-
    course and put a solid foundation in place upon which the IRS can build
    for decades to come.
        Question. The committee understands that the E-Services program is
    expected to be fully operational by fiscal year 2005. Is this program
    still on schedule? What has occurred to make this project cost go from
    $44,045,000 to $130,281,000? Why is it 18 months behind schedule?
        Answer. The IRS has achieved a great deal of success with the e-
    Services project. The IRS has delivered electronic services to tax
    practitioners, and other third parties such as banks and brokerage
    firms that report 1099s. The IRS deployed all Release 1.0 and Release
    2.0 initial operations functionality by the end of April 2004. The IRS
    conducted additional pilot and performance testing of both releases
    prior to deployment to the broad practitioner community. The response
    has been extremely positive.
        In March 2004, James D. Leimbach appeared before the Ways & Means
    Oversight Subcommittee on behalf of the National Association of
    Enrolled Agents (NAEA) and said, ``This new capability is truly going
    to revolutionize the way we conduct future business with the IRS. The
    ultimate beneficiary is the American taxpayer. We are truly amazed and
    thrilled beyond description at this way of doing business with the IRS,
    and we would like for you to understand why we feel as we do.''
        All e-Services Release 1.0 products are fully deployed and
    available over the Internet, including:
      --Registration and online address change access for third parties and
            IRS employees through secure user portals;
      --Preparer Tax Identification Number (PTIN) online application;
      --Interactive Taxpayer Identification Number (TIN) matching for
            payers and/or authorized agents who submit any of six
            information returns subject to backup withholding (Forms 1099-
            B, INT, DIV, OID, PATR, and MISC);
      --Secure Electronic Return Originator (ERO) application process; and
      --Access to e-Services registration and application processes by
            Modernized e-file (MeF) participants.
        E-Services Release 2.0 products are now in production and available
    for use by IRS staff and taxpayers, including:
      --Electronic Account Resolution (EAR);
      --Electronic TIN Bulk Matching (Bulk Requests);
      --Disclosure Authorization (DA); and
      --Infrastructure support for outbound facsimile service.
        Statistics gathered as of May 13, demonstrate that the e-services
    program is providing important benefits for taxpayers and tax
    practitioners:
      --No. of Individuals registered=24,000;
      --No. of Individuals changing address during registration=3,000;
      --No. of Interactive TIN Match requests=221,000;
      --Bulk TIN Requests=4.7 million.
        There were five main causes for the schedule delays and cost
    increases from $44,045,000 to $130,281,000.
        Budget Omission for Infrastructure Functionality/Acquisition ($8-9
    million).--The original project budget failed to consider the
    integration of the e-services application with the modernized
    infrastructure or budget for the acquisition of specific hardware or
    software to support e-Services development and production environments.
        Extended Testing and Infrastructure Integration ($15-17 million).--
    The quality of the software that CSC and Unisys delivered to the IRS
    for e-Services was lower than anticipated and the time it took to
    resolve each of the errors took longer than anticipated. In addition,
    there was a series of actual integration issues between the application
    and the infrastructure that were greater in number and took longer than
    anticipated to resolve.
        Modernized e-file 1040 e-file support ($4-6 million).--In reviewing
    the proposed design for the Modernized e-file project, it was
    discovered that the project plan called for a system that would not be
    multifunctional. The IRS developed an alternative plan to expand e-
    Services functionality to provide these services for Modernized e-file
    in a manner that was consistent with the Enterprise Architecture, which
    describes the business and information systems and technical
    infrastructure that are both in place (Current) and planned (Target).
    In addition, the Enterprise Architecture defines the architectural
    strategies to be followed and prescribes standards and technologies to
    be used.
        IRS Initiated changes including filing season changes ($8-10
    million).--Due to the fact that it took longer than anticipated to
    build the e-Services system, the IRS made a number of significant
    changes to ensure that the e-Services system was consistent with filing
    season requirements and current production changes.
        Extension of MS5 and a misestimate of MS5 costs ($45-48 million--
    increased estimates for costs through 9/30/05).--Because the e-Services
    project ran over cost and schedule estimates, the IRS deployed the
    project using version 8.1 Peoplesoft, CRM. Peoplesoft will stop
    maintenance of this version of the software in 2005. The IRS must
    upgrade the production system to conform to latest Peoplesoft CRM 8.8
    release. Due to the complexity of the upgrade, the BSM program had to
    make the changes before turning it over to ITS for operations and
    maintenance. The BSM program was originally scheduled to turn the e-
    Services project over in May 2004. The program will now be maintaining
    and upgrading the system a year longer, until May 2005.
        Question. Of the ten computer modernization projects ongoing as of
    September 2003, nine are currently over their original cost estimate by
    a total of $292,013,000.
        What needs to occur for the IRS to better monitor the escalating
    costs of these systems?
        What types of oversight does the IRS provide over the contracts for
    development and acquisition of these projects?
        Answer. The IRS is currently putting in place several control
    mechanisms for Contractual, Enterprise Life Cycle, Earned Value
    Management, Performance and Cost and Schedule Estimating that directly
    address the estimate overruns. In particular, the IRS is enacting
    methodologies that will eliminate future ``escalating costs.''
        The IRS has been working jointly with MITRE and CSC (the PRIME
    Contractor) to improve cost and schedule estimating capability. The IRS
    is using the well-recognized Carnegie Mellon Software Engineering
    Institute's (SEIs) Requisites for Reliable Estimating Processes as a
    guide. The requisites provide for development and execution of the
    following key cost and schedule estimating objectives:
      --Maintaining historical data;
      --Structured estimating processes;
      --Mechanisms for extrapolating estimates from successful past
            projects;
      --Audit trails; and
      --Ensuring integrity in dealing with dictated costs and schedules.
        Both CSC and the IRS have made significant progress towards
    achieving these key objectives. The IRS has implemented procedures for
    validating contractors' estimating systems and for reviewing cost and
    schedule estimates. The procedures provide guidance for evaluating
    reliability of documentation supporting individual estimates and for
    tracking compliance with sound estimating practices. Furthermore, the
    procedures also address professional development of personnel with the
    right skill set for developing and evaluating cost and schedule
    estimates. CSC has established a historical database, calibrated
    estimating models and developed detailed requirements for documenting
    and supporting bases of estimates along with related guidance and
    directives. Work is also in progress for continuing refinement and
    improvement in each of these elements.
        In addition, joint training is being conducted for IRS, CSC and
    MITRE personnel as an integral part of the overall plan to ensure
    competent deployment of improved processes and procedures. The IRS,
    with MITRE's assistance, recently completed a review of CSC's
    estimating system. The IRS is finalizing the results and will issue
    them in a report in the latter part of June. In general, there have
    been improvements. The report will include a time phased corrective
    action plan for addressing deficiencies. To ensure the tools, guidance,
    processes and procedures are part of a mature repeatable process, a
    concerted effort is underway to fully validate all aspects of the
    processes and procedures prior to official roll-out within the IRS.
    This pilot program is intended to verify the soundness of the processes
    and procedures and provide lessons learned, before full implementation
    is effected.
        Every effort is being made to hire qualified staff and fully
    implement improved tools, guidance, processes and procedures as soon as
    possible. However, this is taking more time than the IRS would like.
    This is a pervasive problem on programs of the size and complexity of
    the modernization initiative. Nonetheless, the IRS believes that there
    will be evidence of increased accuracy by the end of fiscal year 2004
    and continued improvements over time.
        Finally, all of these efforts are part of a highly visible set of
    plans geared to identifying, tracking, reporting, and reviewing the
    critical cost and schedule estimating commitments with IRS Executive
    Management and GAO/TIGTA.
        The following initiatives have been implemented (or are pending) to
    improve performance in the other areas:
      --Application of Performance-Based Contracting (PBC) Techniques.--
            Applying performance-based contracting techniques and
            leveraging lessons learned enhances the IRS's ability to
            proactively establish expectations for and manage the PRIME
            contractor's performance.
      --Determination of Task Order for Acquiring Modernization Systems.--
            To further improve modernization controls and capabilities, the
            IRS has established and is implementing a process for
            determining the type of task order to be awarded when acquiring
            modernization systems. The IRS issued a policy stating that
            contracts and task orders for the BSM projects in Milestones 4
            and 5 (development and deployment) will be fixed price, as
            appropriate. This type of task order will shift most or all
            risks from the IRS to the PRIME.
      --Implementation of Fixed Price Contracting Policy.--The IRS's
            Contracting organization and the Enterprise Life Cycle program
            are developing a joint approach to implement the fixed price
            contracting policy.
      --Identification of Issues and Tracking Progress.--The IRS is making
            use of Earned Value Management, Program Performance
            Measurements, and a sophisticated electronic analysis and
            reporting mechanism (the Dashboard) to track progress, identify
            variances early, and facilitate escalation of issues early in
            the life cycle.
      --Development of Metrics.--Finally, the Program Performance
            Management Office (PPMO) is developing efficiency and outcome
            metrics to:
        --decrease contracted program variances,
        --decrease requirements volatility, and,
        --increase contracted requirements delivery.
        These metrics support program management effectiveness, and provide
    the ability to assess achievement of program performance goals relative
    to cost, schedule, requirements scope, and requirements delivery.

                                FUEL TAX EVASION

        Question. The Federal Highway Administration (FHWA) Motor Fuel Tax
    Evasion Project supports Federal and State efforts to enhance motor
    fuel tax enforcement. The program was established by the Intermodal
    Surface Transportation Efficiency Act of 1991 (Public Law 102-240) and
    continued under the Transportation Equity Act for the 21st Century
    (TEA-21) (Public Law 105-178).
        Since 1998, the Department of Transportation has provided the
    Internal Revenue Service (IRS) $31 million from Highway Trust Fund
    revenues to enhance motor fuel tax enforcement, primarily by developing
    and operating an automated excise fuel tax reporting system, the Excise
    Fuel Information Reporting System (ExFIRS). The administration's
    proposed Safe, Accountable, Flexible and Efficient Transportation
    Equity Act (SAFETEA) of 2003 includes $163 million for the IRS through
    fiscal year 2009, and the Surface Transportation Authorization bill as
    passed by the Senate proposes about $300 million.
        The IRS has been struggling to modernize its automated systems. For
    example, the committee has been told that Commissioner Everson excluded
    one contractor from a project to update the IRS's tax enforcement
    systems after learning the contractor would miss an April deadline for
    putting in a new general ledger accounting system.
        How is ExFIRS currently being used to enhance motor fuel tax
    enforcement and what are its capabilities? Is the system fully
    operational and functioning as envisioned? If not, what is needed to
    complete the systems development effort?
        Answer. ExFIRS is an umbrella system made up of several subsystems/
    modules that support the collection of motor fuel industry information,
    support automated analysis of this information, and help identify areas
    with the highest risk for non-payment of excise tax liabilities
    (therefore offering higher potential for return on investigative and
    enforcement activities). The most important of the subsystems is the
    Excise Summary Terminal Activity Reporting System (ExSTARS), which
    tracks all petroleum movements, in and out, through approved terminals,
    and captures information that the IRS shares with State taxing
    agencies.
        ExSTARS is the information reporting system that was designed
    similar to the IRS 1099 matching system that matches information
    received from employers, financial institutions and other businesses
    with information reported by taxpayers. It enables the IRS to track all
    reported fuel transactions that occur within the fuel industry's bulk
    shipping and storage system. It provides tracking capabilities of fuel
    from the pipeline/barge delivery system to the point of taxation for
    the Federal Excise Tax at the terminal. This information is then
    matched by the IRS to fuel sales transactions reported by taxpayers and
    to verify their tax liabilities reported on the quarterly Forms 720.
        ExSTARS was operational on April 1, 2001. However, the large volume
    of paper returns filed each month has hampered the maximum use and
    benefit of the system. ExSTARS requires information reporting from over
    1,400 terminals registered to transact fuel sales in this country, as
    well as the pipelines and barge carriers that transport the fuel from
    the refineries to the terminals. The IRS receives information reports
    on 10 to 14 million fuel transactions monthly. Approximately 70 percent
    of these are filed electronically. Working with the remaining 30
    percent filed on paper documents is both impractical and cost
    prohibitive. Senate Bill S. 1072, the Safe, Accountable, Flexible, and
    Efficient Transportation Equity Act of 2004 (SAFETEA), would require
    electronic filing of any return containing more then 25 transactions,
    as proposed in the administration's SAFETEA bill. This legislation, if
    passed, will greatly enhance the tracking capabilities of ExSTARS.
        ExFIRS includes a Data Warehouse module that interfaces with
    ExSTARS. This module uses the information reported in ExSTARS, on the
    distribution of fuel, to match against the reported amounts on
    taxpayer's 720 Excise Tax Returns. ExFIRS also includes legacy systems
    that the IRS used to track and monitor compliance in the motor fuel
    area. The Excise Tax Registration Authentication System (ExTRAS)
    contains the monitoring system for the registration program of
    taxpayers allowed to carry on tax free transactions within the fuel
    distribution system. The Excise Fuel On-line Network (ExFON) is the
    management information system used to monitor the Dyed Fuel Program.
    The IRS included these systems in the ExFIRS Program because they are
    an integral part of the motor fuel tax program and must be included in
    the IRS's tracking of activities that impact compliance in this area.
    The funding for the update and enhancement of these systems came from
    IRS operating funds. These systems have been operational for several
    years and the updated versions are in place and operating within the
    ExFIRS Program. The Excise Tax Agent Work Center (ExTAC) is an
    automated work center that will enable IRS Excise Tax Agents to receive
    tax returns in electronic format and to conduct examinations in an
    automated environment. ExTAC is a part of ExFIRS and will receive
    information from the system to assist in the examination of returns.
    ExTAC was funded by the IRS and is currently a working prototype
    version. The system will be in full production and used by agents by
    the end of the first quarter of fiscal year 2005.
        Question. Given the problems IRS has experienced fixing its other
    automated systems, what reasonable assurance can you provide this
    committee that taxpayers are getting a good return on their investment
    in ExFIRS and that the project is being properly managed?
        Answer. In 1998, Congress passed the Transportation Equity Act for
    the 21st Century, requiring the IRS to develop a fuel tracking system.
    This act required the IRS to use an outside contractor for the
    development and maintenance of the system. The IRS has met this
    requirement, and is using Software Engineering Institute (SEI) CMMI
    Level 2 development processes to manage the development efforts of the
    contractor and subcontractor personnel in order to ensure a continuous,
    uninterrupted, integrated approach to the development, installation and
    implementation of the ExFIRS subsystems.
        As stated above, the ExSTARS module of ExFIRS was operational April
    1, 2001. The design and development of this system was a joint effort
    between the IRS, industry and the States. The IRS is using the system,
    but the ability to date to maximize the effectiveness has been limited
    by two factors.
        Due to the high volume of paper returns that contain thousands of
    individual transactions, the IRS only captures summary information from
    paper returns. This limits the IRS's ability to meet the goal of
    matching ExSTARS information to filed Excise Tax returns.
        The filing requirements for ExSTARS required a significant
    investment for the fuel industry and at the time of ExSTARS becoming
    operational, some companies were not fully prepared to meet all of the
    filing requirements. Since April 1, 2001, the IRS has worked closely
    with industry filers to ensure accurate and timely filing of the
    information returns required for the operation of ExSTARS. The IRS
    formed a Data Perfection Team composed of IRS personnel along with
    outside contractors to work with and assist individual companies meet
    their filing requirements. Although the IRS has made great progress
    this area, some companies are still experiencing problems. The IRS has
    made a decision to continue to work in a cooperative manner with all
    companies that demonstrate a desire to address their problems and come
    into compliance with the ExSTARS filing requirements.
        The IRS is using the system today. It has the ability to track the
    movement of fuel in all States--but within the limitations of the
    problems outlined above. If the issue of paper returns is addressed,
    the IRS will be able to match individual filers to the ExSTARS
    database. This will enable the IRS to better determine where to
    allocate its enforcement resources to combat fuel tax non-compliance.
    This same information will allow States that have the same tax point as
    the Federal Excise Tax to ``piggyback'' on this data to enhance their
    own compliance efforts.
        On the question of the return on investment to the American
    taxpayers, one needs to look at the effectiveness of information
    reporting for compliance with income taxes. Matching information
    received from employers, financial institutions, and other businesses
    with information reported by taxpayers has long been recognized as one
    of the most powerful tools that the Internal Revenue Service has used
    to ensure income tax compliance. In fact, third parties report
    approximately 80 percent of the personal income received by taxpayers.
    Through its document matching programs, the Internal Revenue Service is
    able to use this data as an effective compliance tool. The ExFIRS
    Program will deliver the same effectiveness to the Excise Fuel Tax
    arena. The information gathered by the ExFIRS Program will be shared
    with all State motor fuel taxing agencies and will lead to increased
    compliance for the States. The States will directly benefit from the
    increased revenues that will be generated by a higher level of
    compliance in both the Federal and State areas.
        Question. How were systems requirements determined and were other
    Federal and State law enforcement agencies involved in defining the
    requirements?
        Answer. The design, development, and implementation of ExSTARS is a
    result of a working collaboration between the Internal Revenue Service,
    Contractors, Federal Highway Administration, State tax administrators,
    and industry stakeholders over more than a 5-year time period. A key
    goal in the development process was to create a system that would
    benefit State revenue agencies as well as the IRS. The system uses the
    Uniform Reporting Standards developed by the States to ensure all data
    is compatible with State systems. The Excise Tax On-line Exchange
    (ExTOLE) module was developed specifically for use by the States.
    ExTOLE allows States to exchange data that relates to motor fuel tax
    issues.
        Question. What is the total cost of ExFIRS to date? What is the
    cost, funding, and schedule status of any development effort still
    needed for the system? What is the annual cost to operate and maintain
    the system?
        Answer. The IRS and FhWA have provided funding for ExFIRS. The IRS
    funding is used to cover the incorporation of legacy system into
    ExFIRS. The two charts below show the cost to date:

                                                                    FHWA ExFIRS EXPENDITURES
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Fiscal Year      Fiscal Year     Fiscal Year      Fiscal Year     Fiscal Year
                       Cost Categories                          1999            2000             2001            2002             2003            Totals
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Initial Distribution from FHWA......................      $9,430,000       $7,923,000      $4,479,000       $4,609,000      $4,739,000      $31,180,000
    Budget Reduction from FHWA..........................        (180,000)  ..............         (11,000)  ..............         (32,500)        (223,500)
    Total Available for Project.........................       9,250,000        7,923,000       4,468,000        4,609,000       4,706,500       30,956,500
    Contractors.........................................       6,151,747        4,237,216       3,913,663        3,938,222       2,922,850       21,163,698
    Labor...............................................         517,849          943,910  ...............         114,489  ...............       1,593,948
    Training............................................          20,615           33,270          85,320          112,165          96,653          348,023
    Travel..............................................         521,052          968,000  ...............         165,000         287,610        1,941,662
    Background Investigations...........................  ...............          32,175          20,000            4,000           5,425           61,600
    Hardware............................................       1,871,037          772,693          89,015          108,315         271,358        3,112,418
    Software............................................  ...............         769,676         146,079           13,819         918,060        1,847,634
    Maintenance.........................................  ...............           2,000          28,140            2,990          54,544           87,674
    Criminal Investigation Division.....................         150,000          150,000         150,000          150,000         150,000          750,000
    Telecom.............................................  ...............          14,060          35,783   ..............  ...............          49,843
                                                         ---------------------------------------------------------------------------------------------------
          Total Spent on Project........................       9,232,300        7,923,000       4,468,000        4,609,000       4,706,500       30,956,500
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                     IRS ExFIRS EXPENDITURES
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Fiscal Year      Fiscal Year     Fiscal Year      Fiscal Year      Fiscal Year
                      Cost Categories                          1999            2000             2001             2002             2003            Totals
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Initial Request from IRS...........................      $2,510,000       $2,101,000      $3,758,000       $5,204,000       $9,106,000      $22,679,000
    Budget Reduction from IRS..........................         (92,338)  ..............      (1,037,469)      (3,406,000)      (7,220,000)     (11,755,807)
    Total Available for Project........................       2,417,662        2,101,000       2,720,531        1,798,000        1,886,000       10,923,193
    Contractors........................................       1,173,062        2,077,039       2,720,531        1,319,000        1,886,000        9,175,632
    Labor..............................................  ...............  ..............  ...............  ...............  ...............  ...............
    Training...........................................  ...............  ..............  ...............  ...............  ...............  ...............
    Travel.............................................  ...............  ..............  ...............  ...............  ...............  ...............
    Background Investigations..........................  ...............  ..............  ...............  ...............  ...............  ...............
    Hardware...........................................         967,462            8,000  ...............          62,000   ...............       1,037,462
    Software...........................................         149,998           15,961  ...............  ...............  ...............         165,959
    Maintenance........................................         127,140   ..............  ...............         417,000   ...............         544,140
    Criminal Investigation Division....................  ...............  ..............  ...............  ...............  ...............  ...............
    Telecom............................................  ...............  ..............  ...............  ...............  ...............  ...............
                                                        ----------------------------------------------------------------------------------------------------
          Total Spent on Project.......................       2,417,662        2,101,000       2,720,531        1,798,000        1,886,000       10,923,193
    --------------------------------------------------------------------------------------------------------------------------------------------------------

        In addition, here are spreadsheets detailing future development,
    maintenance and operating cost through fiscal year 2006. Funding is
    provided each year to assist the IRS CI in their efforts on motor fuel
    issues.

             ExFIRS SUPPORT CONTRACTOR COST ESTIMATES BY FISCAL YEAR
                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                     Fiscal Year   Fiscal Year   Fiscal Year
      ExFIRS SW Develop/Enhance/      2004 Oct      2005 Oct      2006 Oct
     Maint Via TIPSS Type Contract    2003-Sep      2004-Sep      2005-Sep
                                        2004          2005          2006
    ------------------------------------------------------------------------
    ExFON Dev/Maint/Enhancement            700.8         790.4         160.0
     (includes Legacy Maint, New
     ExFON Dev In Web Envir and
     Data Migration)..............
    ExSTARS Dev/Maint/Enhancement        2,945.0       1,594.2         400.8
     (includes Maint of ExSTARS 1
     and Dev/Maint of ExSTARS 2)..
    ExTRAS Dev/Maint/Enhancement            80.0         372.8         160.0
     (includes legacy maint and
     development in Web
     environment).................
    BTRIS Dev/Maint/Enhancement            424.0       1,118.2         225.0
     (includes maint of current
     BTRIS and development of the
     Analyst Module)..............
    ExCIDS Dev/Maint/Enhancement           190.6       1,182.7         120.0
     (includes devel of case mgt
     and workflow modules)........
    ExTAC Dev/Maint/Enhancement            770.8         691.2         320.0
     (includes maint of current
     system, development of GM
     module, and migration to Web
     environment).................
    ExTOLE Maint/Enhancement                80.0         160.0         120.0
     (includes maint of current
     system and development of
     enhancements called out in
     SOW).........................
    ExMIS Dev/Maint/Enhancement            546.0         597.1         120.0
     (includes DW and ExCIS maint
     and analysis/reporting
     enhancements)................
    Common Costs Associated with         2,466.2       2,476.1       1,866.4
     all Subsystems (includes Prog
     Mgt, Sys Engr, CM, QA,
     Testing, SEI/CMM, Security,
     Subcontract Mgt, travel
     expenses, etc.)..............
    Infrastructure Costs--See            3,779.0       3,789.0       3,568.0
     Infrastructure sheet
     (includes SW/HW Upgrades/
     Migrations, Tier 2 and
     Modernization Requirements,
     COTS and SW Licenses/
     Maintenance, Technology
     Advancements, Service Center
     Support, etc.)...............
                                   -----------------------------------------
          Subtotal................      11,982.4      12,771.7       7,060.2
                                   -----------------------------------------
    FhWA Funding at Current Rate..       4,200.0       4,200.0       4,200.0
    Projected Need................       7,782.4       8,571.7       2,860.2
    IRS Funding Allotted..........       4,959.0       4,250.0       3,453.0
    Funding Shortfall.............       2,823.4       4,321.7        -592.8
    ------------------------------------------------------------------------

               ExFIRS INFRASTRUCTURE COST ESTIMATES BY FISCAL YEAR
                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                     Fiscal Year   Fiscal Year   Fiscal Year
         ExFIRS Infrastructure        2004 Oct      2005 Oct      2006 Oct
               Estimates              2003-Sep      2004-Sep      2005-Sep
                                        2004          2005          2006
    ------------------------------------------------------------------------
    Annual COTS Licenses, Yearly           656.0         637.0         668.0
     Maintenance and New User
     Licenses (Oracle,
     Informatica, Paper Free,
     Mecator, Business Objects,
     MapInfo, FileNet, Ventica)...
    ExFIRS SW Migrations for New           924.0         236.0         970.0
     RDBMS/OS/COTS (Oracle/Sun/
     NT). Major migration every
     other year (even years)......
    Tier 2 Requirements (New CM            231.0         243.0         100.0
     tool, additional security,
     move to Tier 2 infrastructure
     and web page compliance--
     508J)........................
    ExFIRS Harware Migrations              236.0         892.0         248.0
     (production, development, and
     test servers/user desktops,
     laptops and handheld devices/
     gateway firewalls and routers/
     technology upgrades). Major
     upgrade every other year (odd
     years).......................
    ExFIRS Service Center Expenses         982.0       1,031.0       1,082.0
     (SA/DBA personnel and
     training covered by SLA--9.9
     staff years).................
    Other ExFIRS Expenses (SW              750.0         750.0         500.0
     upgrades for technolgy
     advancements, new user
     functionality and IRS
     modernization initiatives)...
                                   -----------------------------------------
          Subtotal................       3,779.0       3,789.0       3,568.0
    ------------------------------------------------------------------------

        Question. What benefits does FHWA derive from the system? Does IRS
    believe FHWA receives satisfactory return on investment from the
    system?
        Answer. Tax receipts deposited in the Highway Trust Fund Account
    totaled $35.2 billion in fiscal year 2003, of which $30.2 billion went
    to the Highway Account and $5 billion to the Mass Transit Account. As
    described above, the ExFIRS Program will enhance fuel tax compliance
    directly impacting the FHWA's mission. In addition, the FHWA will be
    able to use data from the system in its own planning process. Just
    recently the IRS met and provided summary data to FHWA to assist in its
    efforts to develop their model of State revenue sharing.
        Question. Has an independent audit or review ever been performed of
    the ExFIRS development effort?
        Answer. ExFIRS has a requirement to operate at a minimum of
    Maturity Level 2 of the SEI CMM. Yearly Process Appraisal Review
    Methodology (PARM) review of the process was completed in February 23,
    2004. At Technology Solutions Center a CMMI SEI Level 2 rating was
    verified by independent evaluations (external SCAMPI Class A) on
    February 27, 2004.
        Question. Fuel tax fraud creates a drain on Highway Trust Fund
    (HTF) revenues, which FHWA estimates costs at least $1 billion
    annually. Department of Transportation Secretary Mineta has called
    evasion of Federal motor fuel taxes ``a serious and growing problem
    that requires a serious Federal response.'' The loss of motor fuel
    taxes is also detrimental to State programs. The impact of these losses
    is even greater coming at a time when we have experienced a reduction
    in the growth of HTF revenues, while demands on highway capacity have
    reached unprecedented levels, and replacement and rehabilitation costs
    for aging infrastructure are rapidly increasing.
        Although fuel excise taxes represent less than 2 percent of total
    Federal tax revenues, they are a critical funding source for DOT
    programs. Taxes on gasoline, diesel, and other fuels provide about $33
    billion each year, or 89 percent of the HTF revenues used to finance
    highway and transit projects nationwide. Increased tax collections mean
    increased Federal revenues for funding the Nation's highways and
    transit programs.
        In July 2002, FHWA Administrator Peters testified before Congress
    that the administration proposed to halt fuel tax evasion through ``a
    vigorous and more collaborative enforcement effort by State and Federal
    agencies'' and a significant increase in funding over TEA21. The
    administration proposed providing $202 million for the Highway Use Tax
    Evasion Project, of which $163 million would be transferred to the IRS.
        What does IRS currently estimate the losses from fuel tax evasion
    to be and how was this estimate derived?
        Answer. KPMG, not the Federal Highway Administration, estimates
    drain on the Highway Trust Fund revenues to be the $1 billion. Although
    it is difficult to estimate evasion because the IRS does not know what
    is not being reported, the IRS identified and is addressing critical
    areas of excise tax non-compliance. These include the:
      --Continuing misuse of dyed diesel fuel;
      --Smuggling to evade payment of taxes;
      --Cocktailing (increasing the fuel volume by mixing in other
            products) to illegally reduce the effective tax rate; and
      --Diverting aviation jet fuel to highway use to illegally evade motor
            fuel taxes.
        The IRS continues to discover misuse of dyed diesel fuel for tax
    evasion purposes despite the numerous legislative and regulatory steps
    Federal and State governments have taken. The 140 fuel compliance
    officers (FCO) monitor 1,400 terminals, all fuel wholesalers, thousands
    of retail motor fuel outlets, and U.S. border crossings. Additionally,
    FCOs periodically inspect on-road vehicles on highways throughout the
    country. From January 1, 2003 through December 15, 2003, FCOs have
    assessed over 1,400 penalties totaling over $1,400,000 for misuse of
    dyed diesel fuels. A further analysis of these results indicates that
    70 percent of the penalties involved the misuse of fuel by taxpayers in
    the construction and agriculture industries. Both of these industries
    are subject to broad-based tax exemptions for non-highway use of motor
    fuels, thereby, presenting opportunities for abuse.
        Another critical compliance problem is smuggling of motor fuel.
    This involves the illegal introduction of fuel into the United States
    to evade payment of excise taxes. This problem may occur at border
    crossing points and points of entry for ocean-going vessels. More than
    9 million trucks pass through the 55 border crossings between Canada
    and Mexico into the United States each year.
        The IRS also has found instances of fuel smuggled into the country
    by people using barges that off load from ocean-going vessels. The IRS
    is involved in two investigations of barges being used to smuggle fuel;
    however, it does not know the full extent of activities in this area.
    These activities are extremely hard to identify due to the multitude of
    locations and means smugglers may use. The Corps of Engineers has
    identified over 600 locations that are not terminals but are known to
    have the ability to off load fuel from barges. In addition, barges may
    have portable devices that become mobile racks, providing the ability
    to off load fuel at any location.
        Another compliance problem is the use of adulterated fuel through
    cocktailing. This technique increases profits by increasing the volume
    of diesel fuel with used motor oil and other distillates including
    pollutants, cleaning agents, and unfinished refinery products. This
    form of tax evasion is attractive for two reasons. First, the
    substances used to extend the fuel are often not regulated, so they are
    not recorded in any fuel reporting system. Second, in some cases, the
    substances are regulated as waste materials, providing an unscrupulous
    individual an opportunity to get paid to dispose of the product(s) and
    then blend them into gasoline and get paid again. This tax evasion
    technique results in an ongoing revenue loss. It may also be dangerous
    to the public when the taxable fuels are blended with hazardous waste.
        Aviation fuel is the last interchangeable product available within
    the legal fuel distribution system that is not taxed when the fuel
    leaves a terminal. In any given month, hundreds of millions of gallons
    of aviation fuel flow into and out of registered terminals. This exempt
    removal at the rack creates incentives and opportunities to divert
    aviation fuel to highway use. From fuel inspections, the IRS knows
    aviation fuel is being diverted. However, the IRS does not know for
    certain the amount diverted. The IRS is finding aviation fuel in small
    amounts blended into normal diesel in the propulsion tanks of trucks/
    tractors. Also, the IRS has found aviation fuel in larger quantities in
    retail outlets through its Below The Rack compliance efforts. The IRS
    has found a blend of 5 to 10 percent in most cases.
        In 2002, KPMG released a report alleging that the possible loss
    each year to aviation fuel diversion may exceed $1 billion. The results
    from IRS internal efforts do not support or disprove an estimate of
    that size. The IRS initiated an audit program to determine if it could
    identify significant diversion through aviation fuel distributors
    operating as 637 H Registrants. In most situations, the distributor had
    the paperwork to support a tax free/reduced tax sale of the fuel. To
    date, the IRS has not identified registrants with massive amounts of
    fuel for which they cannot account. Due to the lapse of time between
    the sale of the fuel and the audit, the IRS could not successfully
    track down the ultimate users of the fuel to verify that the fuel was,
    in fact, used in a proper fashion. The only way to ensure the fuel is
    used properly is to track the fuel to each end user. The diversion of 1
    percent of the aviation fuel that leaves the terminals in the United
    States represents the loss of over $65,000,000 per year. Based on IRS's
    findings in the fingerprinting test, it believes that a 3 percent
    diversion is a conservative estimate. This amount of diversion would
    cost $195,000,000 per year.
        Dyed Fuel Misuse.--Dyed Fuel used on highways.--The IRS does not
    have an exact figure that it can state as the extent of total non-
    compliance for the misuse of dyed fuel. Based on penalties asserted
    over the past 3 years, the IRS assesses a penalty on an average of 1
    percent of the trucks it inspects on the highway and 6 percent of the
    end user sites that it inspects. The IRS does not have data on the
    total volume of fuel involved in each of these cases; however, these
    results indicate a continuing non-compliance issue with the proper use
    of dyed fuel. Based on this experience, the IRS believes that at least
    1 percent of dyed fuel sold each year is diverted, resulting in loss of
    tax of at least $50,000,000.
        Cocktailing/Illegal Blending.--The Internal Revenue Service has
    developed a ``fuel fingerprinting'' technology to combat fuel tax
    evasion occurring ``below the rack''--particularly bootlegging,
    smuggling, and adulterated fuel through ``cocktailing'' or blending the
    product. Fuel fingerprinting is a technique that examines the
    ``chemical fingerprint'' of samples taken from retail stations for
    adulteration or for a mismatch with samples taken from the terminal
    racks that normally supply those stations. This technology allows for
    the detection of untaxed kerosene intended to be used as aviation fuel,
    ``transmix'' taken out of pipelines, waste vegetable oils, used dry-
    cleaning fluids, and other chemicals that may be mixed with diesel fuel
    and find their way into the tanks of trucks on the road. Fuel
    fingerprinting provides a more efficient and comprehensive method to
    monitor compliance compared to traditional audit techniques. The IRS
    has conducted sampling on diesel fuel in several parts of the country.
    Results indicate approximately 8 percent of the diesel fuel tested has
    some form of adulterant. The amount of adulterant found in retail
    outlets has been in the range of 2 percent-25 percent with an average
    of 8.2 percent. Using these results, the IRS estimates that there is a
    minimum of $50,000,000 each year in tax loss due to illegal blending of
    diesel fuel.
        Due to safety issues with handling gasoline, the IRS has not
    conducted fuel fingerprinting tests for gasoline. The IRS has anecdotal
    information from informants that illegal blending is much more common
    for gasoline then diesel. The reason given is the huge demand for
    gasoline and the ease to hide the adulterants among the large volume of
    fuel moving through a location. Using estimates for diesel fuel and
    comparing the sale of gasoline to diesel (3 to 1), the IRS has a
    minimum estimate of $150,000,000 per year for illegal gasoline
    blending.
        Although the IRS has evidence of fuel being smuggled into the
    country, it does not have a reasonable basis for an estimate at this
    time. As mentioned in the discussion of the various schemes used for
    motor fuel tax non-compliance, the IRS does not have exact estimates of
    the potential revenue losses. All of these schemes are outside the law
    and the information is based on information the IRS has gathered
    through examinations and fuel testing. The IRS believes this is a
    conservative estimate and, in fact, does not include any estimation for
    smuggling in these numbers. In summary, estimates for the overall loss
    of revenue are as follows:

    ------------------------------------------------------------------------
                                                                  Amount
    ------------------------------------------------------------------------
    Misuse of Aviation Fuel.................................    $195,000,000
    Misuse of Dyed Fuel.....................................      50,000,000
    Cocktailing of Diesel...................................      50,000,000
    Cocktailing of Gasoline.................................     150,000,000
                                                             ---------------
          Overall Estimate..................................     445,000,000
    ------------------------------------------------------------------------

        Question. How is IRS working with other Federal agencies and States
    to leverage enforcement resources? Since 2000, how many cases are being
    jointly investigated with other Federal and State law enforcement
    agencies?
        Answer. The IRS has a long history of working fuel cases with its
    State counterparts and, when appropriate, with other Federal agencies.
    With current disclosure provisions it is difficult to jointly
    investigate motor fuel cases with other Federal agencies. In the past,
    the IRS has successfully worked with other Federal agencies under the
    umbrella of the grand jury. Working with State counterparts is most
    effective when the State has a similar point of taxation, that being at
    the terminal rack.
        The IRS does not have a measurement process for determining how
    many cases have been worked with State or other Federal agencies. These
    situations have been on a case-by-case basis with the documentation in
    the case file.
        Question. Who is responsible for coordinating the overall Federal
    and State efforts for pursuing all fuel tax evasion-related offenses?
        Answer. The Internal Revenue Service is responsible for Federal
    efforts to pursue fuel tax evasion. It works in a collaborative fashion
    with State agencies and other Federal agencies. In these efforts, the
    IRS does not direct the resources of the other agencies; however, it
    does share information that it can properly share under the existing
    disclosure provisions. As stated earlier, the ability to share
    information with these partners must conform with the provisions of IRC
    6103 for disclosure of taxpayer information.
        Question. What is the total Federal ``level of effort'' in terms of
    staff and resources, being directed at these crimes?
        Answer. The IRS has several programs/activities that support motor
    fuel tax compliance and other taxes that support the Highway Trust
    Fund. The Small Business/Self Employed (SB/SE) Division has
    approximately 260 revenue agents who are excise tax specialists and
    approximately 140 fuel compliance officers (FCOS). Historically, IRS's
    revenue agents spend 40-50 percent of their direct examination time on
    the taxes that support the Highway Trust Fund. The FCOs spend 100
    percent of their time enforcing the dyed fuel laws and detecting
    illegally blended fuel through its below the rack (BTR) efforts. In
    addition to these employees, the IRS has approximately 50 tax examiners
    that audit claims for excise tax refunds, the majority being for motor
    fuel taxes. Motor fuel excise tax compliance is a priority for Criminal
    Investigation (CI) and included in its fraud program along with
    bankruptcy, insurance, healthcare, and other financial frauds. CI
    resources are applied to this program area based on the degree of
    criminal activity identified.
        Question. What is the IRS's budget request for fuel tax enforcement
    activities for fiscal year 2005? Please compare to funding allocated to
    this area of enforcement for the past 5 fiscal years. Does IRS have any
    plans to increase the number of resources devoted to this area? Should
    funding for this project increase?
        Answer.

                                               COSTS FOR EXCISE AGENTS \1\
    ----------------------------------------------------------------------------------------------------------------
                                                                    FTE       Salaries     Benefits        Total
    ----------------------------------------------------------------------------------------------------------------
    Fiscal year 2000...........................................        271      $59,636      $18,832     $21,264,828
    Fiscal year 2001...........................................        267       61,249       19,342      21,517,797
    Fiscal year 2002...........................................        285       63,451       20,037      23,794,080
    Fiscal year 2003...........................................        282       65,421       20,659      24,274,560
    Fiscal year 2004...........................................        252       68,103       21,506      22,581,468
    Fiscal year 2005 \2\.......................................        240       69,465       21,936      21,936,240
    ----------------------------------------------------------------------------------------------------------------
    \1\ Based on GS-13 Step 5 RUS.
    \2\ Projected.

        The above chart reflects the total number of Excise Agents that
    worked all Excise returns. The IRS is currently evaluating the staffing
    levels for fiscal year 2005 but no decisions have been made to date. In
    its SAFETEA legislation, the administration proposed $54.5 million for
    highway use tax evasion projects in fiscal year 2005. This funding
    would enable the IRS to increase resources applied to motor fuel tax
    compliance. As ExFIRS becomes a more viable system, the IRS anticipates
    having improved data to determine the appropriate level of future
    staffing.
        Question. What is IRS's current fuel tax evasion investigative
    caseload? How many staff does IRS devote to this area? Does the IRS
    need to devote additional revenue agents or criminal investigators to
    fuel tax evasion fraud? Why or why not?
        Answer. Criminal Investigation currently has fourteen motor fuel
    cases under investigation. In fiscal year 2003 the IRS devoted nine
    special agent FTE and three non-special agent FTE to excise tax cases.
    Criminal Investigation does not anticipate a significant increase in
    resources devoted to motor fuel excise tax evasion cases because the
    legislative changes enacted over the past decade have significantly
    curtailed opportunities for abuse that previously existed, but CI will
    commit additional resources if local or regional compliance problems
    arise.
        Question. How does IRS measure the success or failure of its fuel
    tax evasion efforts? What indictments, recoveries, and convictions has
    IRS attained as a result of their fuel tax evasion efforts? What
    successes or failures have the States and other Federal agencies had in
    this area?
        Answer. Criminal Investigation has no formal measures to gauge the
    success of its excise tax program. Ultimately, it is the impact of
    successful prosecutions that ultimately determine success or failure.
    During the period fiscal year 1993 through fiscal year 2003, the IRS
    prosecuted 364 people for participating in schemes to evade excise
    taxes. In aggregate, these prosecutions involved over $500,000,000 in
    tax revenue and involved many prominent members of organized crime. CI
    reported the magnitude of this effort in the excise tax case summaries
    contained in their annual reports from fiscal year 1993 through fiscal
    year 2001. These summaries chronicle many prominent cases and the
    history of motor fuel enforcement efforts over the last decade. After
    fiscal year 1997, motor fuel tax evasion case initiations began to
    decline. Subsequent schemes lacked the complexity and scope previously
    seen. This decline is attributable to the following factors:
      --The cooperative efforts of Federal and State revenue and regulatory
            agencies;
      --Support from the motor fuel distribution industry and professional
            associations;
      --Effective criminal prosecutions;
      --Development of improved auditing and compliance tools (particularly
            fuel tracking systems, fuel dyeing and the on road inspection
            programs; and,
      --Passage of fundamental legislative changes that reduced the
            opportunities for evasion.
        Question. Does the IRS have a plan for achieving a more vigorous
    and collaborative Federal and State effort for pursuing fuel tax
    evasion? If so, please describe the plan. Does IRS see any barriers to
    expanding current efforts to collaborate with other agencies on fuel
    tax fraud-related investigations?
        Answer. The IRS is continuing to work closely with other Federal
    and State agencies that enforce motor fuel laws. It also works with
    State environmental agencies when notified of misuse of hazardous
    materials in illegal cocktailing and blending. The IRS is participating
    with nine regional task force groups as part of the joint project with
    FHWA. IRS staff meets periodically with State counterparts to share
    information and conduct joint investigations. The IRS is involved in
    several ongoing cases with multiple States and agency.
        With the expansion of the ExSTARS reporting, several of the holes
    will be plugged in tracking motor fuel products. With the enhanced
    reporting, the States and the IRS will be able to easier identify fuel
    diversions. The principal roadblock to collaborating with other Non-
    revenue State and Federal agencies is the disclosure restrictions.
        Question. How do fuel tax evasion-related crimes relate to homeland
    security? How is IRS working with the U.S. Customs and Border
    Protection agency to combat this problem?
        Answer. Motor fuel product is a very volatile liquid and in the
    hands of the wrong individuals could have disastrous results. Criminal
    Investigation is a member of the FBI's Joint Terrorism Task Forces.
    These task forces are aware fuel tanker trucks could be utilized by
    terrorists to perpetrate a terrorist attack. Since September 11, 2001,
    all allegations involving fuel tanker trucks have been vigorously
    investigated, as have allegations that persons potentially affiliated
    with terrorist groups may be acquiring licenses to operate fuel tankers
    or transport hazardous materials.
        The IRS believes the ExFIRS/ExSTARS programs have the capability to
    handle enhanced tracking of fuel systems and it supports the
    legislation that would track vessels both for security and tax
    purposes. The IRS has also developed an acoustical device for
    identifying product that is being transported to ensure that the actual
    product being shipped matches the shipping paperwork.
                          bank secrecy act enforcement
        Question. Given the limited resources in the IRS budget for
    enforcement and compliance, what standards does the IRS use to select
    cases to review for Bank Secrecy Act (BSA) compliance?
        Answer. The Internal Revenue Manual (IRM) 4.26.3.2.4, Selection for
    Assignment provides specific guidelines to the Anti-Money Laundering
    (AML) coordinators about case selection. It provides:
      --The AML coordinator should select entities from the nonbank
            financial institution (NBFI) database or the Form 8300
            inventory, using risk-based analysis to select those entities
            with the highest potential for noncompliance for compliance
            examinations or reviews, such as:
        --Entities with a high volume of cash transactions or abnormal cash
                activity;
        --Entities in local geographic areas with high potential in money
                laundering;
        --Entities which have a previous history of noncompliance; and
        --Entities which have been cited for poor or inadequate
                recordkeeping.
      --The AML coordinator should consider available resources as well as
            balanced coverage (geographic area and industry) when selecting
            NBFIs or Non-financial trade or Businesses (NFTB) for
            compliance examinations or reviews.
      --Input from other operating divisions (e.g. TE/GE) can assist the
            coordinator in assessing risk.
      --Prior to opening the exam or review the names of selected entities
            are to be furnished to Criminal Investigation (CI) for
            clearance.
        The IRS and the Financial Crimes Enforcement Network (FinCEN)
    jointly establish the priorities for types of NBFIs to be examined, and
    the IRS provides these priorities to its AML coordinators in an annual
    program letter. In addition, as part of the efforts to improve the
    effectiveness of the AML program, the IRS provided training for its AML
    coordinators in March 2003 on methods to apply against the Currency
    Banking and Retrieval System (CBRS) to identify cases. Since that time,
    CBRS analysis has been provided to the coordinators on a regular basis
    to assist them in the identification of cases. To further ensure
    consistency in case selection, the IRS plans to centralize the case
    identification process by October 2004. The IRS is also working with
    its SBSE Research to enhance the case selection criteria.
        Question. Are the standards for determining BSA cases for review
    uniform in every office? Please provide a copy of those uniform
    standards.
        Answer. The standards for selecting cases for review are detailed
    in the response to the question above. During the AML program reviews
    conducted by the headquarters office, conformity with these guidelines
    is reviewed specifically.
        The IRS is currently centralizing case selection. BSA typed
    inventory varies demographically and changes or moves constantly. The
    IRS is seeing the shift of currency cells away from banks and larger
    cities. Efforts to centralize inventory selection will better help the
    IRS recognize these trends and quickly shift field resources as needed.
        Question. How many cases were reviewed for BSA compliance? How many
    possible cases are there? What percentage of total cases are forwarded
    for prosecution or further review?
        Answer. In fiscal year 2003, the IRS closed 3,655 NBFI cases. The
    IRS also contacted an additional 8,800 businesses to determine if those
    that had a requirement to register had done so. The number of possible
    Money Service Businesses (MSB) is constantly changing, but there are
    currently more than 88,000 potential NBFIs on the database. One of the
    objectives of the program is to identify new businesses while removing
    from the database those that no longer are in business.
        In fiscal year 2003, seven cases were forwarded to the IRS's
    Criminal Investigation Division and two cases were referred to FinCEN
    for penalty consideration. The number of cases is less than 1 percent
    of those examined.
        Question. Does the IRS train its compliance personnel in the IRS's
    responsibilities under the USA PATRIOT Act?
        Answer. IRS Compliance personnel involved in the AML program
    receive specific training regarding BSA AML Compliance Programs and
    related proposed regulations. IRS revised its Basic AML Course to
    reflect the changes resulting from the USA PATRIOT Act. As part of this
    training, personnel are:
      --Instructed on how to access the Office of Foreign Asset Control's
            (OFAC) website to identify individuals and countries which have
            been placed on OFAC's Specially Designated Nationals (SDN)
            list. In addition, information regarding the SDN list is placed
            on the AML Website to insure that examiners are aware of any
            changes to the list.
      --Trained to look for transactions going to OFAC sanctioned
            countries. If such transactions are found, personnel are
            trained to contact the OFAC's Compliance Hotline and proceed
            directly to OFAC.
      --Trained to look for unlicensed money transmitters. Two Continuing
            Professional Education (CPE) modules have been developed
            specifically addressing Informal Value Transfer Systems and
            Section 352 of the USA PATRIOT Act.
      --Trained in audit procedures to detect structuring, using data from
            actual examples of structured transactions. They are taught to
            follow the transaction through the final clearing in order to
            identify structured transactions through OFAC sanctioned
            countries.
        Question. What training does each compliance officer receive each
    year related to BSA and the USA PATRIOT Act?
        Answer. This year, the IRS provided CPE modules to IRS's AML
    examiners: Suspicious Activity Reports, Structuring, Informal Value
    Transfer Systems, and Section 352 of the USA PATRIOT Act. The IRS
    provides examiners with workshops regarding the BSA during group
    meetings held at least once a year. The IRS makes AML Technical
    Advisors available to attend these group meetings.
        In addition, information regarding new regulations is forwarded
    from Headquarters to Territory Managers for immediate dissemination to
    examiners, and examiners review FinCEN's SAR Activity Reviews Digests
    as well as other issued guidance. In addition, examiners are required
    to refer to the AML website on a regular basis for any changes to
    procedures and/or regulations.
        Question. When the IRS audits a casino, is the auditor versed in
    the intricacies of the Patriot Act?
        Answer. AML examiners, all of whom have received training that
    deals specifically with the USA PATRIOT Act (for example, the four
    recent CPE modules: Suspicious Activity Reports, Structuring, Informal
    Value Transfer Systems, and Section 352 of the USA PATRIOT ACT),
    conduct the IRS's examinations of casinos. In addition, the Casino
    Course these examiners attend includes changes in the law under the
    Patriot Act, and the IRS makes these changes available to all casino
    examiners on the AML web page.
        Question. Does IRS have any performance measures to determine
    auditor knowledge of the laws they enforce?
        Answer. The official IRS position descriptions for the AML
    examiners outline the job knowledge required as well as Critical Job
    Elements. The Critical Job Elements on which AML examiners are
    evaluated include Knowledge and Application of Anti-Money Laundering
    Law. The IRS is currently developing case review procedures that will
    centralize closed case reviews using full time reviewers as well as
    provide managers with a review document. The attributes in the case
    review document include the interview conducted, managerial
    involvement, interpretation and application of the law, fact gathering,
    penalty determination, and documentation.
        Question. Is there any follow-up with the casinos or money service
    businesses to get feed-back on its audit?
        Answer. The IRS has an effort under way to develop a customer
    satisfaction survey for the AML Program by the end of fiscal year 2004.
        Question. How many cases were referred by the IRS in fiscal year
    2003 for enforcement action? What were the outcomes of the referrals?
        Answer. In fiscal year 2003, seven cases were referred to IRS's
    Criminal Investigation (CI) Division; three are currently under active
    investigation. In addition, during the first 6 months of fiscal year
    2004, SB/SE referred an additional seven cases to CI, five of which are
    under investigation. As a result of referrals from its AML program, the
    IRS also examined and closed 538 cases for income tax violations in
    fiscal year 2003.
        Question. How many cases were referred by the IRS in fiscal year
    2003 to FinCEN for further review? What were the outcomes of the
    referrals?
        Answer. In fiscal year 2003, the IRS referred two cases to FinCEN
    for penalty consideration. Both were issued warning letters. The IRS
    referred two additional cases in the first half of fiscal year 2004,
    and is currently developing another two for referral.
        Question. What level of oversight regarding the compliance of
    casinos and money service businesses (MSB's) does the IRS exercise?
    Please describe those efforts in detail.
        Answer. The IRS has been delegated responsibility for civil
    examinations for BSA compliance. In addition to examinations, the IRS
    also conducts outreach (in coordination with FinCEN) to ensure
    businesses are aware of their filing, recordkeeping and registration
    responsibilities. The IRS currently has approximately 350 examiners
    (including managers) assigned to the Anti-Money Laundering (AML)
    program. They are supported by 16 Area AML coordinators and
    approximately 8 computer audit specialists from LMSB. IRS AML examiners
    currently are conducting 5,576 examinations, which reflects 6 percent
    of the IRS-known potential population.
        In addition to the examination of NBFIs, the AML examiners also
    conduct reviews for compliance with the currency reporting requirements
    of Sec. 6050I of the Internal Revenue Code. Since Sept. 30, 2000, the
    IRS has added 48,688 potential NBFI entities to the database. As of
    March 31, 2004 the NBFI database reflected over 88,000 potential NBFIs.
    The IRS is also conducting investigations on 690 businesses for
    potential registration requirements.
        From September 30, 2000 through the present, the IRS has closed
    13,288 cases and conducted 5,940 (fiscal year 2003 and fiscal year
    2004) registration examinations.
        Since 2002, the AML Compliance program has transitioned from
    conducting individual education visits to focusing on examinations. The
    education and outreach now is performed by the Small Business and Self-
    Employed operating Division's (SB/SE) Taxpayer Education and
    Communication (TEC) Division. TEC delivers education/outreach to
    external stakeholders, using leveraged resources to reach a larger
    number of covered businesses. The National TEC AML strategy was
    designed in conjunction with SB/SE Compliance, IRS's Criminal
    Investigation Division and FinCEN to increase compliance of MSBs, NBFIs
    and casinos with the BSA.
        Question. What performance measures are in place to measure IRS
    compliance efforts as they relate to MSB's and casinos?
        Answer. The current measures for the AML examination program
    include the number of NBFIs identified, the number of examinations
    conducted and closed, and the results of completed examinations. The
    IRS also now has a database in place that provides information on the
    hours per closed case as well as the cycle time of cases. In the course
    of the BSA examinations conducted, the IRS also identifies potential
    cases for unreported income under Title 26. On the education/outreach
    side, the TEC organization monitors the number of outreach events they
    deliver and the number of participants at the events.
        Question. The Tax Inspector General for Tax Administration (TIGTA)
    reports that the IRS small business/self employed (SB/SE) division
    responsible for compliance of the BSA for non-bank financial
    institutions lacks meaningful performance measures, has no useful data
    to provide oversight of program performance, and does not base case
    selection in risk factors. Similar findings also occurred in a previous
    audit in December of 2000. The IRS has known since at least 2000 that
    these problems were pervasive in the compliance program. In September
    of 2003, the IRS continues to fail in delivering compliance results
    commensurate with the resources spent. In the response on this issue to
    the committee the IRS has stated that the agency ``does not
    characterize this as a problem''. There are two TIGTA audit reports
    which demonstrate the IRS has failed repeatedly to make meaningful
    progress in its compliance efforts for BSA. If the IRS and FinCEN do
    not believe this as a problem, what would elevate it to warrant
    recognition? How can the IRS allow these types of lapses to recur?
        Answer. In 2002, the IRS made a commitment to ensure the effective
    operation of the Anti-Money Laundering Program. In particular, the IRS
    has taken the following steps:
      --Named a national AML program manager in February 2002;
      --Created 32 groups nationwide dedicated to the AML program (added
            one additional group in 2004);
      --Replaced part-time revenue agents, for whom AML was a collateral
            duty, with full-time, fully trained revenue agents dedicated to
            AML;
      --Minimized the use of lower-graded tax compliance officers, who
            previously handled many of the AML examinations;
      --Designated a territory manager in each IRS Area for AML program
            responsibility;
      --Designed a Management Information System to capture the results of
            BSA examinations; and
      --Secured funding from FinCEN, beginning in fiscal year 2003, to add
            70 additional FTEs to the AML compliance program.
        As a result of these improvements, all program indicators (numbers
    of MSBs identified, outreach contacts, and examinations) are trending
    up. In the first half of fiscal year 2004, the IRS's SB/SE Division
    made more referrals to FinCEN and had more referrals accepted by CI
    than in all of fiscal year 2003. In fiscal year 2003, SB/SE also
    focused on ensuring that MSBs that had a requirement to register did,
    in fact, register. Those efforts resulted in an additional 2500
    registrations, which represented a 20 percent increase in the number of
    registered MSBs.
        In a recent review of the AML program, TIGTA acknowledged the IRS's
    efforts to enhance the program but identified the need for further
    improvements. Ongoing efforts include the following:
      --Centralization of case identification, incorporating leads from the
            field and CI, as well as CBRS analysis for October 2004;
      --Piloting of MSB examinations at the entity's corporate headquarters
            level to facilitate the identification of MSB agents with the
            highest risk of noncompliance;
      --Incorporation of quality performance measures into the embedded
            quality process in October 2004;
      --Transition of outreach activities from Compliance to TEC within SB/
            SE to provide broad educational opportunities to external
            stakeholders;
      --Completion of a template for a Fed/State MOU to provide reciprocal
            opportunities to leverage resources for examinations, outreach,
            and training;
      --Partnership with FinCEN to identify locations of potential
            noncompliance, as well as the first joint examination of a
            major MSB with FinCEN; and
      --MOU with FinCEN to allow IRS full access to SARs (for purposes of
            BSA examinations only).
        Question. What is the IRS doing to ensure case selection criteria
    are uniform? Please provide a copy to explain how case selection
    criteria have changed since the Tax Inspector General for Tax
    Administration (TIGTA) audit in 2003.
        Answer. As mentioned previously in questions 1 and 2, the Internal
    Revenue Manual provides guidelines about case selection to the AML
    coordinator in IRM 4.26.3.2.4, Selection for Assignment. During AML
    program reviews conducted by the SB/SE headquarters office, conformity
    with the guidelines is an item specifically reviewed.
        TIGTA identified a concern that there was no consistency in how the
    IRS selected AML cases for examination. To remedy this situation, the
    IRS increased program oversight to ensure the compliance risk case
    selection tools provided to the field are being used to identify cases.
    The centralization of case identification, incorporating leads from the
    field and Criminal Investigation, as well as CBRS analysis, is
    scheduled to be in place by October 2004. The centralization of
    workload identification will ensure consistency in risk based case
    selection. The IRS is including FinCEN in this process. Case selection
    methods are addressed in Area program reviews. In addition, SB/SE's
    Research organization has undertaken a project to possibly identify
    other methods for selection.
        Question. The IRS has a poor record regarding regulatory compliance
    operation and management of BSA data according to numerous IG, GAO, and
    TIGTA reports. What is the IRS doing to correct these long-standing
    problems? What guarantees can the IRS provide that will show they will
    do the job right this time?
        Answer. In recent years, the IRS has shown significant commitment
    to the effective operation of the Anti-Money Laundering Program, and
    considers the identification of opportunities for improvement to be an
    ongoing process. Improvement efforts in progress include the
    centralized review process, the embedded quality initiative, improved
    management information systems and centralized compliance examinations.
        In particular, the IRS has taken the following steps to enhance the
    effectiveness and professionalism of the AML program:
      --Named a national AML program manager in February 2002;
      --Created 32 groups nationwide dedicated to the AML program (added
            one additional group in 2004);
      --Replaced part-time revenue agents, for whom AML was a collateral
            duty, with full-time, fully trained revenue agents dedicated to
            AML;
      --Minimized the use of lower-graded tax compliance officers, who
            previously handled many of the AML examinations;
      --Designated a territory manager in each IRS Area for AML program
            responsibility;
      --Designed a Management Information System to capture the results of
            BSA examinations; and
      --Secured funding from FinCEN, beginning in fiscal year 2003, to add
            70 additional FTEs to the AML compliance program.
        As a result of these improvements, all program indicators (numbers
    of MSBs identified, outreach contacts, and examinations) are trending
    up. In the first half of fiscal year 2004, the IRS's SB/SE Division
    made more referrals to FinCEN and had more referrals accepted by CI
    than in all of fiscal year 2003. In fiscal year 2003, SB/SE also
    focused on ensuring that MSBs that had a requirement to register did,
    in fact, register. Those efforts resulted in an additional 2500
    registrations, which represented a 20 percent increase in the number of
    registered MSBs.
        In a recent review of the AML program, TIGTA acknowledged the IRS's
    efforts to enhance the program but identified the need for further
    improvements. Ongoing efforts include the following:
      --Centralization of case identification, and incorporating leads from
            the field and CI, as well as CBRS analysis for October 2004;
      --Piloting of MSB examinations at the entity's corporate headquarters
            level to facilitate the identification of MSB agents with the
            highest risk of noncompliance;
      --Incorporation of quality performance measures into the embedded
            quality process in October 2004;
      --Transition of outreach activities from Compliance to TEC within SB/
            SE to provide broad educational opportunities to external
            stakeholders;
      --Completion of a template for a Fed/State MOU to provide reciprocal
            opportunities to leverage resources for examinations, outreach
            and training;
      --Partnership with FinCEN to identify locations of potential
            noncompliance, as well as the first joint examination of a
            major MSB with FinCEN; and
      --MOU with FinCEN to allow IRS full access to SARs (for purposes of
            BSA examinations only).
        Question. The IRS, in its response to the committee, states that
    there are standards in place to select cases in all compliance
    programs. TIGTA states in its 2000 and 2003 audit that the program
    still lacks performance standards. The only performance goal that
    exists for this program is ``delivery of Direct Examination Staff Years
    (DESYs).'' To accomplish this goal the IRS need only assign sufficient
    personnel to the program to meet the allocated DESYs. There are no
    other measures for evaluating the program's performance. Does the IRS
    consider this performance measure sufficient to measure the outputs and
    outcomes of this program? Are other compliance programs held to such a
    low threshold?
        Answer. In addition to the delivery of DESYs, the AML Program
    currently measures the number of NBFIs identified, the number of
    examinations conducted and closed, the results of completed
    examinations, the number of Title 26 information items prepared and
    related income tax examinations completed. The TEC organization
    monitors the number of outreach visits, seminars, participants, and
    mailings accomplished. Recent improvements to the MIS now provide
    information on the hours per closed case, as well as the cycle time of
    cases.
        Question. The committee understands that IRS has begun to review
    its performance measures and is in the process of establishing
    measurable performance-based indicators for BSA programs. What is the
    status of this effort? Please include in your response the new
    performance measures being used to measure fiscal year 2004
    performance?
        Answer. The current measures for the AML examination program
    include the number of NBFIs identified, the number of examinations
    conducted and closed, and the results of completed examinations. The
    IRS also now has a database in place that provides information on the
    hours per closed case, as well as the cycle time of cases. In the
    course of the BSA examinations conducted, examiners also identify
    potential cases for unreported income under Title 26. On the education/
    outreach side, the TEC organization monitors the number of outreach
    events they deliver and the number of participants at the events.
        Question. In Treasury's April 30 responses to the committee, the
    Department and the IRS contend that IRS compliance programs include
    reviews of examiners work. Performance plans for all managers include
    the requirement to review cases and to be involved in case development.
    Yet the IRS in its response to the TIGTA report state ``there continues
    to be significant risk of undetected noncompliance and inconsistent
    program delivery. Based on our review of a judgmentally selected sample
    of 76 cases from 3 Area Offices, standard case selection criteria are
    not used, cases are not properly documented and potential noncompliance
    information is not available''. How does the IRS explain the
    discrepancy between stated requirements and failed results?
        Answer. The quote attributed above to the IRS was actually a
    statement made by TIGTA in their Report (Audit No. 200330004). The
    relevant TIGTA recommendations from that report, and the actions the
    IRS is taking to implement them, are as follows:
      --Develop standard risk-based case selection criteria that would
            provide minimum requirements and parameters for case selection.
          The SB/SE Division Research function is developing a scoring
            system, or set of rules, to prioritize workload by using
            Currency Banking Retrieval System data. Until the scoring
            system is implemented, the IRS has taken other steps to ensure
            appropriate case selection. The IRS has increased program
            oversight to ensure the compliance risk case selection tools
            already provided to the field are being used to identify cases.
            In addition, case selection methods are addressed as part of
            the Area program reviews. The centralization of case
            identification, incorporating leads from the field and Criminal
            Investigation, as well as CBRS analysis, is scheduled to be in
            place by October 2004. This centralization will ensure
            consistency in using risk based case selection for the AML
            cases.
      --Reinforce the importance of case documentation with specific
            instructions or case models and implement a centralized quality
            review process.
          The IRS has taken a number steps to increase the quality of the
            cases. In July 2003, two technical advisors were added to
            headquarters staff to provide technical assistance to the
            field. Since their arrival, they have visited several areas, to
            review cases and meet with the examiners and managers to
            discuss their observations. This has been well received by the
            field personnel, and requests for their participation continue
            to increase. The first AML Technical Digest, which addresses
            examination issues, will be published on the AML web page in
            late May 2004.
          The IRS is on target to incorporate quality performance measures
            for AML into the new embedded quality process that will be in
            place in October 2004. Including AML in the embedded quality
            process will provide a systemic method for consistent
            managerial feedback. In addition, the centralized closed case
            review process, which will be a part of embedded quality, will
            provide headquarters with the ability to identify trends and
            training needs.
      --Coordinate with the FinCEN to secure BSA examiner and RA access to
            SARs.
          The Commissioner, SB/SE Division, initiated a Memorandum of
            Understanding with the Director of the FinCEN to permit BSA
            examiners access to SARs for the purpose of MSB compliance
            checks. That MOU has been signed by both the IRS and FinCEN.
            IRS senior executives are continuing to pursue access to SARs
            for RAs in the regular examination program.
        Question. TIGTA found that ``no standard criteria exist for
    selecting BSA compliance cases.''
        Should the committee be concerned that there are no standards that
    exist for case selection?
        IRS states that AML coordinators use their own criteria. Please
    provide a complete list of those criteria.
        Given Mr. Everson's strong statements about the need for more
    resources, does this program not point out that IRS has enormous
    savings to be realized by using its current resources in a smarter and
    more efficient manner?
        Answer. Through its Internal Revenue Manual (IRM) 4.26.3.2.4,
    Selection for Assignment, the IRS provides specific guidelines to its
    AML coordinators about case selection. It reads as follows:
      --The AML coordinator should select entities from the nonbank
            financial institution (NBFI) database or the Form 8300
            inventory, using risk-based analysis to select those entities
            with the highest potential for noncompliance for compliance
            examinations or reviews, such as:
        --Entities with a high volume of cash transactions or abnormal cash
                activity;
        --Entities in local geographic areas with high potential in money
                laundering;
        --Entities which have a previous history of noncompliance;
        --Entities which have been cited for poor or inadequate
                recordkeeping;
      --The AML coordinator should consider available resources as well as
            balanced coverage (geographic area and industry) when selecting
            NBFIs or NFTBs for compliance examinations or reviews;
      --Input from other operating divisions (e.g. TE/GE) can assist the
            coordinator in assessing risk;
      --Prior to opening the exam or review the names of selected entities
            are to be furnished to Criminal Investigation (CI) for
            clearance.
        The IRS has increased program oversight to ensure these compliance
    risk case selection tools provided to the field are being used to
    identify cases. In addition, the IRS and FinCEN jointly establish the
    priorities for types of NBFIs to be examined, and the IRS provides
    these priorities to its AML coordinators in an annual program letter.
    Further, as part of the efforts to improve the effectiveness of the AML
    program, the IRS provided training for its AML coordinators in March
    2003 on methods to apply against the Currency Banking and Retrieval
    System (CBRS) to identify cases. Since that time, CBRS analysis has
    been provided to the coordinators on a regular basis to assist them in
    the identification of cases. Case selection methods also are addressed
    during Area program reviews.
        To further ensure consistency in case selection, the IRS plans to
    centralize the case identification process by October 2004. This
    centralization, which will incorporate leads from the field and
    Criminal Investigation, as well as CBRS analysis, will ensure
    consistency in risk based case selection and allow for improved trend
    analysis. In addition, SB/SE's Research organization has undertaken an
    effort to enhance the case selection criteria.
        To improve its utilization of resources, the IRS is piloting the
    examination of Money Service Businesses (MSB) at the entity's corporate
    headquarters level. Three such examinations are currently underway.
    Working with the business, IRS will be able to identify the MSB's
    agents with the highest risk of noncompliance. This is a new approach
    for the program, one that was developed in cooperation with FinCEN, and
    one that will provide better customer service.
        Question. IRS indicates that it is creating a scoring system to
    prioritize its BSA workload. Please provide an update to the committee
    on the development of this system?
        Answer. SB/SE Research is designing a process that uses the
    Currency and Banking Retrieval System (CBRS) data to prioritize or
    select entities for Title 31 and Form 8300 examinations based on risk
    factors. The project is organized into five phases, including
    assessment of current processes used to select workload (Phase 1),
    development of rules that express predictive and evaluative factors of
    non-compliance with BSA requirements (Phase 2), engineering of formulas
    to evaluate and rank entities for risk of non-compliance based on CBRS
    data and completion of the decision factor set that will be used (Phase
    3), suitability testing to ensure the proposed system follows the best
    practices identified by AML technical advisors (Phase 4), and
    assessment of automation and programming needs required to pilot the
    proposed system (Phase 5).
        To date, much of the data and knowledge acquisition activity has
    been completed. As a by-product of this work, the research team
    developed a work flow diagram depicting ``best practices'' of
    processes, tools, techniques, and decisions in the AML program.
    Following review by the technical advisors, the IRS plans to make this
    interim work product will be available to Compliance Policy/AML
    examiners in July 2004 for use in the current program. The work that
    SB/SE Research is doing to develop a risk-based selection process using
    CBRS data will assist the IRS in applying case selection standards
    uniformly across the country. The proposed system will use the same
    identified scoring factors (with priorities and weights) to rank all
    entities for examination potential. Subsequently, local program
    managers will be able to filter the ranked list for geographic
    location, providing a local list that reflects the same selection
    criteria as any other case. A potential side benefit of the proposed
    system will be IRS's ability to assess whether their resources are
    appropriately deployed geographically and make adjustments based on
    where the prioritized workload actually exists.
        Question. TIGTA has identified that IRS examiners have a perception
    that FinCEN does not assess penalties. TIGTA has also identified that
    FinCEN has a negative perception of the IRS case quality and that the
    cases referred for enforcement actions do not contain sufficient
    information to assess penalties. What are these two organizations doing
    to overcome these barriers?
        Answer. FinCEN and the IRS are jointly committed to identifying
    opportunities to improve case development and the ability to assess
    civil penalties when appropriate. As a part of the IRS's revamped
    training efforts, FinCEN is participating in AML basic training classes
    to provide guidance on developing cases for penalty referral to FinCEN.
    For fiscal year 2004 the IRS has committed to taking a more proactive
    approach to getting FinCEN's input when serious violations have been
    identified, by providing them opportunity for involvement early in the
    development of the penalty case. To support this commitment, the IRS
    also has developed new referral guidelines based on previous well-
    developed cases, and has included these guidelines in the AML Technical
    Digest.
        Question. The SB/SE division is responsible for compliance with the
    BSA. This unit spends $43 million for BSA compliance including
    examinations outreach and compliance. Please provide a detailed break
    out of how the $43 million is spent on by activity. Given the numerous
    reports about the failures of the SB/SE division, what is the IRS doing
    to correct the deficiencies identified?
        Answer. The original estimate of $43 million for BSA compliance
    included some one-time training costs related to BSA, but did not
    include costs associated with Currency Transaction Report (CTR)
    processing (which is essential to the AML program). Based on a revised
    estimate, which reflects only annualized costs, SB/SE expects to spend
    $53.7 million in fiscal year 2004 in support of BSA compliance,
    including examinations, education and outreach activities, and
    processing of CTRs. The breakdown of these costs for both fiscal year
    2003 and fiscal year 2004 is shown in the following table:

                         EXPENDITURES FOR BSA COMPLIANCE
                            [In millions of dollars]
    ------------------------------------------------------------------------
                                                                Fiscal Year
               Functional Activity              Fiscal Year        2004
                                               2003 (Actual)    (Projected)
    ------------------------------------------------------------------------
    Compliance..............................           33.66           34.97
    Taxpayer Education and Communications...            0.86            1.14
    CTR Processing \1\......................            7.81           17.57
                                             -------------------------------
          Total for SB/SE...................           42.33           53.68
    ------------------------------------------------------------------------
    \1\ In fiscal year 2003, IRS's Modernizing Information Technology
      Systems spent $8.84 million in support of CTR Processing. In fiscal
      year 2004, SB/SE is responsible for the full program.

        As described in the responses to the earlier questions, the IRS has
    taken, and is continuing to take, a series of proactive steps to
    improve its AML program. To summarize, the IRS has:
      --Revamped the structure and staffing of its AML program by:
        --Naming a national AML program manager in February 2002;
        --Creating 32 groups nationwide dedicated to the AML program (added
                one additional group in 2004);
        --Replacing part-time revenue agents, for whom AML was a collateral
                duty, with full-time, fully trained revenue agents
                dedicated to AML;
        --Minimizing the use of lower-graded tax compliance officers, who
                previously handled many of the AML examinations;
        --Designating a territory manager in each IRS Area for AML program
                responsibility; and
        --Securing funding from FinCEN, beginning in fiscal year 2003, to
                add 70 additional FTEs to the AML compliance program;
      --Focused increased attention on case selection using current
            guidelines, while developing a centralized case identification
            process;
      --Ensured all AML examiners receive appropriate training, including
            the changes resulting form the USA PATRIOT Act;
      --Undertaken a research-driven effort to design and develop a method
            for prioritizing case selection based on CBRS data;
      --Taken steps to improve AML case quality via technical case reviews
            and included the AML program in the embedded quality measures
            process to be implemented in October 2004;
      --Transferred AML outreach activities from Compliance to TEC within
            SB/SE to provide broad educational opportunities to external
            stakeholders; and
      --Increased its coordination with FinCEN, especially in the areas of
            training, workload identification and penalty referrals.
                       workforce and facility realignment
        Question. The IRS expects to receive some savings from the closure
    of the Brookhaven Service Center. Are you going to increase the
    frontline enforcement personnel with these savings?
        Answer. The IRS anticipates savings in fiscal year 2005 of $6
    million and 147 FTE because of e-file efforts, including the closure of
    the Brookhaven facility. These savings, along with $105 million
    additional savings, will be reapplied as described in the IRS's fiscal
    year 2005 Congressional Justification. These reinvestments are:

                              [Dollars in millions]
    ------------------------------------------------------------------------
                                                   Millions of
                    Reinvestment                     Dollars         FTE
    ------------------------------------------------------------------------
    Curb Egregious Noncompliance................          $31.4          293
    Select High Risk Cases for Examination......           $6.0  ...........
    Embedded Quality \1\........................           $1.6           26
    Consolidation--Case Processing..............          $13.7           80
    Consolidation--Insolvency...................           $2.1           15
    Combat Corporate Abusive Tax Schemes........           $5.0           34
    Leverage/Enhance Special Agent Productivity.           $2.5           28
    Standardize CLMC Training Rooms.............           $0.5  ...........
    IRS Reorganization Transition...............           $5.0  ...........
    Servicewide Competitive Sourcing............           $9.1  ...........
    MITS Reorganization Transition..............          $34.0          236
                                                 ---------------------------
          Total.................................         $110.9          712
    ------------------------------------------------------------------------
    \1\ This initiative, through an Embedded Quality system in Submission
      Processing (EQSP), will create a new measurement system that will
      identify the cause and impact of errors, apply common measures to
      every level of the new organization, and enable frontline employees to
      understand how their contributions impact IRS's performance. An
      embedded quality system links individual and business performance with
      multiple quality review sources. EQSP will instill complete
      accountability for quality performance across operations.

         TAX LAW ENFORCEMENT BUDGET PRIORITIES AND RESOURCE ALLOCATION

        Question. Given IRS's inability to increase enforcement in recent
    years, what will be different in fiscal year 2005?
        Answer. The IRS's enforcement statistics for fiscal year 2003
    demonstrate that IRS has arrested the enforcement decline that began in
    the 1990's and continued through the implementation of RRA 98. Audits,
    criminal investigations, and monies collected have all increased. In
    particular, when compared with fiscal year 2001, audits of taxpayers
    with incomes over $100,000 increased by over 50 percent by fiscal year
    2003.
        The administration's 2005 budget request for the IRS will continue
    to rebuild its enforcement activities. Two-thirds of the new monies
    requested will be devoted to addressing abuses by high-income taxpayers
    and corporations, and increasing criminal investigations.
        In fiscal year 2005, the IRS is seeking an additional $300 million
    for enforcement activities to focus on the following four objectives in
    enforcement:
      --Discourage and deter non-compliance, with emphasis on corrosive
            activity by corporations, high-income individuals and other
            contributors to the tax gap;
      --Ensure that attorneys, accountants and other tax professionals
            adhere to professional standards and follow the law;
      --Detect and deter domestic and off-shore tax and financial criminal
            activity; and
      --Discourage and the misuse of tax-exempt and government entities for
            tax avoidance and other purposes.
        These incremental resources will help IRS to address the tax gap,
    the difference between what is owed and what is paid due to non-filing,
    underreporting, and underpayment, and secure billions of extra dollars
    for the Treasury. Once the IRS hires and trains enforcement personnel,
    it estimates the direct return on investment will be about 6 to 1 for
    direct revenue-producing initiatives. Beyond the incremental revenues
    directly associated with the increased audits, investigations and
    collection activity, the increased publicity of these actions will
    discourage other taxpayers from cheating.

                          FUTURE STAFFING REQUIREMENTS

        Question. What is IRS's assessment of the IRS's long term
    requirements?
        Answer. The vision of the IRS remains to re-center the agency with
    the proper balance of service and enforcement poised to quickly meet
    technological and demographic changes, and customer expectations.
        The IRS's goals remain the same--to improve taxpayer service,
    enhance enforcement through uniform application of the law, and improve
    the IRS infrastructure and modernize technology. The IRS working
    equation is that service plus enforcement equals compliance. The IRS is
    maintaining high levels of taxpayer service while focusing on corrosive
    areas of non-compliance. Ensuring fairness will help restore faith in
    the Nation's tax administration system.
        Question. Can the IRS assure this committee that the current
    refocus can put this program back on schedule so that it will not go
    the way of TSM?
        Answer. The IRS needs a more versatile team of seasoned executives
    to provide long-term stability to the program. The IRS is complementing
    the skills of experienced IRS tax executives with outside seasoned
    technology executives who have experience managing large-scale, complex
    IT projects. As such, the IRS is hiring two Associate Chief Information
    Officers to join the MITS organization, and an executive search firm is
    conducting searches for five senior executives with a wide range of
    diverse experience in developing and implementing large modernization
    systems.
        In addition, the IRS used the results from independent studies
    commissioned during the summer of 2003 to create a BSM Challenges Plan
    comprised of 40 some action items. Given the strategic importance of
    the plan, the Commissioner appointed an IRS business unit deputy
    commissioner to oversee the implementation of the plan.
        As a first step, the BSM project team developed a crosswalk to
    ensure that the BSM Challenges Plan's definition of the issues
    addressed and/or satisfied all of the recommendations from the four
    commissioned studies as well as the recommendations submitted by the
    IRS Oversight Board, and the Software Engineering Institute (SEI) study
    of CADE.
        While the deputy commissioner made significant progress in
    implementing the plan, the full closure of all actions items was
    unrealistic within the elapsed timeframe of the 6-month appointment.
    Concurrently, the CIO created a new direct report position for
    modernization management and assigned responsibility for implementing
    the plan to the individual recently hired into this newly created
    position.
        Under the leadership of the deputy commissioner, the IRS and CSC
    team brought closure to several key actions items, including:
    clarifying the roles of committees as advisory, identifying
    ``blockers'' on contracting issues, appointing business leaders to each
    project, establishing a risk-adjusted schedule and new baseline for
    CADE Releases 1.0 and 1.1, and increasing the frequency of CADE reviews
    with the business owner to twice monthly. The majority of the action
    items are still works-in-progress, some of which will take time to
    fully complete. Others will span the life of the BSM program.
        For example, strengthening systems engineering capabilities by
    hiring external candidates will take time since it involves conducting
    the searches, interviewing the candidates, and negotiating the new
    hires to come on board. The IRS and CSC developed ground rules for
    escalating issues, but they will need to be continually enforced
    throughout the life of the program. The IRS rewrote the charters of the
    governing committees to reflect their advisory role and clearly
    articulated their responsibilities, however, it will probably take a
    year to truly evaluate and measure their effectiveness.
        As stated, the IRS has made progress toward closing all the action
    items, but it has much more work to do in critical areas. For example,
    the IRS needs to religiously follow the proper methodologies and hold
    people accountable if they do not. The IRS must start ``doing things
    right'' as opposed to ``doing things fast'' such as exiting milestones
    prematurely. An ongoing challenge will be balancing the scope and pace
    of projects consistent with capacity, ensuring that the right people
    are in place before launching a project, and setting realistic delivery
    schedules and cost estimates. The IRS is committed to staying-the-
    course and delivering on its promise to modernize America's tax
    systems, but it is important for everyone to acknowledge this is a
    monumental effort.
        The magnitude and evolution of the BSM program dictates that the
    IRS will always be going through an evolution of assessment and
    improvements. In that regard, the BSM Challenges Plan is still evolving
    and the IRS is using certain action items to continuously improve the
    program.

                                 BSM MANAGEMENT

        Question. Is IRS's schedule for completing the remaining corrective
    actions identified in the associated BSM Action Plan?
        Answer. Please see response to previous question.

                           ACTUARIAL SOFTWARE PROGRAM

        Question. What number of life insurance companies or what
    percentage of the industry does the IRS consider an appropriate amount
    to examine in order to provide the IRS with ``sufficient data to
    conduct a cost benefit analysis?''
        Answer. The IRS has determined that a sample of four Coordinated
    Industry life insurance audits (based on the criteria as described in
    the question below) will give sufficient data for preliminary results
    from a cost benefit analysis. The fact that the IRS anticipates closing
    four cases led it to determine that a 5 percent completion rate would
    give it preliminary figures so that it could project over the total
    population.
        Question. What selection criteria is the IRS using to make sure
    that the initial examination results analyzed are an accurate
    estimation or cross-section of the industry?
        Answer. The IRS based the selection criteria it used on a mix of
    variables, such as the stage of the audit cycle, product mix, and size
    of taxpayers. These criteria allowed the IRS to have a cross-section of
    the industry. Due to the length of time it takes to examine life
    insurance reserves, the stage of the audit means that the IRS needs to
    examine reserves very early in the audit and not when the audit's
    estimated completion date is approaching. Product mix means that the
    IRS attempted to select taxpayers for audit who sold different kinds of
    policies such as traditional life insurance, universal life insurance,
    variable life insurance, single premium annuities, and etc. Size of the
    taxpayer means that the IRS is looking to select not only the extremely
    large taxpayers in the Coordinated Industry arena but also the ones who
    have lesser gross receipts and assets in size.
        Question. When does the IRS expect to have sufficient data?
        Answer. The IRS is projecting to have four audits complete by the
    end of the fiscal year that would give sufficient data. The fact that
    the IRS anticipates closing four cases led it to determine that a 5
    percent completion rate would give it preliminary figures so that it
    can project over the total population.
        Question. Congress has funded the program for 3 years, yet due to
    the very late start date of the program, although the program has been
    provided fiscal year 2004 funding, the program is still using fiscal
    year 2003 funding. Has the IRS set aside the fiscal year 2004 funding
    provided for the third year of the program?
        Answer. The appropriation language for fiscal year 2003 reads that
    the IRS will provide up to $4 million from available funds to support
    the program. As services are rendered and invoices received, the IRS is
    currently paying amounts to the vendor out of fiscal year 2003 funding
    for the actuarial software license, maintenance, actuary salaries, and
    related travel costs to conduct training sessions. In addition, the IRS
    has available $2 million from fiscal year 2004 funding for IRS employee
    travel and training expenses, testing and the related implementation
    costs, the purchase of additional memory to upgrade revenue agent
    computers to 512MB capacity, the purchase of additional software which
    is required for the vendor's Total Life software to work, and the
    possibility of hiring additional life insurance actuaries to assist on
    examinations.
        Question. What plans does the IRS have for this funding?
        Answer. Please see response to previous question.
        Question. In March 2004, the IRS stated that after software
    training for 2004 is complete, ``this will result in 41 coordinated
    life insurance examinations having the use of the software.'' How many
    coordinated life insurance examinations currently exist?
        Answer. There currently are approximately 75 Coordinated Industry
    life insurance examinations, of which 30 are either using the software
    or are planning to use it in the near future. Another class is
    scheduled for the second week in June where more teams will receive
    training in using the software. The fact that the IRS anticipates
    closing four cases led it to determine that a 5 percent completion rate
    would give it preliminary figures so that it can project over the total
    population.
        Question. Should not the software be used on all life insurance
    examinations?
        Answer. If the results of the cost benefit analysis prove
    productive and promote compliance, the goal would be to use the
    software on any life insurance examination, as appropriate. The stage
    of the audit cycle, as mentioned in the second question above, will
    dictate when it is appropriate to use the software on the balance of
    the Coordinated Industry life insurance cases.
        Question. Given the technical nature of the program, does the IRS
    have personnel with sufficient expertise and knowledge to effectively
    implement the program? What additional personnel, if any, does the IRS
    believe it needs to make the program fully effective?
        Answer. Experience has shown over the last year of training revenue
    agents and computer audit specialists that they would have the
    expertise to utilize the software on audits immediately following
    training with the assistance of a life insurance actuary. The Large and
    Mid-Size Business Operating Division has two in-house life insurance
    actuaries with the level of expertise and knowledge to implement the
    program. Since audit cycles are normally 2 to 3 years in length, on an
    average, a revenue agent may only use this software once during this
    time frame, which may result in a high learning curve or the need for
    additional refresher training for subsequent and additional audit
    cycles. The IRS believes that it is essential for life insurance
    actuaries to be involved as the focal point to utilize this software
    effectively.
        Depending on the benefit analysis results, the IRS will evaluate
    the opportunity to hire additional life insurance actuaries as funding
    permits.
                                     ______

                  Questions Submitted by Senator Patty Murray

                      FAILURE TO COLLECT DELINQUENT TAXES

        Question. Based on your collections to date, it appears that IRS is
    not pursuing billions of dollars in uncollected taxes. In recent
    testimony before the Finance Committee, Treasury Deputy Secretary
    nominee Samuel Bodman stated that:
      --As of the end of fiscal year 2003, $16.5 billion was in deferred
            status, meaning that these taxpayers have filed a return and
            owe tax, but have not paid it or have only partially paid.
      --The largest delinquent amount in deferred status is more than $50
            million.
      --In recent years, accounts in deferred status have decreased
            slightly but the dollar amounts have increased.
        Mr. Everson, how do you respond to this pathetic record of
    collecting unpaid taxes?
        Answer. The collection results for accounts that are in a deferred
    status are not indicative of the IRS's overall Collection effort.
    During fiscal year 2003, the IRS issued first notices to about 11.8
    million new balance due accounts, as required by IRC section 6303.
    During the same period, the IRS resolved about 7.6 million accounts by
    full payment, installment agreement, or other means as a result of the
    taxpayer's response to the first or subsequent notices. The IRS
    subsequently resolves a significant portion (on average, about 67
    percent) of the balance due accounts, which are not resolved in notice
    status and become Taxpayer Delinquent Accounts (TDAs), through full
    payment or the initiation of an installment agreement.
        Deferred accounts are placed in a suspended category because of
    other collection priorities and resource limitations and they are first
    subject to risk and collection probability analysis. Cases that have a
    modest compliance risk, i.e., lesser impact on tax administration and
    subsequent noncompliance, and low probability of collection are
    deferred, freeing Collection resources to work more in-business trust
    fund cases and cases where there is a likelihood of full payment.
    However, the IRS is refining its Collection models for these cases and
    evaluating the benefit of filing notices of Federal tax liens on
    deferred accounts.
        Question. Mr. Everson, your budget documents say that a growing
    number of Americans think it is okay to cheat on their taxes and that
    ``this trend threatens the government's future revenue stream and basic
    respect for the law.'' Why should these taxpayers take their IRS debt
    seriously if the agency never presses for collection?
        Answer. All delinquent accounts receive Collection action. The
    treatment for a particular delinquent account depends on the amount
    owed and the predicted compliance risk. Taxpayers generally receive at
    least two notices and if they fail to respond, enforcement action is
    likely. Each year, the IRS resolves a large percentage of its
    delinquent accounts through full payment or installment agreement. Many
    others are ultimately resolved through refund offsets, abatements, and
    Offers in Compromise. As shown in the following chart, overall
    enforcement actions on taxpayer delinquent accounts have increased
    significantly since fiscal year 2000. In fiscal year 2003, the IRS
    filed 548,683 Notices of Federal Tax Lien and served 1,680,844 Notices
    of Levy. Passage of the administration's proposed Private Collection
    Agent (PCA) legislation will further improve these results.

    ----------------------------------------------------------------------------------------------------------------
                        Activity                           2000            2001            2001            2003
    ----------------------------------------------------------------------------------------------------------------
    Enforcement activity (actual numbers):
        Number of notices of Federal tax liens filed         287,517         426,166         482,509         548,683
        Number of notices of levy served upon third          219,778         674,080       1,283,742       1,680,844
         parties....................................
        Number of seizures..........................              74             234             296             399
    ----------------------------------------------------------------------------------------------------------------

        In addition, the IRS has taken a number of steps recently to
    further address taxpayers' noncompliance with their filing and payment
    obligations, including:
      --Case Selection.--The IRS refined its inventory delivery system so
            that the higher priority cases (in terms of impact on tax
            administration and subsequent noncompliance as well as
            potential for collection) are selected for assignment to the
            Collection field function and the Automated Collection System.
            The IRS continually examines how case selection can be
            improved.
      --Employment Taxes.--The failure of employers to make their Federal
            tax deposits and pay over the withheld trust fund taxes is a
            serious compliance issue. The IRS has developed and is
            implementing a strategy to improve collection of employment
            taxes.
      --Causes for Underpayment and Non-Filing.--The IRS is working to
            identify the components of its potentially collectible
            inventory, the main causes of non-compliance, and the
            contributing market segments. The information obtained is being
            used to address taxpayers through outreach and education, and
            to determine potential systems and policy changes. One
            significant component involves estimated tax compliance.
      --Taxpayer Education.--The IRS is aggressively reaching out to
            taxpayers before they either intentionally or inadvertently,
            fail to file or fail to pay the full amount of tax due.
            Stopping noncompliance before it occurs is far preferable than
            having to find it afterwards. The IRS website has been a
            tremendous success and has been an important resource for
            taxpayers. It also is an important way for the IRS to
            communicate to taxpayers, including reaching out to those
            taxpayers who may be missing out on important tax benefits when
            they fail to file a return. The IRS is continuing to examine
            how taxpayer outreach can be improved and made more effective.
        Question. A recent report by the Treasury Inspector General for Tax
    Administration (TIGTA) found that IRS's existing procedures are
    ineffective in ensuring even that criminals who are convicted in court
    for tax evasion are paying their civil tax liabilities. Why can't IRS
    collect from tax cheats?
        Answer. In response to problems identified in the TIGTA audit, the
    IRS completed a review of the process for referring criminal cases for
    civil disposition that have conditions of probation. CI conducted this
    review in partnership with SB/SE. Furthermore, CI and SB/SE have taken
    the following steps:
      --The Chief CI and SB/SE Commissioner issued a joint memorandum on
            April 13, 2004, to field office personnel stressing the
            importance of cooperation in handling civil closings for
            sentenced taxpayers and provided operating procedures for
            processing the civil closings of all sentenced taxpayers. CI
            and SB/SE are revising the Internal Revenue Manual to implement
            these procedural changes.
      --The Technical Service, Advisory Unit within SB/SE is reviewing
            assessed tax liabilities in these cases to identify cases
            wherein the conditions of probation were not met and will
            report this information to CI.
      --CI's Research Unit has identified all cases within their management
            information system that have outstanding conditions of
            probation or appear anomalous. The Research Unit forwarded the
            information to the appropriate CI field office for review and
            corrective action, if necessary. Twice a year, the Research
            Unit will submit similar information to the responsible field
            office(s) for verification and correction.
      --The CI Research Unit added additional tracking codes to the
            management information system to ensure that management only
            tracks and reviews viable open cases.
      --CI revised its Criminal Investigation Closing Report. This report
            will serve as CI's notice to the SB/SE Territory Manager of
            Technical Services that the court has sentenced a taxpayer and
            document the tax-related conditions of the sentence.
      --CI is developing a ``Fraud Life Cycle'' communications model as an
            educational tool to improve its understanding of the
            interaction among the various CI and SB/SE functional
            processes. This model will help CI and SB/SE develop ways to
            improve the processing of conditions of probation cases.
      --CI front line managers received refresher training on using current
            systems to effectively identify, report, and monitor terms and
            conditions of probation on tax investigations.
      --CI's Review and Program Evaluation (RPE) Section has incorporated,
            as part of its field office review process, an analysis of the
            CIMIS information on terms and conditions of probation. Senior
            executives in CI will use RPE reports to ensure that all
            conditions of probation procedures are effectively implemented
            in each field office.
      --The Program Manager, Technical & Insolvency of SB/SE will include
            the monitoring of conditions of probation in fiscal year 2005
            reviews of Technical Services operations and keep the Director,
            Payment Compliance informed of adherence to IRM procedures.
            These procedures require Technical Services to immediately
            report to CI evasive or uncooperative taxpayers, as well as
            taxpayers who have fully complied with conditions of probation.
            For other non-compliant taxpayers subject to conditions of
            probation, Technical Services must provide the required reports
            to CI no later than 6 months before the probation expires. CI
            will advise the Courts of these conditions.
        These steps will improve coordination between CI and SB/SE, clarify
    areas of responsibility, enhance employees' understanding of newly
    implemented procedures, and improve the processing of conditions of
    probation cases.
        Question. Ms. Gardiner, given the fact that the head of IRS-
    Criminal Investigations disagreed with a number of your
    recommendations, are you confident that this grotesque abuse will be
    stopped? Mr. Everson, would you care to comment as well? Ms. Gardiner,
    why do you believe that IRS has not cleared up even the simplest of
    cases of uncollected taxes? Do you consider it a possibility that IRS
    has not done so in order to build a case for the use of private
    collection agencies?
        Answer. The IRS unequivocally states that no collection action has
    been taken or not been taken for the purpose of building a case for the
    use of private collection agencies (PCAs). Under the administration's
    proposals, PCAs would supplement, and not supplant, IRS collection
    efforts. PCAs would expand the IRS's overall capability to address
    outstanding tax liabilities while also allowing the IRS resources to be
    directed at more complex cases and issues.
        TIGTA will respond separately.
        Question. Ms. Gardiner, why do you believe that IRS has not cleared
    up even the simplest of cases of uncollected taxes?
        Answer. TIGTA will respond separately.
        Question. Do you consider it a possibility that IRS has not done so
    in order to build a case for the use of private collection agencies?
        Answer. TIGTA will respond separately.
        Question. In response to questions posed at the Treasury Deputy
    Secretary's nomination hearing, Mr. Bodman said that IRS has
    implemented several actions to ensure that all deferred accounts
    receive adequate collection. But as I read it, only one of these four
    actions actually tries to collect from the taxpayer: the annual notices
    that remind taxpayers to pay their obligations. The other three seem to
    only further penalize the already delinquent party. How do these other
    activities really help in the collection of tax debts? Don't they
    simply compound the problem? Are these really the best ways to go after
    tax cheats?
        Answer. The actions described by Dr. Bodman (refund offsets, the
    Federal Payment Levy Program (FPLP), and reactivation) are the
    principal methods of collection for deferred accounts; the IRS also
    uses these techniques as supplemental collection techniques for other
    types of cases. Since these methods generally employ automated
    processes, they allow the IRS to pursue these accounts at relatively
    low cost. Reactivation of a deferred account may be triggered when the
    taxpayer incurs a new liability, a tax filing delinquency occurs, or
    the IRS learns of a source of income. Based on the triggering event,
    the IRS reevaluates the priority of the case in terms of compliance
    risk and potential to collect the delinquency. Typically, if the case
    is deemed collectible, the IRS can expect to collect 64 percent of the
    debt through full payment or an installment agreement.
        As noted in Dr. Bodman's response, many of the accounts in deferred
    status represent taxpayers who have filed a tax return showing an
    amount of tax due, but who have failed to pay the tax. Other accounts
    represent taxpayers who have been assessed additional tax by the IRS
    and have made three or more voluntary payments to satisfy that
    additional tax, but who have stopped making payments. These taxpayers
    are aware of their outstanding liabilities. The IRS, however, is unable
    to continuously pursue each taxpayer with an outstanding tax liability
    because of other resource and collection priorities. Many taxpayers
    with outstanding tax liabilities, however, would make payment if
    contacted by telephone and, if necessary, offered the ability to make
    payment of the full amount in installments. The administration's fiscal
    year 2005 budget proposes to permit the IRS to use private collection
    agencies (PCAs) to address accounts in deferred status.
        Question. Mr. Everson, a recent IRS Oversight Board report claims
    that each year, ``the IRS must absorb millions of unfunded costs, such
    as rent increases and postage, left uncovered by the administration's
    budget request.'' The Board estimates that in both fiscal year 2004 and
    fiscal year 2005, there will be at least $100 million in unfunded
    expenses. Further, the ``resulting shortfalls mean that the IRS is
    consistently unable to hire the personnel assumed in the
    administration's request.'' In what areas has the IRS cut, in order to
    pay these unfunded costs?
        Answer. The IRS took reductions across-the-board from all programs
    to fund pay parity, but protected enforcement initiatives. When
    absorbing the appropriation reduction, the IRS protected enforcement
    initiatives and related support costs, and took the majority of the cut
    from Information Systems and other support.
        The fiscal year 2005 budget includes a 1.5 percent increase for
    pay. If Congress approves and the President signs the anticipated 3.5
    percent increase, the impact of this increase would result in a
    shortfall of $109 million. Most of the IRS budget is composed of labor
    (71 percent) and most of the remainder is composed of items that
    support staff directly (travel, rent, supplies and equipment). The
    total percentage of the IRS budget that does not support staff directly
    is less than 18 percent. Any reduction to IRS funding or any absorption
    of an unfunded mandate like a pay raise would, of necessity, have a
    direct impact on FTE. Because most IRS staffing is devoted to taxpayer
    casework--answering telephones, collecting overdue money, or auditing
    returns--reductions inevitably affect these taxpayer assistance areas,
    affecting both taxpayer service and enforcement.
        [Clerk's Note.--The report follows:]

                                     Report

                                   BACKGROUND

        The National Commission on Restructuring the IRS issued a report in
    1997 defining ``A Vision for a New IRS.'' In 1998, the IRS
    Restructuring and Reform Act (RRA 98) codified much of that vision into
    law. Since the passage of RRA 98, the IRS has undergone enormous
    changes, including the most extensive reorganization of the agency in
    the past 50 years. Prior to the IRS reorganization, all ten IRS
    Submission Processing Centers performed similar functions and processed
    returns for both the Individual Taxpayers (IMF) and Business Taxpayers
    (BMF). Each center also handled Taxpayer Accounts (correspondence/
    telephones) and Compliance programs for both IMF and BMF.
        Although the ten-center configuration was successful and worked for
    many years, we felt we could improve our business results and better
    respond to customer needs by organizing around our customer segments.
    We based the initial IMF Consolidation Strategy of our centers around
    Wage and Investment (W&I), Small Business/Self Employed (SB/SE), Large
    and Mid-Size Business (LMSB), and Tax Exempt and Government Entities
    (TE/GE) customer segments. As a result of this reorganization, we
    realigned the ten Processing Campuses into eight W&I (IMF) and two SB/
    SE (BMF) Submission (paper returns) Processing Centers. We completed
    this realignment of the customer base in 2002. Now, all BMF taxpayers
    file their paper returns at our processing centers located at either
    Ogden, Utah or Cincinnati, Ohio. All IMF taxpayers file their paper
    returns at one of the W&I centers.
        The RRA 98 also mandated that the IRS improve the Electronic Tax
    Administration program to reach the goal of 80 percent of individual
    returns filed electronically by 2007. With increased emphasis and
    success of electronic filing, the volume of paper returns has
    decreased. To effectively administer and manage this change in taxpayer
    behavior, the IRS analyzed ``E-file versus Paper Trends'' and developed
    a detailed business plan to gradually reduce the number of IMF paper
    Processing Centers. We approved this ``Business Plan,'' which will take
    several years to fully implement, in 2002. The plan calls for the
    consolidation of an IMF paper processing center every few years,
    contingent on the public's continued migration from paper to
    electronically filed returns.
        At the completion of each filing season, we assess both the e-file
    progress and the paper return filing pattern to see if we need to
    adjust the consolidation timelines for the next filing season.
    Flexibility is a key component in this plan, allowing the IRS to plan
    and react appropriately as paper return volumes fluctuate. Many
    restructuring changes have already taken place at the Ogden, Utah;
    Cincinnati, Ohio; and Brookhaven, New York campuses. At Memphis,
    Tennessee; Philadelphia, Pennsylvania; and Andover, Massachusetts, the
    IRS will consolidate the paper return processing function over the next
    several years.
        However, compliance and tax account work will remain at all the
    campuses, making them key employment centers. Our timetable for
    consolidating IMF paper processing at the campuses is as follows:
      --Consolidate the processing of BMF paper returns into two sites
            (Ogden, Utah and Cincinnati, Ohio). We completed this migration
            in 2002.
      --Discontinue the processing of IMF paper returns at Brookhaven, New
            York. We completed this change in October 2003.
      --Discontinue the processing of IMF paper returns at Memphis,
            Tennessee by June 2005.
      --Discontinue the processing of IMF paper returns at Philadelphia,
            Pennsylvania by June 2007.
        We will determine the specific dates for consolidating of the
    remaining centers based on e-file and paper volume projections for
    subsequent years.

                               ELECTRONIC FILING

        In 1999 the IRS processed 29 million electronically filed returns,
    and in 2003, 53 million taxpayers chose to file electronically. We
    estimate that nearly half of all taxpayers will e-file in 2004. We are
    encouraged by both the growth of e-file to date and the projected
    growth through 2010. We will continue to strive to reach the RRA 98
    goal, but believe that individual returns filed electronically will not
    reach 80 percent by 2007; however the IRS's electronic tax filing
    program has experienced tremendous gains in customer acceptance. The
    chart below reflects the progress we made in e-file from 1997 through
    2003, and our projections for the future look equally promising.

                                                         ACTUAL
                                                  [Volume in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                  1997      1998      1999      2000      2001      2002      2003
    ----------------------------------------------------------------------------------------------------------------
    Total Returns.............................     120.7     125.2     126.0     128.4     131.0     131.7     130.1
    Total Paper...............................     101.5     100.6      96.7      93.0      90.9      85.0      77.2
    Total Electronic..........................      19.2      24.6      29.3      35.4      40.1      46.7      52.9
    Percent e-filed...........................      15.9      19.6      23.3      27.6      30.6      35.5      40.7
    Percent growth Electronic.................  ........      28.1      19.1      20.8      13.3      16.5      13.3
    Percent decrease Paper....................  ........       0.9       3.9       3.8       2.3       6.5       9.2
    ----------------------------------------------------------------------------------------------------------------

                                               PROJECTED--2004 AND BEYOND
                                                  [Volume in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                  2004      2005      2006      2007      2008      2009      2010
    ----------------------------------------------------------------------------------------------------------------
    Total Returns.............................     130.9     133.3     135.5     137.3     139.0     140.5     141.9
    Total Paper...............................      71.1      66.6      62.2      58.1      54.8      51.9      49.5
    Total Electronic..........................      59.8      66.7      73.3      79.2      84.2      88.6      92.4
    Percent e-filed...........................      45.7      50.0      54.1      57.7      60.6      63.1      65.1
    Percent growth Electronic.................      13.5      11.5       9.9       8.0       6.3       5.2       4.3
    Percent decrease Paper....................       8.1       6.3       6.6       6.6       5.7       5.3       4.6
    ----------------------------------------------------------------------------------------------------------------

                            PROCESSING PAPER RETURNS

        As a result of the increase in e-file volume, the paper return
    volume has decreased each year since 1998. For example, in 1999 we
    processed over 97 million paper returns, or 77 percent of the total
    returns processed by the IRS. From 1999 through 2003, paper return
    volume has decreased by almost 26 million returns, a 26 percent
    reduction. In 2004, we project we will process 71 million paper
    returns, which is 54 percent of the total returns processed. This is an
    average of over 4 million fewer paper returns each year; a trend that
    we expect will continue. Based on these trends, we analyzed the impact
    on operations and developed a comprehensive business plan by looking at
    the impact e-file would have on our processing centers (Phase I), and
    then developing a strategy to address the decline in paper return
    volumes (Phase II).

                       PHASE I OF CONSOLIDATION STRATEGY

        Due to the actual and projected increases in electronic filing
    (ELF), we decided to assess the current and future impact of e-file on
    our paper processing sites. In 2000, we developed a long-term strategy
    by answering three key questions about the future of IMF return
    processing:
      --How does an increased ELF volume affect the workforce?
      --What is the ideal configuration (end state) of centers when we
            achieve 80 percent ELF?
      --How will the IRS manage the path toward the end-state
            configuration?
        We assessed projected volumes of ELF and paper processing capacity
    at each site, multiple transition scenarios, and business objectives to
    arrive at a consolidation strategy. The results of this analysis showed
    that continuing to operate ten paper processing sites was inefficient.
    Although we analyzed multiple strategies, consolidating one IMF center
    at a time (as the volume of e-file returns continues to increase) was
    the most efficient strategy. We shared this strategy with all our
    internal and external stakeholders, then proceeded to implement this
    ``Modernization/Consolidation of Submission Processing Centers,''
    starting with the consolidation of the Brookhaven IMF Submission
    Processing operation. As a result, Brookhaven stopped processing
    individual paper returns as of October 2003.
        Our strategy will allow us to improve customer service, increase
    business performance, and adjust the plan as paper and e-file volumes
    and patterns dictate. It will also permit us to reduce overhead and
    real estate costs campus by campus.

                       PHASE II OF CONSOLIDATION STRATEGY

        For the second phase of our analysis, we reviewed each site against
    factors including business operational alignment, economies of scale,
    labor market issues, and real estate costs. This analysis identified
    the order of the consolidation of IMF processing centers, starting with
    the Brookhaven Submission Processing center in October 2003, the
    Memphis Submission Processing center in October 2005, and the
    Philadelphia Submission Processing Center in October 2007.
        We expect these consolidations to be followed by the Andover
    Submission Processing center, and so forth, until the IRS reaches its
    ``end state'' configuration. Again, this plan is contingent on the
    continued growth in the number of e-filed returns.

                                TAXPAYER IMPACT

        At the very beginning of our modernization efforts, we recognized
    the challenge we would face in ensuring our customers understood the
    reason for consolidating our operations and the changes they could
    expect to see. We have tried to minimize the impact of these changes by
    consulting with various groups including the National Treasury
    Employees Union (NTEU) and Tax Practitioner groups. Working with our
    own Multi-Media operation, we made sure that various tax packages
    included updated instructions on the location to send returns. We also
    made presentations at various tax forums around the country. Although
    this effort has been challenging, we have successfully consolidated IMF
    and BMF customer processing sites and the Brookhaven Submission
    Processing operation. Even though we substantially reduced the number
    of returns processed at Brookhaven in 2003, we completed one of our
    most successful filing seasons. We review each consolidation process
    and build on that foundation as we continue our consolidation efforts.

                                WORKFORCE IMPACT

        We recognize that one of our greatest assets is the people who help
    in the daily processing of taxpayers' returns. We also recognize that
    consolidating paper processing operations will affect our workforce. In
    anticipation of the consolidation, we stopped hiring ``career
    conditional'' employees and started hiring ``temporary'' employees in
    Memphis, Philadelphia, and Andover. The new hires understand their
    appointment is temporary. When job reductions occur, we will make every
    effort to minimize the adverse effects on our employees. For example,
    when we realigned the processing of IMF/BMF paper returns into eight
    IMF centers and two BMF centers, we did so without a loss of jobs. In
    addition, in the Brookhaven and Memphis centers we prepared for staff
    downsizing by consolidating our Centralized Offer in Compromise (COIC)
    program in the centers, creating hundreds of job opportunities at each
    location. We also recently announced the proposed consolidation of Case
    Processing and the Insolvency Program, which will also create hundreds
    of jobs in Memphis and Philadelphia.
        We are working with NTEU to develop workforce transition plans and
    to take advantage of every tool we have to help employees through this
    transition. We have held ``Town Hall'' meetings with the employees at
    all our campuses and will continue to do so as we schedule specific
    campuses for consolidation. We will also continue to provide our
    employees with job placement assistance. Of course, if we must
    involuntarily separate employees from the IRS, we will give them all
    the benefits to which they are entitled under the law.

                                   CONCLUSION

        We began modernizing our paper processing centers in 1998. We
    conducted an extensive business plan analysis before making
    consolidation decisions, and we continue to rely on this business plan
    as we move forward with consolidation. We also adjust our plan based on
    our initial experiences with the streamlining of the service centers.
    This report captures at a high level the analysis, efforts and progress
    we have made in improving our processing operations. We would welcome
    the opportunity to present this extensive business case to you and your
    staff at your earliest convenience.

        Question. In addition to the new enforcement funding IRS is seeking
    from Congress, the IRS's budget justification states the following
    about its intention to fund enforcement from other areas: ``In fiscal
    year 2005, $111 million will come from current operations to improve
    enforcement and infrastructure.'' ``The majority of resources ($61
    million) generated from base mining will be diverted to enforcement
    activities. . . .'' Why is only a little more than half of the money
    going toward enforcement? For what specific purposes is the other money
    going and what is meant by infrastructure?
        Answer. The IRS is emphasizing enforcement, but it cannot ignore
    service or the infrastructure supporting it. Thus, in order to balance
    its efforts, the IRS redirected some funds to modernizing IRS
    infrastructure. The IRS budget strategy is designed to redirect
    productivity enhancements from increases in electronic processing and
    modernization of business systems to continue to improve taxpayer
    service and enforcement.
        Of the $111 million in redirected resources, $61 million will be
    diverted to enforcement activities. The remaining $50 million will be
    redirected as follows:

                             INFRASTRUCTURE EXPENSES
                            [In millions of dollars]
    ------------------------------------------------------------------------
                                                                  Amount
    ------------------------------------------------------------------------
    Cost of Transitioning Employees\1\......................            39.0
    Continue Competitive Sourcing Studies...................             9.0
    Embedded Quality \2\....................................             1.6
    Create ADA-Compliant Training Facility..................             0.5
                                                             ---------------
          TOTAL.............................................            50.1
    ------------------------------------------------------------------------
    \1\ Includes lump-sum leave, severance and relocation.
    \2\ This initiative, through an Embedded Quality system in Submission
      Processing (EQSP), will create a new measurement system that will
      identify the cause and impact of errors, apply common measures to
      every level of the new organization, and enable frontline employees to
      understand how their contributions impact IRS's performance. An
      embedded quality system links individual and business performance with
      multiple quality review sources. EQSP will instill complete
      accountability for quality performance across operations.

        Infrastructure refers to programs and activities that support
    enforcement and taxpayer service. These activities align with the IRS's
    third strategic goal, ``modernize the IRS through its people,
    processes, and technology.''
        Question. As part of its budget request, IRS proposes spending
    $121.6 million and 1,167 FTE to ``curb egregious noncompliance''.
    Please provide a table citing each instance of egregious noncompliance,
    along with the associated dollar amount and FTE.
        Answer. The ``Curb Egregious Noncompliance'' (CEN) enforcement
    initiative addresses the continuing concern over the proliferation of
    abusive domestic and international tax avoidance transactions and
    schemes. In addition, requested staffing will allow the IRS to address
    issues associated with certain individual taxpayers and those who use
    structured transactions and flow-through entities to conceal or
    improperly reduce taxable income and avoid payment of taxes owed. This
    noncompliance represents a real threat to the American system of
    voluntary compliance. Traditional approaches aimed at maintaining audit
    coverage and managing growing case inventories with a declining
    resource base have failed to adequately address these complex
    enforcement issues.
        To address these issues, the CEN initiative will allow the IRS to
    hire and train new staff in the Examination, Collection and Document
    Matching programs during fiscal year 2005.
        The following table shows the projected expenditures of FTE and
    dollars by program.

                              [Dollars in millions]
    ------------------------------------------------------------------------
                     Program                        FTE           Amount
    ------------------------------------------------------------------------
    Field Examinations......................             492           $66.0
    Field Collection........................             332           $29.2
    Automated Underreporter.................              53            $4.2
    Automated Collection (ACS)..............             125           $10.9
    Correspondence Exams....................             165           $11.3
                                             -------------------------------
          Total.............................           1,167          $121.6
    ------------------------------------------------------------------------

        Question. Please provide a breakdown by percentage of how proposed
    enforcement resources would be allocated toward the various segments of
    the taxpayer population within $25,000 increments.
        Answer. In fiscal year 2005, proposed increases for the Tax Law
    Enforcement account, including annualization and enforcement
    initiatives, total $393 million. The IRS aligns increases in
    enforcement as follows:
      --Corporations.--$59 million (22 percent) and 562 FTE;
      --High-income taxpayers (>$100,000).--$57 million (21 percent) and
            674 FTE;
      --Criminal activity.--$64 million (23 percent) and 299 FTE;
      --Tax-exempt organizations.--$16 million (6 percent) and 180 FTE; and
      --Other contributors to the tax gap.--$76 million (28 percent) and
            1,226 FTE.
        The increase also includes $121 million for inflation to maintain
    current levels.

                               IRS REORGANIZATION

        Question. Please summarize in detail what has happened to IRS
    employees who were determined to be ``transitional'', stating from
    which program area they were taken and when, how many reassigned, how
    many were lost due to attrition, as well as how the requested $5
    million will remove the remaining employees ``from the rolls.''
        Answer. Upon stand-up in September 2000, approximately 5,000
    employees did not align with the new organizational structure. Over the
    next 3 years, the IRS placed approximately 4,450 employees into
    permanent positions or they voluntarily left the IRS. Approximately
    1,000 of these employees left under Voluntary Early Retirement
    Authority (VERA) or Voluntary Separation Incentive Payment (VSIP). On
    August 9, 2003, the IRS terminated the ``transition'' designation and
    declared permanent all employees previously designated as
    ``transition.'' At that time, there were approximately 550 formerly
    transition employees. Of this group, the IRS placed approximately 290
    employees in permanent positions and 260 remained in non-continuing
    positions. The IRS expects to offer VERA/VSIP to the employees in the
    non-continuing positions to facilitate voluntary separations.
        Question. In early January, IRS officials announced a major
    organizational restructuring resulting in 2,400 layoffs as well as
    office consolidations. As part of the same announcement, IRS indicated
    its intention to then fill 2,200 new positions. What is the cost of the
    2,200 new enforcement positions the IRS intends to add? What is the
    cost savings associated with the layoffs and consolidations?
        Answer. As noted in the January announcement, as a result of our
    planned consolidation, the IRS expects to perform its Case Processing
    and Insolvency operations while using fewer full-time employees--saving
    approximately 350 staff years. Similarly, the IRS expects that Support
    Optimization initiative will allow it to deliver its operations support
    services while saving approximately 750 staff years. The Memphis
    Submissions Processing ramp-down will eliminate approximately 2,200
    positions. The January announcement stated the intention to redeploy
    the personnel reductions towards enforcement priorities.
        In determining the approximate numbers of full-time positions that
    could be redirected to enforcement activities, the IRS assumed a 1-for-
    1 redeployment of the full time positions (i.e., approximately 350 from
    Case Processing and Insolvency and 750 from Support Optimization) and a
    2-for-1 redeployment for the submissions processing positions (i.e.,
    for every two submission processing positions eliminated the IRS could
    expect approximately one full-time position available for redeployment,
    or approximately 1,100 positions). Thus, the IRS estimated that
    approximately 2,200 positions would be available for redeployment to
    enforcement activities that would not be otherwise available without
    such efficiencies.
        In determining the numbers of employees potentially subject to
    involuntary separation, the IRS estimated the numbers of employees in
    positions to be eliminated, and reduced that figure to account for the
    numbers of employees who are expected to voluntarily leave through
    normal attrition, the use of Voluntary Early Retirement Authority
    (VERA) and Voluntary Separation Incentive Payments (VSIP), and those
    employees expected to be placed in other positions with the IRS. For
    this determination, the IRS did not include employees hired for
    limited-term appointments, because employees accepted these positions
    with the understanding that the positions would ``sunset'' in 2005 and
    because the elimination of these positions does not require the same
    involuntary separation procedures.
        For the income tax returns processing initiative, the IRS estimates
    that approximately 2,200 positions will be eliminated. Of this number,
    approximately 400 are term appointments. Therefore, the IRS determined
    that approximately 1,800 permanent (full-time or seasonal) positions
    would be eliminated. Based on this figure, the IRS anticipates
    approximately 1,000 employees will be involuntarily separated. For the
    case processing and insolvency initiatives, the IRS estimates that
    approximately 1,400 positions will be eliminated. Of this number, it
    anticipates that approximately 1,000 employees will be involuntarily
    separated (because the case processing and insolvency initiative
    involves consolidating work, i.e., eliminating positions in field
    offices while creating positions in the four consolidated campus
    locations, the net number of positions available for redeployment
    (approximately 350) is less than the gross numbers of positions being
    eliminated (approximately 1,400)). The Support Optimization initiative
    involves eliminating approximately 750 positions, and based on that
    figure, the IRS anticipates approximately 400 employees will be
    involuntarily separated. Thus, the total number of employees estimated
    to be subject to involuntary separation is estimated to be 2,400.
        Question. The nationwide case processing and insolvency support
    workforce would be reduced from 1,600 positions to 1,200, a 25 percent
    reduction. What analysis has been done to show that 25 percent fewer
    employees can perform this work? What cost savings does the IRS project
    from this? All background on how the savings are projected should be
    provided.
        Answer. The IRS has been studying the reengineering of the case
    processing and insolvency operations since 2000. Even after taking into
    account costs such as severance, hiring, training, salary cost
    differentials, and infrastructure, the IRS expects these initiatives to
    yield more than $300 million in savings over the next 10 years. These
    savings will allow us to redirect the equivalent of 350-425 full-time
    employees to front line tax law enforcement.
        The IRS considered alternative approaches, including switching
    staffing allocations from the area offices to the campuses at a pace
    driven by natural attrition. The IRS rejected this approach because of
    low return on investment and implementation difficulties. Competitive
    outsourcing was also considered and rejected because case processing
    and insolvency work is mainly inherently governmental.
        The IRS's analysis involved baselining the existing case processing
    and insolvency processes currently performed in the areas, identifying
    best practices, and standardizing the processes to be implemented in
    the campus from these baselines and best practices. The new operational
    structure builds on existing processes currently being performed at IRS
    campuses, provides economies of scale and standardization, allows the
    creation of a quality review unit, offers staffing flexibility, and
    creates space savings due to shift work.
        The IRS's analysis of sources such as OMB and best practices used
    in private industry predicted that a 35 percent reduction in case
    processing and insolvency costs would be possible through consolidation
    and process standardization. The results predicted from external
    indicators were compared with area and campus case closure
    efficiencies. Centralized staffing calculations were updated based on
    area and campus efficiency and projected work plans resulting in a more
    conservative of 25 percent cost savings projection.
        Question. IRS has stated that no employee would be involuntarily
    separated before January 2005. When would new employees be hired and
    what kind of training will be provided? How would IRS deal with an
    inexperienced workforce--reduced by 25 percent from current levels--
    that will have no institutional memory?
        Answer. The IRS is currently in negotiations with NTEU regarding
    the potential reduction in force. Until negotiations are finalized, no
    employee will be involuntarily separated. However, the IRS has recently
    entered into a separate memorandum of understanding with NTEU that
    authorizes a staged hiring at the campus consolidated sites to address
    excess workload in the area offices created by the natural attrition of
    staff. This step will allow the organization to begin ramp up by
    providing training and significant experience with the work before any
    off rolls occur.
        Once this IRS reaches its final agreement with NTEU, full
    implementation will occur with a staged deployment of hiring at the
    campuses, redirecting work from the field, and workforce transition in
    the non-continuing sites. This approach allows campus personnel
    additional experience with total centralization before off rolls will
    occur in 2005.
        The IRS established a training team made up of subject matter
    experts from case processing, insolvency, and campus employees to
    revise existing training material, write additional training lessons
    and develop training guidelines and timeframes. All campus hires will
    be given a combination of classroom and on the job training as soon as
    they are hired, which is a significant improvement over current field
    practices in case processing and insolvency.
        Learning curves were projected for centralized case processing and
    insolvency new hires aligned by grade level and skill set. These
    learning curves provided the underpinnings for decisions regarding the
    timing for early ramp up and staging the implementation. Projections
    for the time needed for training are conservative as many of the hires
    will already have experience from positions and activities currently
    performed on the campus that are similar to those in centralized case
    processing and insolvency.
        Question. How is it more efficient to move these case processing
    staff away from the collection staff they are supporting to centralized
    locations?
        Answer. In a centralized situation, a smaller team of employees can
    focus on one function for longer periods of time, and can work more
    efficiently than the larger number of staff in the separate locations.
    The workload can also be more easily managed and scheduled because of
    the consolidation. Training expenses and other costs have been
    considered, and the resulting savings shows centralization is cost
    effective.
        Many revenue officers and revenue agents currently mail their work
    to the area offices and under the new design the only change for them
    would be the address they mail to. To address lingering concerns of the
    collection staff there will be a FORT (Field Office Resource Team)
    consisting of revenue officers who will be responsible for assisting
    tax examiners and field collection personnel in making any necessary
    corrections to reports or closing documents.
        Question. How is it more efficient to centralize insolvency/
    bankruptcy staff when this work is ruled in large part by 50 different
    State laws?
        Answer. Over 900 Insolvency Specialists and Advisors will remain in
    the area offices to address the more technical issues. They will no
    longer be pulled away from the technical work to help with clerical and
    para-professional duties. Therefore, centralization will actually
    enhance the relationships with the bankruptcy courts, trustees and
    external stakeholders that have been established over the years and
    increase customer service.
        The new structure provides economies of scale and standardization,
    allows the creation of a quality review unit, offers staffing
    flexibility, and creates space savings due to shift work.
    Centralization will also help create an environment suitable for
    electronic processing and transmission of Proofs of Claim. The planned
    use of an electronic knowledge system will provide a national resource
    for State law information.
        Question. Have you discussed this reorganization with the affected
    parties? What do the revenue officers and agents think the impact of
    this will be on their efficiency? What do tax practitioner groups think
    of this?
        Answer. There is a natural concern and uneasiness that accompanies
    any change. Focus interviews and customer surveys were conducted with
    area directors, revenue officers, revenue agents, and other bargaining
    unit employees in which the case processing redesign team received
    valuable information on issues and ideas to be considered for possible
    centralization. As a result of this feedback, the IRS developed the
    concept of the Field Office Resource Team (FORT). The FORT, consisting
    of revenue officers, will be available to address the needs of field
    collection personnel in making any necessary corrections to reports or
    closing documents.
        Insolvency has little contact with revenue officers, revenue
    agents, or practitioners. A centralized phone number and phone unit
    will be established to answer calls and concerns of trustees, taxpayers
    as well as any internal customers.
        The Case Processing Team had conversations with some of the large
    institutional practitioner groups and received support for the
    redesign.
        Question. At the Memphis Service Center, 2,200 current employees
    would be laid off and not replaced. IRS claims that this is aimed at
    reducing paper processing staff in response to increases in electronic
    filing. IRS has already downsized returns processing employees at the
    Brookhaven, NY Service Center. The House report accompanying the fiscal
    year 2004 Transportation, Treasury Appropriations bill recommended that
    IRS refrain from initiating any premature and ill-considered reductions
    in force until reporting to Congress. What progress has been made on
    the report to Congress and when will it be submitted? What are the cost
    savings associated with the reduction in force?
        Answer. The IRS delivered the report to Congress on April 22, 2004.
    A copy is attached. The IRS estimates the cost savings for Memphis to
    be $12.5 million for the period 2004 through 2006 and then an annual
    cost avoidance of $9.5 million dollars a year starting in 2007.
        Question. GAO has indicated that electronic filing is far short of
    IRS projections. What is the level of electronic filing compared to IRS
    projections? What level of increase in electronic filing is IRS
    projecting that will make it plausible to lay off 2,200 return
    processing employees within the next year?
        Answer. While the IRS is below projections needed to achieve the
    goal of 80 percent of individual returns filed electronically by 2007,
    it is continuing to make strong gains. The Consolidation Strategy is
    based on projections that are keyed to the workload shifts necessary to
    process the reduced paper volumes. In 2004, the IRS projected 59.8
    million electronic returns would be filed. As of May 14, taxpayers
    exceeded the number e-filed returns from the prior year by over 8
    million returns to reach the 60 million mark. This figure equates to
    approximately 50 percent of all individual returns filed and represents
    a milestone in e-file progress. The IRS's Consolidation Strategy is on
    track.

             PROBLEMS WITH IRS BUSINESS SYSTEMS MODERNIZATION (BSM)

        Question. In a March 2004 review, GAO found that although IRS has
    made some progress in implementing their recommendations and improving
    its modernization management, certain recommendations have not yet been
    fully implemented or institutionalized. These weaknesses have
    contributed, at least in part, to BSM project cost and schedule
    shortfalls. GAO states that, ``Projects continue to incur cost
    increases and schedule delays for several reasons, including inadequate
    definition of systems requirements, increases in project scope, and
    cost and schedule estimating deficiencies.'' Mr. Everson, this
    modernization effort has been plagued with these problems from the
    start. What have you done to ensure that IRS staff is adequately
    prepared to define its systems requirements instead of relying
    completely on the contractors to do so? What steps are you taking to
    ensure that cost and schedule estimates, which have been grossly off-
    track, will now be more accurate?
        Answer. Recent improvements to the IRS Enterprise Life Cycle (ELC)
    will ensure that the IRS adequately defines system requirements in the
    future. The recent updates to the ELC include a new milestone
    (Milestone 4A), that requires a detailed definition of a systems'
    physical design baseline under strict configuration management (CM)
    control. This baseline can be used for awarding fixed priced contracts
    for the development, integration, and testing of the system. As a
    prerequisite to the implementation of MS 4A, the ELC now requires
    redefinition of requirements management, and strict CM control for
    projects in prior milestones. For example, at Milestone (MS) 2,
    business requirements constitute the functional baseline. The
    functional baseline is then decomposed into logical systems
    requirements that are baselined under CM control at MS 3. Requirements
    that evolve from milestone 1 through 4A are verifiable and traceable in
    both directions and must be compliant with the Enterprise Architecture
    in order for a project to gain approval to move to the next stage of
    development. There will be a major systems engineering review at the
    end of each development phase, conducted by IRS business and technical
    personnel.
        As the IRS moves forward, constant involvement of the IRS
    stakeholder organizations is critical. Stakeholder involvement in the
    definition, approval, and coordination of system requirements will
    ensure that what the IRS develops is closely traced to IRS's business
    needs and that ownership is clearly identified and understood. As this
    revised ELC strategy is unveiled, training will be provided to ensure
    that IRS personnel are adequately prepared to achieve success.
        The IRS has been working jointly with MITRE and CSC (the PRIME
    Contractor) to improve cost and schedule estimating capability. The IRS
    is using the well-recognized Carnegie Mellon Software Engineering
    Institute's (SEIs) Requisites for Reliable Estimating Processes as a
    guide. The requisites provide for development and execution of the
    following key cost and schedule estimating objectives:
      --Maintaining historical data;
      --Structured estimating processes;
      --Mechanisms for extrapolating estimates from successful past
            projects;
      --Audit trails; and
      --Ensuring integrity in dealing with dictated costs and schedules.
        Both CSC and the IRS have made significant progress towards
    achieving these key objectives. The IRS has implemented procedures for
    validating contractors' estimating systems and for reviewing cost and
    schedule estimates. The procedures provide guidance for evaluating
    reliability of documentation supporting individual estimates and for
    tracking compliance with sound estimating practices. Furthermore, the
    procedures also address professional development of personnel with the
    right skill set for developing and evaluating cost and schedule
    estimates. CSC has established a historical database, calibrated
    estimating models and developed detailed requirements for documenting
    and supporting bases of estimates along with related guidance and
    directives. Work is also in progress for continuing refinement and
    improvement in each of these elements.
        In addition, joint training is being conducted for IRS, CSC and
    MITRE personnel as an integral part of the overall plan to ensure
    competent deployment of improved processes and procedures. The IRS,
    with MITRE's assistance, recently completed a review of CSC's
    estimating system. The IRS is finalizing the results and will issue
    them in a report in the latter part of June. In general, there have
    been improvements. The report will include a time phased corrective
    action plan for addressing deficiencies. To ensure the tools, guidance,
    processes and procedures are part of a mature repeatable process, a
    concerted effort is underway to fully validate all aspects of the
    processes and procedures prior to official roll-out within the IRS.
    This pilot program is intended to verify the soundness of the processes
    and procedures and provide lessons learned, before full implementation
    is effected.
        The IRS is making every effort to hire qualified staff and fully
    implement its improved tools, guidance, processes, and procedures as
    soon as possible. However, this is taking more time than the IRS would
    like. This is a pervasive problem on programs of the size and
    complexity of the modernization initiative. Nonetheless, the IRS
    believes that there will be evidence of increased accuracy by the end
    of fiscal year 2004 and continued improvements over time.
        Finally, all of these efforts are part of a highly visible set of
    plans geared to identifying, tracking, reporting, and reviewing the
    critical cost and schedule estimating commitments with IRS Executive
    Management and GAO/TIGTA.
        Question. The modernization of IRS business systems has suffered
    numerous problems and delays and now some IRS staff integral to the
    process are leaving, including the director of BSM. How will this
    affect the program, what steps are being taken to ensure that
    institutional knowledge of the modernization program remains?
        Answer. In addition to putting a succession management plan in
    place, the IRS needs a more versatile team of seasoned executives to
    provide long-term stability to the program. The IRS is complementing
    the skills of its experienced tax executives with outside seasoned
    technology executives who have experience managing large-scale, complex
    IT projects. As such, the IRS is hiring two Associate Chief Information
    Officers to join the MITS organization, and an executive search firm is
    conducting searches for five senior executives with a wide range of
    diverse experience in developing and implementing large modernization
    systems. The new Associate CIOs will assume modernization management
    responsibilities so that the Associate CIO of business systems
    modernization can focus primarily on delivering projects.
        Question. Until recently, IRS has used its information technology
    services staff with minimal input from its business units. The business
    units will be the ultimate users of this program. What steps has IRS
    taken to incorporate the business managers into BSM?
        Answer. The Commissioner is holding IRS senior business unit
    managers accountable for the success of modernization efforts as it
    relates to defining, developing, and controlling business requirements.
    For example, a senior business unit manager is responsible for working
    closely with the BSM and Modernization and Information Technology
    Services (MITS) executives to ensure that the delivery of the CADE
    project meets all business requirements.
        Question. GAO has concluded that the IRS must institutionalize the
    management processes and controls necessary to resolve the deficiencies
    identified by the reviews and assessments in order to strengthen
    management of the Business Systems Modernization program. What steps is
    IRS undertaking to accomplish this?
        Answer. Over the past 2 years, the BSM organization has been
    working diligently toward integrating and institutionalizing the
    management processes of the BSM program. While the IRS has achieved
    real progress, as recognized by TIGTA and GAO, the BSM Challenges Plan
    has complemented ongoing efforts by providing a special focus on
    significant issues that needed more attention.
        GAO recognized the need for continual growth in the maturity of the
    BSM management processes and raised concerns in key areas such as
    configuration management, human capital management, contract
    management, and cost and schedule estimating. Accordingly, BSMO
    committed to maturing its management processes and established
    corrective action plans for each area, assigned responsibilities and
    set milestones, and initiated a formal monitoring process for measuring
    progress in each area.
        For example, the IRS has developed configuration management
    processes and is institutionalizing configuration procedures. It
    established a process for determining the type of task order to be
    awarded and MITS is implementing plans for attracting, developing, and
    retaining requisite human capital resources. Key stakeholders are
    reviewing documented procedures for how to effectively validate the
    cost and scheduling estimates submitted by the PRIME.
        Question. The IRS Oversight Board stated in a December 2003 report
    that, as the foundation of the modernization project, the Customer
    Account Data Engine (CADE), requires special attention. CADE will
    replace the existing IRS Master File of taxpayer accounts. It is the
    most costly, complex, largest, and longest-running project within the
    BSM portfolio. IRS has engaged Carnegie Mellon's Software Engineering
    Institute (SEI) to review CADE. One of SEI's findings is that a key
    component of CADE, its ``business rules engine'' which translates tax
    processing rules into computer code, must be defined and modeled in
    order for CADE to succeed. Is IRS following this recommendation and if
    so, what is the status? If not, why not?
        Answer. The IRS is following the recommendation from Carnegie
    Mellon's Software Engineering Institute. The IRS tasked PRIME to do a
    business rules engine performance engineering study that measured and
    modeled the performance of the business rules engine. The IRS also
    tasked PRIME to evaluate design alternatives that lowered risk of
    implementing business rules. The PRIME has completed performance tests.
        Senior engineers from IRS, PRIME, MITRE, and Sapiens (the business
    rules vendor) met the week of May 10, to review the test results and
    assess alternatives that will improve the performance of CADE and lower
    the risk of implementing business rules. Design changes will be modeled
    using the performance data obtained in the tests. The final report is
    due to be completed June 20, 2004.
        Question. In Ms. Gardiner's formal testimony, she states that
    oversight groups are starting to lose confidence in the ability of your
    PRIME contractor to meet its commitment in modernizing the IRS's
    business systems. This observation is clearly based on the deadlines
    that have already been missed and the cost overruns already incurred.
    Mr. Everson, what is your current assessment of your PRIME contractor's
    ability to get the job done without further delays and further cost
    overruns? Are you giving any consideration to changing your PRIME
    contractor on this critically important endeavor? If so, what would be
    the cost to the taxpayer of changing your PRIME contractor at this
    time?
        Answer. There are no current plans to replace CSC as the PRIME
    contractor, however, Commissioner Everson has made it vividly clear to
    Mike Laphen, the President and Chief Operating Officer of CSC, that CSC
    needs to significantly improve their performance. In February 2004, he
    announced his decision to direct the upcoming enforcement modernization
    projects for collection contract support and filing and payment
    compliance to other contracts. It is the Commissioner's hope that this
    action, while no doubt unwelcome to CSC, will lead to a sharpened focus
    and discipline, and will in fact enhance the prospects for successful
    and timely delivery of other modernization projects by CSC.
        While CSC has improved their performance somewhat, the IRS
    carefully assessing CSC's performance on current projects and the
    results of CSC's overall program management and integration efforts
    before awarding any follow-on work for existing projects. The IRS needs
    consistent, high-level performance and service from CSC. The IRS has
    also moved to capped or fixed price contracts for almost all
    development work to balance the financial risk on modernization
    projects.

                              COMPETITIVE SOURCING

        Question. Mr. Everson, you are very familiar with the President's
    competitive sourcing initiative since you served as Deputy Director for
    Management at OMB. I understand that you plan to spend $9.1 million in
    unbudgeted funds in fiscal year 2005. What areas are you planning to
    contract out?
        Answer. The $9.1 million you cite is the amount the IRS has
    requested in the fiscal year 2005 budget submission to support the
    Competitive Sourcing program. The IRS plans to use public-private
    competition to improve operations, but only if it makes economic sense.
    Traditionally, the employee government bid teams have won over 50
    percent of the public-private competitions. Historically, organizations
    that have successfully used competition to improve operations have
    achieved an overall 30 percent reduction in operating costs. These
    reductions are typically in the support functions and are achieved
    through such actions as consolidation of existing facilities (releasing
    commercially leased space), staff reductions, and increased use of
    technology. Similarly, the IRS focus is on support functions.
        Question. What is the status of all the competitive sourcing
    studies that have been undertaken at IRS? Please include year, area,
    and result. How much money has been spent on these competitions? Since
    the competitions are not budgeted for, where has the money come from?
        Answer. It has been difficult to finance the Competitive Sourcing
    Program since the IRS does not know the outcomes in advance, the exact
    level of savings are yet to be determined, and it takes time to realize
    these savings. The IRS had to internally realign. However, the
    investments made today in public-private competitions show a return on
    investment usually within 2-3 years (including payment of transition
    costs--voluntary early retirement, voluntary separation incentive,
    etc.). At that time, the IRS plans to reinvest the savings to fund
    future competitions and cover transition costs. It will take several
    years to get there. The IRS does request funding in the fiscal year
    2005 budget for the Competitive Sourcing program.
    Status of IRS Competitive Sourcing Studies
        Architects and Engineers (10 FTE).--Streamline competition resulted
    in in-house award. The in-house team was most efficient.
        No savings achieved.
        Area Distribution Centers (500 FTE in Bloomington, IL; Rancho
    Cordova, CA; Richmond, VA).--The three Area Distribution Centers
    distribute tax forms, instructions and publications to taxpayers and
    internal use documents to IRS employees.
        Standard Competition with award decision scheduled for June 28,
    2004.
        Expected Saving and Benefits: Consolidation of activities and
    geographic locations resulting in the release of commercial space,
    revised operational processes and procedures to gain efficiencies, new
    information system, reduced staff and increased managerial span of
    control.
        Anticipated return on investment (fiscal year 2005-fiscal year
    2009): $22 million.
        Building Delegations or Operation and Maintenance (O&M) of
    Delegated Buildings (100 FTE in Covington, Fresno, Austin, Ogden,
    Philadelphia, Headquarters).--O&M are those functions identified in the
    Building Delegation Agreements between the General Services
    Administration (GSA) and the IRS. These services include
    responsibilities to operate and maintain building systems (electrical,
    HVAC, control systems, etc.).
        Standard Competition with solicitation release scheduled for June
    2004.
        Expected Saving and Benefits: Revised operational processes and
    procedures to gain efficiencies; reduced staff; and increased
    managerial span of control.
        Anticipated return on investment (fiscal year 2006-fiscal year
    2010): $3.9 million.
        Mail Rooms (70 FTE).--Mailroom services functions include all
    aspects of the delivery of mail from full service delivery to mail stop
    or desktop to self-service mailrooms where customers pick up their own
    mail. The IRS made a decision to divide the study among headquarters,
    nationwide ``stand alone sites'' and campuses.
        The IRS plans to use public-private competition to improve
    operations.
        Direct Conversion--in progress.
        Fully Implemented--Denver, CO; Detroit, MI; Plantation, FL; Detroit
    Computing Center, MI; Houston (Leland), TX; Laguna Niguel, CA; Oklahoma
    City, OK; and San Francisco, CA.
        Partially Implemented--Washington, DC; New Carrollton, MD.
        Scheduled for Implementation--Cincinnati, OH; Jacksonville, FL (5/
    17); and Nashville, TN.
        Implementation Not Scheduled--Atlanta, GA; Baltimore, MD; Boston,
    MA; Buffalo, NY; Dallas, TX;; Greensboro, NC; Hartford, CT; Houston
    (Alliance), TX; Indianapolis, IN; Los Angeles, CA; Milwaukee, WI; New
    Orleans, LA; Oakland, CA; Philadelphia, PA; Phoenix, AZ; Richmond, VA;
    Chicago, IL; Springfield, NJ; St. Louis, MO; St. Paul, MN.
        Anticipated return on investment (fiscal year 2005-2009): $399,000.
        Campus Operations (Information Technology) (350 FTE in Ogden, UT;
    Atlanta, GA; Brookhaven, NY; Andover, MA; Cincinnati, OH; Fresno, CA;
    Austin, TX; Memphis TN; Kansas City, MO; Philadelphia, PA).--This
    functional area provides the Information Systems (IS) computer
    operations at the ten IRS Campus facilities. The positions include
    computer operators, production controllers, tape librarians, computer
    specialists, and clerks.
        Standard Competition with award decision scheduled for July 2004.
        Expected Saving and Benefits: Revised operational processes and
    procedures to gain efficiencies; reduced staff; and increased
    managerial span of control.
        Anticipated return on investment (fiscal year 2005-2009): $12.7
    million.
        Logistics Support (formerly Warehouse and Transportation) (160 FTE
    in Andover, MA; Philadelphia, PA; Brookhaven, NY; Atlanta, GA;
    Covington, KY; Austin, TX; Kansas City, MO; Ogden, UT; Fresno, CA;
    Memphis, TN).--This functional area provides warehousing and
    transportation, mainly at the 10 campus sites. This activity includes
    positions such as material handlers, warehouseman, motor vehicle
    operators, laborers, and clerks.
        Standard Competition with Performance Work Statement development
    underway.
        Expected Saving and Benefits: Revised operational processes and
    procedures to gain efficiencies, release of leased space, reduced staff
    and increase of managerial span of control.
        Anticipated return on investment (fiscal year 2006-2010): $4.8
    million.
        Campus Files Activity (1458 FTE in Austin, TX; Andover, MA;
    Philadelphia, PA; Brookhaven, NY; Cincinnati, OH; Memphis, TN; Atlanta,
    GA; Kansas City, MO; Ogden, UT; Fresno, CA).--This functional area
    receives, controls, shelves and maintains all returns/documents for
    retention and retirement. They retrieve documents as requested by
    customer organizations. Liaison work is critical with the Federal
    Records Centers for final retention of documents. The work is routine
    and does not involve making complex determinations or present unique
    fact patterns.
        Standard Competition with solicitation release scheduled for the
    fourth quarter of 2004.
        Expected Saving and Benefits: Revised operational processes and
    procedures to gain efficiencies; reduced staff; and increased
    managerial span of control.
        Anticipated return on investment (fiscal year 2006-2010): $22
    million.
        Learning and Education (617 FTE Service-wide).--This functional
    area is responsible for determining service-wide and division-level
    professional training requirements, developing training plans and
    curriculum, evaluating the effectiveness of training, and performing a
    broad spectrum of program administration.
        Standard Competition with Performance Work Statement development
    underway.
        Expected Saving and Benefits: Consolidation of activities, revised
    operational processes and procedures to gain efficiencies,
    implementation of learning content management and learning management
    systems, reduced staff and increased managerial span of control.
        Anticipated return on investment (fiscal year 2006-2010): $25
    million.
    Competitive Sourcing Competition Costs

                            [In millions of dollars]
    ------------------------------------------------------------------------
                                                                 Amount\1\
    ------------------------------------------------------------------------
    Fiscal year 2003........................................             5.0
    Fiscal year 2004........................................             6.3
    ------------------------------------------------------------------------
    \1\ Travel, training, staffing, expert contractor support (PWS, Most
      Efficient Organization, Independent Review)--does not reflect
      transition/separation costs.
    Note.--Return on investment includes cost of conducting competition and
      transition/separation costs. The IRS calculated savings calculated
      through fiscal year 2007.

    Business Case Analysis/Feasibility Studies
        Tax Law Telephone.--This is a preliminary feasibility assessment of
    having a vendor provide tax law telephone assistance. After the
    completion of the preliminary feasibility assessment, the IRS will make
    a decision as to whether to go forward with the competition.
        Fuel Compliance Activity (140 FTE Service-wide).--This function
    area monitors 1,400 terminals, all fuel wholesalers, thousands of
    retail motor fuel outlets, and U.S. border crossings. Additionally,
    these personnel are charged with conducting periodic inspections of on-
    road vehicles on highways throughout the country.
        IT Support (Service-wide).--This is identification and development
    of sourcing strategy to identify candidate public-private competition
    activities.
        Question. One of the provisions included in last year's
    appropriations bill was a prohibition against using fiscal year 2004
    funds to contract out any Federal job overseas. To my shock, the
    President's budget specifically requests that this provision be deleted
    for fiscal year 2005. Mr. Everson, could you cite for me some instances
    at IRS where you might take work that is currently be conducted by
    Federal employees and send that work overseas?
        Answer. The IRS has no specific plans to move work overseas. There
    are added complexities and security challenges that make moving work
    that would involve access to the IRS's information technology systems
    and/or sensitive data cost prohibitive.
        However, while the IRS has no specific plans to contract work
    overseas, it is conceivable that qualified bidders with overseas
    operations may be responsive to future IRS public-private competitions
    that do not involve access to the IRS's information technology systems
    and/or taxpayer return information. The IRS will continually identify a
    series of functions that are commercial in nature in accordance with
    the FAIR Act. At that time, a business case is developed that indicates
    whether or not a more efficient method of operation may be available.
    If so, a competitive sourcing initiative is begun under the guidelines
    of the OMB A-76 Circular. A contractor may then bid for that work. It
    is highly unlikely that a contractor would bid work to be performed
    overseas given the nature of the work the IRS has identified to date or
    anticipates identifying. Under the IRS Competitive Sourcing Program, no
    initiative has resulted in Federal jobs being outsourced overseas. The
    IRS adheres primarily to the Federal Acquisition Regulations (FAR) and
    the A-76 Circular when conducting public-private competitions for work
    performed by Federal employees. The FAR currently contains some
    limitation on issuance of contracts to some overseas locations.

                                CUSTOMER SERVICE

        Question. IRS consistently finds its own accuracy rates higher than
    TIGTA does when measuring taxpayer assistance functions, whether we are
    talking about toll-free telephone assistance, walk-in service at
    Taxpayer Assistance Centers, or the IRS website. Mr. Everson, how do
    you explain the discrepancy? Ms. Gardiner, would you care to comment?
        Answer. Typically, TIGTA's reports on accuracy are based on limited
    judgmental sampling conducted during the brief period of their
    fieldwork on a particular audit. The results that they report are not
    statistically valid. The IRS results for telephone accuracy and for
    irs.gov e-mail assistance are based upon an on-going process that is
    statistically reliable. TIGTA typically acknowledges the limitations of
    their data in their reports with statements such as, ``We selected a
    judgmental sample of calls to monitor between April 21 and May 16,
    2003. Our results cannot be compared to the statistical results
    reported by the IRS.''
        The discrepancy between the TIGTA accuracy rates and the Taxpayer
    Assistance Center (TAC) walk-in service accuracy rates is due to the
    calculation methodology. TIGTA and the IRS treat responses to tax law
    questions differently. In contrast to the IRS, TIGTA includes referrals
    to publications, service denied, and referrals to other employees in
    its accuracy calculation. The IRS disagrees with the assertion that a
    non-response is synonymous with providing an incorrect answer. While it
    is clear that there is some disparity in methodology, it is important
    to note that neither of these methods of measuring walk-in service
    accuracy is statistically reliable.
        TIGTA will respond separately.
        Question. As stated in testimony, TIGTA found that IRS employees
    incorrectly prepared 19 of the 23 tax returns prepared during TIGTA
    audit visits to Taxpayer Assistance Centers. What steps has IRS taken
    to remedy this egregious example of inaccuracy and Mr. Everson, do you
    plan to implement the additional actions that TIGTA recommended?
        Answer. The IRS implemented the recommendations made by TIGTA and
    has taken several steps to remedy inaccurate return preparation. The
    IRS directed all TAC employees to adhere to existing screening
    procedures to ensure taxpayers meet the return preparation criteria. In
    addition, the IRS required all employees to use the appropriate
    worksheets in the return preparation software and the publication
    method guide to assist in determining a taxpayer's eligibility for
    deductions and credits claimed on the tax return.
        The IRS also implemented a quality review plan to ensure TAC
    employees adhere to these and other return preparation procedures in
    the Internal Revenue Manual. The IRS requires group managers to
    complete three employee return preparation reviews and the quality
    review staff is required to visit each Area and conduct at least two
    return preparation reviews.
        Question. As stated in testimony, TIGTA found that IRS didn't
    respond to several of the questions TIGTA submitted anonymously to the
    website. Do you have statistics about the number of questions that go
    unanswered? How is this allowed to happen? What is being done to
    prevent this in the future?
        Answer. During the period from February 22 to March 6, 2002, TIGTA
    anonymously submitted 90 questions through the website. TIGTA reported
    that they did not receive a response to 14 of these questions. During
    that period of time, the IRS was making system changes that affected
    its responsiveness. As it transitioned to a new server and a new
    contractor, some messages did not transfer between servers. The IRS was
    able to recover most messages, but unfortunately lost several,
    including some initiated by TIGTA.
        In an October 2002 report, Reference No. 2003-40-014, TIGTA
    recommended that the IRS improve its control system by sending an e-
    mail receipt acknowledgement to the requestor and develop a system to
    track each question submitted to ensure the IRS provides a response.
    The IRS concurred with these recommendations and modified the program
    to add both new features in 2003. Both of these enhancements are
    performing as designed. However, taxpayer e-mail limitations, such as
    address problems, discontinued service, mailbox full, and stringent
    spam filters may continue to block delivery of an IRS response.
        Question. Ms. Gardiner points out that the IRS revised its
    modernization plan for fiscal year 2003 to focus on executable segments
    that could be accomplished in a timely manner. Despite all of the IRS's
    assurances to the contrary, all of the projects on the newly downsized
    list still experienced delays and most incurred significant cost
    increases. What are her observations regarding the IRS's abilities to
    deliver modernization projects on time and on budget for the current
    fiscal year and next year? Why should we believe that the IRS and its
    contractors will improve its performance on these projects going
    forward? Mr. Everson, do you care to comment on this matter?
        Answer. The BSM program is--without a doubt--one of the largest,
    most visible, and most sensitive modernization programs ever undertaken
    in the world.
        When nominated in February 2003, the Commissioner set three
    priorities for his term as Commissioner. First, the IRS must continue
    to improve service to make it easier for taxpayers to understand and
    comply with tax laws. Second, modernization of IRS information
    technology is also a high priority. The third priority is to strengthen
    the integrity of the American tax system with enhanced enforcement
    activities. The Commissioner's first action to address the
    modernization priority was to appoint two new leaders to the
    modernization effort.
        Commissioner Everson appointed John Dalrymple, a 30-year IRS
    veteran who has spent his career focusing on front-line taxpayer
    issues, as the Deputy Commissioner for Operations Support to own the
    modernization initiative and drive productivity across the IRS.
    Simultaneously, he appointed the former IRS Chief Financial Officer, W.
    Todd Grams, to the position of Chief Information Officer to bring
    stronger leadership and discipline to the technology modernization
    program.
        These executive appointments to the IRS modernization program
    represent a major change in the way the IRS has managed previous
    modernization projects. They were necessary steps to bring more
    management discipline and increased business unit knowledge and
    involvement to the modernization program. The following is a brief
    recap of IRS's progress and struggles over the past year.
        The results have been mixed. The IRS built a strong technical
    infrastructure, and designed and implemented stringent security and
    control mechanisms into the infrastructure. It also developed a
    rigorous enterprise life cycle methodology. Over the past 2 years, the
    IRS has been working toward maturing its management processes. The IRS
    has made progress, but a major thrust now focuses on sustaining a solid
    balance of business commitment, accountability, and scope management.
    Finally, the IRS has achieved a great deal of success with the projects
    delivered to date.
        For the first time ever, corporations and tax exempt organizations
    have the option of filing their annual income tax and information
    returns electronically using Modernized e-File (MeF). This new
    electronic filing system significantly reduces the time and cost for
    corporations and tax exempt entities to file their Forms 1120 and 990.
    Simply by using a secure Internet connection to file 1120 and 990
    forms, corporations and tax exempt organizations eliminate the need to
    submit hundreds of pages of paper returns. The e-Gov Institute recently
    chose MeF as a winner of the Government Solutions Center Pioneer
    Awards.
        The IRS has achieved a great deal of success with the e-Services
    projects. All e-Services Release 1.0 products are fully deployed and
    available over the Internet, including: registration and online address
    change access for third parties and IRS employees through secure user
    portals; Preparer Tax Identification Number (PTIN) online application;
    interactive Taxpayer Identification Number (TIN) matching; secure
    Electronic Return Originator (ERO) application processing; and access
    to e-Services registration and application processes by Modernized e-
    File (MeF) participants.
        E-Services Release 2.0 products are also now in production and
    available for use by IRS staff and taxpayers, including: Application
    for e-Filing (external); Electronic Account Resolution (EAR);
    Electronic TIN Bulk Matching (Bulk Requests); Disclosure Authorization
    (DA); and infrastructure support for outbound facsimile service.
        In March 2004, James D. Leimbach appeared before the Ways & Means
    Oversight Subcommittee on behalf of the National Association of
    Enrolled Agents (NAEA), the professional society of enrolled agents, to
    present NAEA's views regarding e-Services delivering electronic
    services to tax practitioners. NAEA's overall assessment was that the
    2003 filing season has run very smoothly--and the NAEA gave the IRS a
    great deal of praise.
        Mr. Leimbach said, ``The difficulty in integrating a 1960's era
    mainframe with the Internet and doing so in an environment using highly
    complex encryption is enormous, costly, and worth every effort and
    every dime spent.'' He added, ``This new capability is truly going to
    revolutionize the way we conduct future business with the IRS. The
    ultimate beneficiary is the American taxpayer. We are truly amazed and
    thrilled beyond description at this way of doing business with the IRS
    and we would like for you to understand why we feel as we do.''
        Mr. Leimbach cited numerous examples of eliminating time delays of
    over a week and reducing response times from weeks and months to 3 days
    simply by having the ability--24 hours a day, 7 days a week--to submit
    information directly to the IRS using the Internet.
        The IRS delivered several additional applications that are
    providing tangible benefits to taxpayers and improving the efficiency
    and effectiveness of tax administration systems such as Where's My
    Refund?, Where's My Advance Child Tax Credit?, Internet EIN, Modernized
    e-File, HR Connect, etc. The following chart highlights the
    applications the IRS delivered, as well as the measurable business
    benefits being realized.

                                BSM DELIVERS REAL BUSINESS VALUE (RESULTS AS OF 6/15/04)
    ----------------------------------------------------------------------------------------------------------------
                  Project                             Description                         Recent Statistics
    ----------------------------------------------------------------------------------------------------------------
    Internet Refund Fact of Filing       Improves customer self-service by      --17.9 million inquiries in 2003; 22
     (2002).                              providing instant refund status        million inquiries to date in 2004
                                          information and instructions for       (1/1/04-6/6/04).
                                          resolving refund problems to          --32 percent of all real time IRS
                                          taxpayers with internet access.        assistance calls come from IRFoF.
                                                                                --Modest reduction of
                                                                                 telecommunications costs (about
                                                                                 $250,000).
                                                                                --Every 1,000 IRFoF contacts
                                                                                 eliminate 1,500-2,000 refund
                                                                                 assistance calls.
    Advanced Child Tax Credit (2003)...  Modifies the Internet Refund           --15.5 million inquiries in 2003;
                                          application to provide taxpayers       11.9 million inquiries to date in
                                          with Advance Child Tax Credit refund   2004 (10/1/03-6/13/04).
                                          status on the internet.               --Peak date 1.1 million interaction.
    Customer Communications (2001).....  Improves communications                --68,000 calls in one 3-minute
                                          infrastructure, including telephone    period during initial week
                                          call management, call routing and      (coincided with start of Advanced
                                          customer self-service applications.    Tax Refund of 2001).
                                                                                --50 percent reduction in waiting
                                                                                 time for assistor to answer call.
                                                                                --50 percent reduction in abandoned
                                                                                 calls.
                                                                                --Number of Spanish calls doubled.
                                                                                --More accurate pre-routing of
                                                                                 calls.
    Internet Employee Identification     Allows businesses and taxpayers to     --1.37 million internet EIN
     Number (2003).                       apply for and receive employer         applications received to date (as
                                          identification numbers over the        of 6/5/04).
                                          internet.
    HR Connect (2002)..................  Delivers an enterprise solution to     --75,000 internal users.
                                          allow IRS employees to access and     --Cited by Commissioner Everson as
                                          manage their human resources           an enabling factor in the
                                          information online.                    redirection of approximately 750
                                                                                 staff years to enforcement.
                                                                                --Treasury was selected as 2004
                                                                                 ComputerWorld Honors Laureate for
                                                                                 HR Connect development and
                                                                                 implementation.
    e-Services R1 (2003-2004)..........  Creates a web portal and value adding  --Over 69,624 PTIN applications
                                          e-Services services to promote the     (W7P) entered to date, data entry
                                          goal of conducting most of the IRS's   productivity doubled (from 8/15/03-
                                          transactions with tax practitioners    6/10/04).
                                          electronically.                       --Over 58,201 e-File applications to
                                                                                 the Third-Party-Data-Store (TPDS)
                                                                                 entered to date (from 8/15/03-6/10/
                                                                                 04).
                                                                                --Approximately 24,939 Registered
                                                                                 (and confirmed) User Portal (RUP)
                                                                                 to date (from 10/1/03-6/10/04).
    Customer Relationship Management     Provides standard tax computation      --Deployed to almost 4,000 Revenue
     Exam (2001).                         software to Large & Mid-Sized          Agents.
                                          Business Revenue Agents.
    Modernized e-File (2004)...........  Provides e-filing to large businesses  --Went live on 2/23/04.
                                          (1120 family) and tax exempt          --Over 35,090 returns (1120 family)
                                          organizations (990 family).            accepted as of 6/13/04.
                                                                                --Over 3,287 participating
                                                                                 Electronic Return Originators as of
                                                                                 6/13/04.
                                                                                --Winner of Government Solutions
                                                                                 ``Best-of-the Best'' Pioneer
                                                                                 Solutions.
    ----------------------------------------------------------------------------------------------------------------

        The bad news, however, is major. Significant cost overruns and
    repeated schedule delays have plagued critical projects, such as the
    Customer Account Data Engine (CADE), the Integrated Financial System
    (IFS), and the Custodial Accounting Project (CAP). CADE replaces the
    current master files that are the IRS's repository of taxpayer
    information. IFS will be the IRS's new core accounting system. CAP
    provides an integrated link between tax administration (revenue) and
    internal management (administrative) financial information.
        The IRS has delayed the CADE program four times. It originally
    planned to deliver the first release of CADE in December 2001. The IRS
    then rescheduled it for August 2003, and later rescheduled it for April
    2004. The IRS recently finalized the re-planning effort for CADE and
    set the latest delivery date for September 2004. While CADE is farther
    along than the IRS has ever been in replacing a component of the master
    file, there are still major hurdles to overcome. The CADE delays
    stemmed from infrastructure upgrades, initial poor software quality
    during the startup of systems integration testing combined with the
    failure to understand the complexity of balance and control, and the
    resolution of operational and performance issues that occurred during
    Phase 3 of the Release 1.0 pilot.
        Like CADE, IFS has been plagued with schedule delays. The IRS
    originally planned to deliver the first release of IFS in October 2003.
    The IRS then rescheduled it for January 2004. The IRS later rescheduled
    it for April 2004. The IRS has subsequently scheduled Release 1.0 for
    October 2004. The IRS delayed the first release of IFS because of the
    need to make technical changes to comply with the enterprise
    architecture, the inability to resolve key design and integration
    issues in a timely manner, the identification of the health coverage
    tax credit interface requirement late in the development process, and
    delays experienced in integration testing due to poor application
    quality and interface testing issues.
        IFS Release 1.0 will cover core accounting functions such as budget
    preparation, general ledger, accounts payable, accounts receivable,
    financial reporting, and purchasing. Problems continue to seriously
    jeopardize the scheduled delivery of this first release of IFS. The IRS
    is 2 weeks behind schedule on testing, which puts the data conversion
    schedule at risk. The IRS is negotiating a fixed price contract for the
    October delivery.
        The IRS is also encountering delays on the first release of the
    Custodial Accounting Project (CAP), which provides an integrated link
    between tax administration (revenue) and internal management
    (administrative) financial information. The first release of CAP will
    address revenue from individual taxpayers on initial tax payments.
    Later releases of CAP will address businesses and collections. CAP
    delays resulted from unstable CADE and IFS interface definitions,
    needing additional testing time due to a much larger than anticipated
    volume of data anomalies discovered during the conversion of data from
    the current Individual Master File (IMF), and the time required
    resolving system performance issues.
        In addition, though not directly responsible for CAP delays to
    date, the IRS has made some adjustments to the functionality that it
    needs to have in CAP Release 1 to support the GAO financial audit as
    well as internal accounting and management. These adjustments will
    increase the cost of later sub-releases of CAP Release 1. The IRS has
    now completed all testing for CAP Release 1, and is adding changes to
    reflect IMF changes from the start of the 2004 filing season (Release
    1.1). The IRS plans to start production, which includes the initial
    load of IMF data, in mid-August. The IRS negotiated a fixed price
    contract for Release 1 and Release 1.1 in May 2004.
        Question. Ms. Gardiner, in her testimony, points out that she found
    several instances where the Business System Modernization project teams
    at the IRS were cutting corners and not following established testing
    procedures due to their desire to meet overly optimistic project
    schedules. It seems that the IRS responds to missing its deadlines by
    cutting corners and thus undermining the likelihood that the agency
    will get what it paid for. What has Ms. Gardiner concluded about the
    IRS's ability to manage these projects effectively and ethically? Is
    there any reason to hope that the IRS is turning a corner and actually
    getting value for the taxpayer from these modernization projects? Mr.
    Everson, would you care to comment?
        Answer. The IRS used the results from independent studies
    commissioned during the summer of 2003 to create a BSM Challenges Plan
    comprised of 40 some action items. Given the strategic importance of
    the plan, The Commissioner appointed an IRS business unit deputy
    commissioner to oversee the implementation of the plan.
        As a first step, the BSM project team developed a crosswalk to
    ensure that the BSM Challenges Plan's definition of the issues
    addressed and/or satisfied all of the recommendations from the four
    commissioned studies as well as the recommendations submitted by the
    IRS Oversight Board, and the Software Engineering Institute (SEI) study
    of CADE.
        While the deputy commissioner made significant progress in
    implementing the plan, the full closure of all actions items was
    unrealistic within the elapsed timeframe of the 6-month appointment.
    Concurrently, the CIO created a new direct report position for
    modernization management and assigned responsibility for implementing
    the plan to the individual recently hired into this newly created
    position.
        Under the leadership of the deputy commissioner, the IRS and CSC
    team brought closure to several key actions items, including:
    clarifying the roles of committees as advisory, identifying
    ``blockers'' on contracting issues, appointing business leaders to each
    project, establishing a risk-adjusted schedule and new baseline for
    CADE Releases 1.0 and 1.1, and increasing the frequency of CADE reviews
    with the business owner to twice monthly. The majority of the action
    items are still works-in-progress, some of which will take time to
    fully complete. Others will span the life of the BSM program.
        For example, strengthening systems engineering capabilities by
    hiring external candidates will take time since it involves conducting
    the searches, interviewing the candidates, and negotiating the new
    hires to come on board. The IRS and CSC developed ground rules for
    escalating issues, but they will need to be continually enforced
    throughout the life of the program. The IRS rewrote the charters of the
    governing committees to reflect their advisory role and clearly
    articulated their responsibilities, however, it will probably take a
    year to truly evaluate and measure their effectiveness.
        As stated, the IRS has made progress toward closing all the action
    items, but it has much more work to do in critical areas. For example,
    the IRS needs to religiously follow the proper methodologies and hold
    people accountable if they do not. The IRS must start ``doing things
    right'' as opposed to ``doing things fast'' such as exiting milestones
    prematurely. An ongoing challenge will be balancing the scope and pace
    of projects consistent with capacity, ensuring that the right people
    are in place before launching a project, and setting realistic delivery
    schedules and cost estimates. The IRS is committed to staying-the-
    course and delivering on its promise to modernize America's tax
    systems, but it is important for everyone to acknowledge this is a
    monumental effort.
        The magnitude and evolution of the BSM program dictates that the
    IRS will always be going through an evolution of assessment and
    improvements. In that regard, the BSM Challenges Plan is still evolving
    and the IRS is using certain action items to continuously improve the
    program.
                                     ______

                Questions Submitted by Senator Richard J. Durbin

                           TAX EVASION/IRS COLLECTION

        Question. In the days leading up to April 15, newspapers around the
    country ran features on personal and corporate tax evasion and the
    IRS's failure to collect many of the taxes it is owed. The President
    proposes a 4.6 percent increase in IRS funding for fiscal year 2005,
    claiming that this will allow the hiring of 5,000 new auditors and
    collectors. While increasing the number of IRS agents and officers is
    central to more effective tax collection, the IRS Oversight Board
    argues that much of the 4.6 percent increase will be swallowed by
    rising salaries and administrative costs. In fact, the Oversight Board
    claims that fiscal year 2005 is the fourth year in a row in which the
    administration has called for IRS staff increases while failing to
    cover pay raises or required expenses.
        In your estimation, how many new auditors and collectors would be
    hired as a result of a 4.6 percent increase in IRS funding in fiscal
    year 2005, and what would be the impact of such an increase on the
    IRS's ability to collect some of the estimated $250 billion in owed
    taxes that go unpaid each year due to tax evasion?
        Answer. The IRS will hire approximately 5,000 new enforcement
    personnel. These new hires will improve voluntary compliance by
    increasing the number of individual and corporate returns examined and
    directly increasing collections of delinquent revenue owed to the
    government by approximately $3 billion in the first 3 years of the
    initiative, fiscal year 2005 through fiscal year 2007, and additional
    collections of $1.5 billion annually thereafter. This increase in IRS
    enforcement personnel also improves voluntary compliance by deterring
    would-be tax cheats from engaging in illegal behavior.

                        TAX ASSISTANCE PROGRAM--ILLINOIS

        Question. In the fiscal year 2004 Senate Transportation-Treasury
    Appropriations report, language was included regarding the Tax
    Assistance Program in Chicago, Illinois. ``The Committee is aware of an
    innovative financial literacy and tax assistance project in Chicago,
    Illinois--Tax Assistance Program--designed to assist low income workers
    and their families with tax education and filing, in cooperation with
    the State of Illinois and the City of Chicago's Earned Income Tax
    Credit (EITC) outreach efforts. The Committee encourages the IRS to
    continue to provide appropriate technical and financial assistance for
    this worthwhile initiative.''
        Is the IRS working with the Tax Assistance Program in Chicago,
    Illinois, and what Federal resources are being provided? Will the IRS
    continue to work with programs like TAP in Chicago in fiscal year 2005?
        Answer. The IRS has partnered with the Tax Assistance Program (TAP)
    for several years and each year has been increasingly impressed with
    the achievements and the dedication of the staff and volunteers. The
    IRS is very fortunate to have this fine organization as a partner in
    providing free tax preparation to low income taxpayers in the Chicago
    metro area. The IRS hopes to sustain this relationship in fiscal year
    2005 and for many years to come. However, outside the Low Income Tax
    Clinic (LITC) Grant Program, the IRS has no legal authority to offer
    funding to the TAP organizations. The TAP currently receives Federal
    funds available through the LITC Grant Program, and the IRS anticipates
    that the TAP will continue to apply for funding through this program in
    the future.
                                     ______

         Questions Submitted to the Treasury Inspector General for Tax
                                 Administration

                Questions Submitted by Senator Richard C. Shelby

                                 MODERNIZATION

        Question. How much more is needed to complete and modernize the
    IRS's outdated systems and processes?
        Answer. We do not know the true total cost needed to complete the
    Business Systems Modernization (BSM) effort. To date, the Internal
    Revenue Service (IRS) has received $1.6 billion for this effort. The
    IRS anticipates that the value of the PRIME \1\ contract will be $8
    billion. However, the PRIME contract is not the only cost associated
    with the BSM effort as other contractors, such as Northrop Grumman,
    International Business Machines, and MITRE Corporation, are involved in
    the BSM effort. In addition, the IRS is incurring substantial internal
    costs in managing the BSM effort. The sum of all PRIME contractor,
    other modernization contractors, and IRS costs for the life of the BSM
    program is not known.
    ---------------------------------------------------------------------------
        \1\ The PRIME contractor is the Computer Sciences Corporation,
    which heads an alliance of leading technology companies brought
    together to assist with the IRS's efforts to modernize its computer
    systems and related information technology.
    ---------------------------------------------------------------------------
        Question. Is the fiscal year 2005 budget request consistent with
    that TIGTA assessment?
        Answer. Yes. We have recommended since September 2002 that the IRS
    slow the pace of the BSM program due to some of the risks that have
    surfaced. The fiscal year 2005 budget request is consistent with our
    past recommendations.
        Question. When will BSM be completed?
        Answer. The BSM program is currently in its sixth year of a 15-year
    contract. However, the IRS and the PRIME contractor have been
    experiencing significant delays. For example, the Customer Account Data
    Engine (CADE) \2\ project is approximately 30 months behind schedule,
    and the detailed planning for the business taxpayer account portion
    (Federal tax deposits, corporate entities, partnerships, etc.) of the
    project has not been completed. Unless the IRS and the PRIME contractor
    take actions to make up the lost time and thoroughly plan all projects,
    it is difficult to know how long the BSM effort will last.
    ---------------------------------------------------------------------------
        \2\ The CADE is the foundation for managing taxpayer accounts in
    the IRS's modernization plan. It will consist of databases and related
    applications that will replace the IRS's existing Master File
    processing systems and will include applications for daily posting,
    settlement, maintenance, refund processing, and issue detection for
    taxpayer tax account and return data.
    ---------------------------------------------------------------------------
        Question. What is the status of IRS's efforts to resolve the
    findings and deficiencies identified by the various internal and
    independent assessments of BSM?
        Answer. To address the results of the recent assessments, the IRS
    and the PRIME contractor have developed a 48-point action plan, known
    as the ``BSM Challenge Plan''. While the 48 planned corrective actions
    should help improve the BSM program, it will take time to
    institutionalize new processes and ensure they are being followed. Only
    at that time will it be possible to determine if the actions have been
    effective.
        The IRS recently reported that 44 of the 48 action plan items were
    closed. However, our preliminary analysis shows that additional actions
    are scheduled for many of these closed items. The IRS Chief Information
    Officer acknowledged that follow-on actions are required to completely
    address the various internal and independent BSM assessments.
        It should be noted that the various assessments resulted in 21
    recommendations for improvement in the BSM program, 15 of which are
    similar to those made in Treasury Inspector General for Tax
    Administration (TIGTA) reports issued during the past 3 years. In
    several instances, the principal recommendations were reported multiple
    times during this period. Since many of the prior TIGTA recommendations
    have resurfaced as part of the recent assessments, we conclude that
    previous weaknesses have proven difficult to correct. Only time will
    tell whether actions taken as part of the 48-point plan will completely
    address the root causes identified in the various assessments.
                                     ______

                  Questions Submitted by Senator Patty Murray

                                 MODERNIZATION

        Question. Ms. Gardiner, your testimony says that IRS plans to
    request $142 million--the remainder of the $388 million appropriated
    last year--for Business Systems Modernization in fiscal year 2004. In
    your opinion, based on performance to date, should the Congress
    withhold or make conditional the approval of that $142 million?
        Answer. While we have not been provided with a copy of the revised
    spending plan, our opinion is that the Congress should approve the
    release of the remaining $142 million. In February 2004, the
    Commissioner testified, ``It's no secret that our projects have
    consistently run late, delivered less functionality than planned, and
    cost significantly more than targeted.'' The IRS's track record is of
    concern; however, the withholding of funds could cause projects to
    stop, which would result in the loss of contractor expertise and would
    lead to additional costs needed to restart the projects. In addition,
    there has been little time to determine if the actions being taken as
    part of the 48-point plan are leading to improvements.
        We believe the $142 million in additional funding should be
    provided, but we would recommend to the Appropriations Subcommittee
    that the BSM program be monitored closely to determine if future
    funding is warranted. The IRS and the PRIME contractor have developed a
    48-point plan to respond to various internal and independent
    assessments. Once the 48-point plan is implemented, it will take time
    to institutionalize new processes and ensure they are being followed.
    Only at that time will it be possible to determine if the corrective
    actions have been effective.
        Question. Ms. Gardiner, you point out that the IRS revised its
    modernization plan for fiscal year 2003 to focus on executable segments
    that could be accomplished in a timely manner. Despite all of the IRS's
    assurances to the contrary, all of the projects on the newly downsized
    list still experienced delays and most incurred significant cost
    increases. What are your observations regarding the IRS's abilities to
    deliver modernization projects on time and on budget for the current
    fiscal year and next year? Why should we believe that the IRS and its
    contractors will improve its performance on these projects going
    forward? Mr. Everson, do you care to comment on this matter?
        Answer. We believe that there are two critical areas that the IRS
    needs to address to be able to deliver modernization projects on time
    and on budget: requirements management and contract management. We have
    provided recommendations for improvement to the IRS in these areas, and
    the 48-point plan also addresses these areas. In addition, we have
    additional concerns in the areas of portfolio management, integration
    management, and staffing.
    Requirements Management
        The PRIME contractor testified that the heart of the problem has
    been the lack of fully defined requirements. While it is inevitable
    that some requirements changes will be needed, e.g., legislative
    changes, the PRIME contractor testified that it often began work
    without fully understanding requirements, and requirements were still
    being identified during the testing phase. In our opinion, this is the
    fault of both the IRS and the PRIME contractor. The IRS should create
    detailed requirements before moving forward, and a contractor at the
    maturity level of the PRIME contractor should know not to start work
    without a full understanding of requirements. Requirements instability
    will continue to lead to increased costs and schedule delays if not
    corrected. This area has been a continuing concern and has been
    reported in several TIGTA reports, beginning in November 2001.
    Contract Management
        Beginning in February 2001, we have made recommendations to assist
    the IRS in shifting financial risk to the PRIME contractor. Our
    recommendations have ranged from including positive and negative
    contractor incentives in task orders to using firm-fixed price task
    orders whenever possible. The recent BSM assessments also recommended
    moving toward a firm-fixed price model. When requirements are fairly
    stable, a firm-fixed price task order shifts some of the risk away from
    the government and to the contractor. If requirements become stable and
    firm-fixed price task orders begin to be issued, this will begin to
    curb some of the cost overruns that have been experienced to date.
    However, this may not have an effect on the timeliness of delivery.
    Portfolio Management
        Beginning in 2002, both the TIGTA and the General Accounting Office
    recommended that the IRS slow the pace of the BSM program due to some
    of the risks that have surfaced. The recent internal and independent
    assessments also make this point. While the IRS responded to this
    concern by scaling back the scope and number of projects in fiscal year
    2003, we noted the fiscal year 2004 BSM plan includes an additional
    modernization project (Collection Contract Support--part of the Filing
    and Payment Compliance project).\3\ Since the IRS and its contractors
    have been unable to deliver the scaled-back portfolio of projects on
    time and within cost, we continue to be concerned that the IRS and its
    contractors may not have the ability to successfully manage the BSM
    portfolio.
    ---------------------------------------------------------------------------
        \3\ The Filing and Payment Compliance project will provide support
    for detecting, scoring, and working nonfiler cases (filing compliance)
    and delinquency cases (payment compliance).
    ---------------------------------------------------------------------------
    Integration Management
        When the BSM effort began, the PRIME contractor was responsible for
    all modernization projects, with the exception of the Custodial
    Accounting Project.\4\ As such, one significant role of the PRIME
    contractor was to ensure integration between all modernization
    projects. This role has become blurred recently with the PRIME
    contractor not being responsible for the Modernized e-File project. In
    addition, the Commissioner testified that he had decided to direct
    upcoming enforcement modernization projects to other contracts. With
    more modernization work being performed outside of the PRIME contract,
    the risk increases that modernization projects will not work in a fully
    integrated fashion.
    ---------------------------------------------------------------------------
        \4\ The CAP will be a single, integrated data repository of
    taxpayer account information, integrated with the general ledger and
    accessible for management analysis and reporting.
    ---------------------------------------------------------------------------
    Staffing
        Recently, the IRS reported to the IRS Oversight Board that it has
    or will make changes in six of eight executive positions within the BSM
    program in an effort to bring more outside experience into the program.
    While the addition of new executives from outside the organization may
    bring new ideas and energy to the program, we are concerned about the
    potential disruption that it may cause. As part of our annual BSM
    assessment, we have included the following challenge for the last 3
    fiscal years: ``Maintain the continuity of strategic direction with
    experienced leadership.''
        Question. Ms. Gardiner, in your testimony, you point out that you
    found several instances where the Business System Modernization project
    teams at the IRS were cutting corners and not following established
    testing procedures due to their desire to meet overly optimistic
    project schedules. It seems that the IRS responds to missing its
    deadlines by cutting corners and thus undermining the likelihood that
    the agency will get what it paid for. Ms. Gardiner, what have you
    concluded about the IRS's ability to manage these projects effectively
    and ethically? Is there any reason to hope that the IRS is turning a
    corner and actually getting value for the taxpayer from these
    modernization projects? Mr. Everson, would you care to comment?
        Answer. Our audits are not designed to examine the ethics of
    project management and, therefore, we cannot answer this portion of the
    question. The IRS and its contractors have deployed projects that
    provide value to taxpayers and have built the infrastructure needed to
    support these projects. Some of the BSM projects that have delivered
    value to taxpayers are the Customer Communications, Internet Refund/
    Fact of Filing (IRFOF), Internet Employer Identification Number (I-
    EIN), e-Services, and Modernized e-File (MeF) projects.
        Customer Communications.--This project has improved customer
    service by increasing the capacity of the toll-free telephone system
    and providing the ability to route taxpayers' calls to the appropriate
    IRS employees. This project became operational in August 2001.
        IRFOF.--This application (also known as ``Where's My Refund?'')
    offers improved customer self-service by providing refund status
    information via the Internet. The pilot version of the ``Where's My
    Refund?'' application was deployed in May 2002. The application was
    upgraded in 2003 and was accessed 17.9 million times that year
    according to the IRS. In 2003, the application was modified to provide
    taxpayers with Advance Child Tax Credit refund status via the Internet.
    The IRS stated that 15.5 million Advance Child Tax Credit inquiries
    were received in 2003.
        I-EIN.--This application allows small businesses and self-employed
    taxpayers to obtain EINs online, eliminating the need to send paperwork
    to the IRS. This application was deployed in May 2003. The Commissioner
    recently testified that the application had processed over 450,000
    applications as of February 2004.
        e-Services.--Deployed in August 2003, this project allows tax
    professionals the ability to register online, create an electronic
    account, and apply for a Preparer Tax Identification Number to use in
    place of their Social Security Number for submitting returns. The IRS
    reported in January 2004 that over 16,000 tax professionals had applied
    to use the e-Services application.
        MeF.--This project is developing the modernized, web-based platform
    for electronically filing approximately 330 IRS forms. The first
    release of the MeF project was deployed in late February 2004 and
    provided electronic filing for 59 forms, including United States (U.S.)
    Corporation Income Tax Return (Form 1120), U.S. Income Tax Return for
    an S Corporation (Form 1120S), Return of Organization Exempt From
    Income Tax (Form 990), Short Form Return of Organization Exempt From
    Income Tax (Form 990-EZ), U.S. Income Tax Return for Certain Political
    Organizations (Form 1120-POL), and Application for Extension of Time To
    File an Exempt Organization Return (Form 8868). The IRS has stated that
    over 18,520 tax returns had been accepted by March 21, 2004.
        Progress is being made. Nonetheless, BSM projects are taking longer
    and costing more to deliver less than originally anticipated. Over the
    past 2 fiscal years, we have cited 4 primary challenges the IRS and its
    contractors must overcome to be successful: (1) implement planned
    improvements in key management processes and commit necessary resources
    to enable success, (2) manage the increasing complexity and risks of
    the BSM program, (3) maintain the continuity of strategic direction
    with experienced leadership, and (4) ensure PRIME contractor
    performance and accountability are effectively managed. Based on the
    results of recent TIGTA audits, as well as the assessment findings, we
    believe these four challenges still need to be met to achieve program
    success.
        While the actions in the 48-point plan mentioned previously should
    help improve the BSM program, it will take time to institutionalize new
    processes and ensure they are being followed. Only at that time will it
    be possible to determine if the corrective actions have effectively
    addressed the four major challenges.

                      FAILURE TO COLLECT DELINQUENT TAXES

        Question. A recent report by the Treasury Inspector General for Tax
    Administration (TIGTA) found that IRS's existing procedures are
    ineffective in ensuring even that criminals who are convicted in court
    for tax evasion are paying their civil tax liabilities. Why can't IRS
    collect from tax cheats?
        Answer. In response to our recommendations in the subject report,
    the IRS issued an April memorandum to both the Small Business/Self-
    Employed Division and the Criminal Investigation organization
    containing interim procedures to process cases with terms of probation
    and to monitor compliance with these cases.
        Question. Ms. Gardiner, given the fact that the head of IRS-
    Criminal Investigations disagreed with a number of your
    recommendations, are you confident that this grotesque abuse will be
    stopped?
        Answer. The IRS did, in fact, disagree with several of our
    recommendations. First, the IRS disagreed with our recommendation
    concerning a technical legal matter on disclosure of tax information,
    stating that it believed it already had sufficient instructions on the
    matter. Our main concern in reporting the issue was to ensure that the
    disclosure rules were interpreted consistently and with the broadest
    possible application. The disclosure issue itself is tangential to the
    main problem of inadequate monitoring of, and follow-up on, probation
    cases.
        The IRS also disagreed with our characterization of the impact of
    the errors in the Criminal Investigation Management Information System.
    Again, this issue is tangential to the main problem and does not affect
    the IRS's need for or commitment to improving its processes on
    monitoring terms of probation.
        Finally, although the IRS disagreed with a recommendation to
    establish certain procedures and part of another recommendation to
    establish periodic systemic reports, it committed to reemphasizing its
    existing instructions and procedures, which it did in the April
    memorandum referenced above. As we stated in our report, we believe
    that this commitment satisfied the intent of our recommendations.
        As to whether we are confident that this abuse will be stopped, the
    key will be the proper implementation and monitoring of the corrective
    actions recently taken or planned. If done properly, the IRS should be
    in a much better position to report to the courts whenever terms of
    probation are not met. Of course, collecting delinquent taxes or
    securing delinquent returns will also be a function of the taxpayer's
    ability to pay or requirement to file.
        Question. Ms. Gardiner, why do you believe that IRS has not cleared
    up even the simplest of cases of uncollected taxes?
        Answer. The IRS collection process for most cases begins with a
    series of notices mailed to taxpayers, asking them to pay the balance
    due. If the taxpayers do not respond, the cases are assigned either to
    the Queue (which is a holding area for cases waiting further assignment
    to the Collection Field function (CFf)) or the Automated Collection
    System (ACS) to be worked by telephone collectors. Generally, higher-
    priority cases are placed in the Queue while lower-priority cases are
    assigned to the ACS. If the ACS cannot resolve the cases, some of them
    are also assigned to the Queue. Cases in the Queue are assigned to
    Revenue Officers in the CFf according to priorities established by IRS
    management. In addition, the IRS has recently implemented a risk-based
    approach that attempts to select those cases with the highest
    probability of being collected. As a result, many lower dollar amount
    cases for individual taxpayer liabilities may not be collected if the
    taxpayer did not respond to the notice or a phone call.
        Overall, the IRS is making some progress in collecting unpaid
    taxes. As we reported in April 2004, the level of compliance activities
    and the results obtained in many Collection function areas in fiscal
    year 2003 showed a continuing increase. Enforcement actions were higher
    in fiscal year 2003 than in fiscal year 2002, but they have not
    returned to pre-1998 levels. Enforcement revenue collected increased
    substantially in fiscal year 2003, while the total amount of
    uncollected liabilities and the gap between new delinquent accounts and
    account closures decreased slightly. Finally, the amount owed on
    accounts in the Queue decreased in fiscal year 2003, but the number of
    accounts in inventory increased.
        Question. Do you consider it a possibility that IRS has not done so
    in order to build a case for the use of private collection agencies?
        Answer. The IRS does not have the resources to work every
    delinquent account case. It has established risk-based priority systems
    in an attempt to use ACS and CFf resources as efficiently as possible.
    We have no evidence that the IRS is intentionally not working these
    cases to build a case for the use of private collection agencies.

                                CUSTOMER SERVICE

        Question. IRS consistently finds its own accuracy rates higher than
    TIGTA does when measuring taxpayer assistance functions, whether we are
    talking about toll-free telephone assistance, walk-in service at
    Taxpayer Assistance Centers, or the IRS website. Mr. Everson, how do
    you explain the discrepancy? Ms. Gardiner, would you care to comment?
        Answer. The large number of taxpayers who use Toll-Free Telephone,
    Taxpayer Assistance Centers (TAC), or the IRS's website, IRS.gov, to
    get answers to their tax law and account questions prohibits us from
    using statistical sampling techniques in our audits to determine the
    accuracy of IRS answers.

    ----------------------------------------------------------------------------------------------------------------
                                                                       IRS-Reported    IRS-Reported   TIGTA-Reported
                             Type of Service                             Customers       Accuracy        Accuracy
                                                                          Served         (Percent)       (Percent)
    ----------------------------------------------------------------------------------------------------------------
    Taxpayer Assistance Centers.....................................       8,588,850          \1\ 75              69
    Referral-Mail...................................................         279,558              72              74
    Toll-Free Accounts..............................................      27,645,540              89              78
    Toll-Free Tax Law...............................................       5,381,687              83              73
    Internet-based IRS website, IRS.gov.............................         119,036             N/A         Over 80
    ----------------------------------------------------------------------------------------------------------------
    \1\ IRS accuracy rate reported in the Wage and Investment Operating Division Business Performance Report, page
      10, dated May 11, 2003.

        Figures for TACs, Referral-Mail, Toll-Free Accounts, and Toll-Free
    Tax Law reported by the IRS are for fiscal year 2003. Figures for
    IRS.gov reported by the IRS are for the 2002 Filing Season.
    Toll-Free Telephone Assistance
        The differences in the TIGTA's and IRS's accuracy rates are based
    largely on the differences in the sampling methodologies, including the
    sample sizes. For example, during the 2004 Filing Season, we monitored
    over 350 toll-free tax law calls while during the same time period for
    the same types of tax law questions (referred to as applications) the
    IRS selected for monitoring a statistically valid sample of 1,527 tax
    law calls. For fiscal years 2002, 2003, and 2004, we monitored a
    judgmental sample of live taxpayer toll-free tax law calls received by
    the IRS during the filing season, generally considered the months of
    January through April. Although our judgmental sample is not
    statistically valid, we attempt to ensure it is representative of the
    population by creating a sampling plan in which the percentage of calls
    monitored by type of tax law question is reflective of the IRS's
    planned filing season volumes of calls per application. However, we do
    not always monitor calls on late evenings and on the weekends.
        See ``Improvement Is Needed in E-Mail Responses to Complex Tax
    Questions Submitted Through Toll-Free Telephone Help Lines'' (Reference
    Number 2004-40-029, dated December 2003); ``Toll-Free Account
    Assistance to Taxpayers Is Professional and Timely, but Improvement Is
    Needed in the Information Provided'' (Reference Number 2004-40-057,
    dated February 2004); ``Toll-Free Tax Law Assistance to Taxpayers Is
    Professional and Timely, but Improvement Is Needed in the Information
    Provided'' (Reference Number 2003-40-216, dated September 2003).
    Taxpayer Assistance Centers
        The IRS did not measure the accuracy of its answers to tax law
    questions asked in the TACs until fiscal year 2003. For 2003, the IRS
    used judgmental sampling to determine accuracy. In fiscal year 2004,
    the IRS is attempting to establish a baseline using statistical
    sampling.
        Though we used judgmental sampling for Calendar Years 2002 and 2003
    to determine whether taxpayers were provided correct and prompt answers
    to their questions, we did ensure all TACs were visited during these 2
    years. For Filing Season 2004, we again used a judgmental sample of
    TACs, ensuring that we visited at least one TAC in each of the IRS's
    territory offices. We visited 199 TACs in 2002, 209 in 2003, and 64 in
    2004 (note that these numbers are only TACs visited to ask questions
    within the scope of TAC employees' training).
        However, we average 80 questions per month while the IRS's Field
    Assistance quality reviewers average 420 a month (Wage and Investment
    Operating Division Business Performance Report, page 6, dated May 11,
    2003). In addition, the IRS does not compute its accuracy rates the
    same way we compute it. TIGTA results present the overall results of
    auditor visits. Accuracy rates are calculated by dividing the total
    response for each category (i.e., correct, incorrect, refer to
    publication, etc.) by the total number of questions asked. In contrast,
    the IRS disagrees with our methodology for including referrals to
    publications and service denied when computing accuracy rates.
        See ``Taxpayer Assistance Center Employees Correctly Answered More
    Tax Law Questions During September and October 2003 Than Compared to
    One Year Ago'' (Reference Number 2004-40-037, dated January 2004),
    ``Accuracy Rates Have Increased at Taxpayer Assistance Centers, but
    Improvement Is Needed to Provide Taxpayers Top-Quality Customer
    Service'' (Reference Number 2004-40-065, dated February 2004), and
    ``Taxpayer Assistance Center Employees Correctly Answered More Tax Law
    Questions During November and December 2003 Than Compared to One Year
    Ago'' (Reference Number 2004-40-090, dated April 2004).
    IRS.gov
        The differences in the TIGTA's and IRS's accuracy rates are based
    on the different methodologies, including the sample sizes. For the
    TIGTA fiscal year 2002 audit, TIGTA auditors anonymously submitted 90
    tax law questions typical of those that may be submitted by an
    individual taxpayer. We rated the answers to those questions we
    submitted. In contrast, during the 2001 Filing Season, the IRS quality
    review system selected 995 questions for quality review.
        The IRS has a centralized quality review site that samples email
    responses for accuracy and measures accuracy with a statistically valid
    sampling plan designed by its Statistics of Income function. The
    sampling plan requires the selection of email responses without regard
    to the type of taxpayer or tax law category, i.e., whether the tax law
    question pertains to individual or business taxpayers.
        See ``Response Accuracy Is Higher for the Internet Program Than
    Other Options Available to Taxpayers Needing Assistance With Tax Law
    Questions'' (Reference Number 2003-40-014, dated October 2002) and
    ``Management Advisory Report: The Internal Revenue Service Needs a
    Reliable Measure of the Quality of Electronic Tax Law Assistance
    Provided to Small Businesses and Self-Employed Taxpayers'' (Reference
    Number 2002-30-120, dated July 2002).

                              SUBCOMMITTEE RECESS

        Senator Shelby. I appreciate both of you appearing here,
    and we will be meeting and talking from time to time.
        Ms. Gardiner. Thank you very much.
        Senator Shelby. The hearing is recessed.
        [Whereupon, at 11:27 a.m., Wednesday, April 7, the subcom-
    mittee was recessed, to reconvene subject to the call of the
    Chair.]

      DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND
              RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2005

                                  ----------

                            TUESDAY, APRIL 20, 2004

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard C. Shelby (chairman)
    presiding.
        Present: Senators Shelby, Bennett, Stevens, Murray, and
    Dorgan.

                           DEPARTMENT OF THE TREASURY

                            Office of the Secretary

    STATEMENT OF HON. JOHN SNOW, SECRETARY

                 OPENING STATEMENT OF SENATOR RICHARD C. SHELBY

        Senator Shelby. The subcommittee will come to order.
        I would like to welcome Secretary John Snow to this
    morning's hearing. I look forward to hearing about your vision
    for the future of the Treasury Department, as well as the
    challenges you will face during the upcoming fiscal year.
        In your first year on the job, you presided, Mr. Secretary,
    over the divestiture of 30,000 Treasury employees pursuant to
    the Homeland Security Act of 2002. You also oversaw the
    establishment of the new Alcohol and Tobacco Tax and Trade
    Bureau (TTB). Such significant realignment of the Department is
    no small task, and you are to be commended, Mr. Secretary, for
    the fine job you have done in completing this transition.
        Now that the transition is complete, I would like to hear
    how the Department is refocusing its resources on its core
    missions of economic policymaker, financial manager, revenue
    collector and the leader in tracking terrorist finances. All of
    these missions are critical to the continued success of the
    economy.
        There is no economic stimulus that can equal the power of
    allowing taxpayers to retain more of their hard-earned
    paychecks and thereby spend their money as they best see fit
    for themselves and their families. I can think of no better way
    to stunt the present economic growth than a sudden increase in
    taxes. Such an action would dry up the additional capital that
    has flowed into our private markets and would set the Nation's
    economy back on the downward course of recession.
        Even if those who propose to raise taxes during the
    recovery are prevented from doing so, we will still face the
    specter of numerous expiring tax cuts over the coming years.
    Without a permanent extension of tax cuts, there is no way to
    provide the certainty and stability necessary to sustain our
    current economic recovery.
        Even as our economy recovers, the threat of terrorism still
    hangs over us. Given its long-standing relationships with
    financial institutions throughout the world and its existing
    intelligence gathering and law-enforcement infrastructure, the
    Department is ideally suited to lead the Federal Government in
    our Nation's fight against terrorist financing. I believe it is
    time for the Treasury to step up to the task.
        Along those lines, I am keenly interested in the proposal
    to create the Office of Terrorism and Financial Intelligence
    (TFI). All of us share the administration's goal to thwart
    financial support for terrorists. We will look forward to
    working with you to establish and to fund this office. I
    believe it is critical that we work together to ensure that we
    get the right structure and the necessary funding in place.
        The Banking Committee and the Select Committee on
    Intelligence combined their efforts to give Treasury a platform
    to reposition itself as the linchpin in the Nation's efforts to
    identify and track movements of funds and commodities which
    would support those who seek to destroy our way of life.
        The Intelligence Authorization Act of 2004 included a new
    Assistant Secretary for Intelligence and Analysis. Treasury
    committed to create an office that would ``enhance the
    Department's access to Intelligence Community information and
    permit a reorganization and upgrading of the scope and
    capacities of Treasury's intelligence functions in light of the
    Nation's counter-terrorist and economic sanctions programs.''
        In hearings last year in the Banking Committee, we heard
    from various experts who noted a need for the Treasury to
    recapture enforcement capabilities. Given the unique status of
    Treasury with the financial services industry, I believe only
    you have the full responsibility, Mr. Secretary, for ensuring
    the integrity of the financial services industry. I am,
    therefore, disappointed that your vision for the revitalized
    role of Treasury has not been as robust as I would have liked.
    I see no plans for reorganization or the growth that we
    anticipated, especially in the enforcement area.
        Your letter dated April 16 merely reiterates the agreements
    our staffs reached in November of 2003. You propose no real
    increase in staff and request no new funding in the budget
    submission. I expected more, but I trust that you will take
    this task as a priority. No task of this size can be
    accomplished without your direction, Mr. Secretary, and your
    vision.
        We on this committee and on the Banking Committee stand
    ready to assist. We have prioritized and will continue to
    prioritize our oversight function to ensure that the American
    people are safe and the integrity of our Financial Services
    Industry is secure.
        Mr. Secretary, I would be remiss if we did not discuss the
    Department of Treasury's $11.6 billion budget request for 2005,
    and particularly the $10.7 billion request for the Internal
    Revenue Service (IRS). The IRS faces enormous problems, and I
    am especially concerned about the continuing failures in
    computer modernization.
        Mr. Secretary, the IRS has spent $2.7 billion on the
    Business System Modernization (BSM) program and has yet to
    produce any real benefit to the taxpayer. In fact, the IRS is
    running late and is over-budget in all of seven core projects
    related to BSM. I am interested in hearing what oversight the
    Department of Treasury is performing to help the IRS put this
    program on track. Without modernization, the IRS will never be
    able to achieve meaningful improvements to taxpayer customer
    service or compliance.
        Mr. Secretary, I listened with interest to your statements
    in the news on April the 15th about simplifying the Federal tax
    code. I believe that the complexity of the tax code is a large
    part of the problem at the IRS. Our tax code and its
    regulations total a staggering 54,000 pages: they are too
    complex, too confusing, and too costly to comply with.
        Comprehensive reform of the tax code itself would go a long
    way to reducing tax fraud by making the process simpler and the
    system fairer for all taxpayers. A less complex tax code would
    provide fewer opportunities for cheaters and reduce the
    paperwork burden for all Americans. I look forward to working
    with you to reach this goal.
        Mr. Secretary, I look forward to hearing your thoughts on
    the economy and also on the Treasury's budget request. I look
    forward to working with you on other issues that are important
    for the Nation.
        Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you, Mr. Chairman.
        I want to welcome Secretary Snow to our subcommittee. And
    this morning I want to focus on three issues: terrorist
    financing, outsourcing, and IRS debt collection.
        Let me start with terrorist financing. Our government has
    certainly stepped up its efforts to stop the flow of money to
    terrorist organizations since September 11. Unfortunately, that
    is not saying much, given the attitudes of some in our
    government before September 11.
        Richard Clarke, the former counter-terrorism official,
    documented these attitudes in his recent book ``Against All
    Enemies.'' Clarke said, ``I wanted to raise the profile of our
    efforts to combat terrorist financing, but found little
    interest.'' Clarke said that the President's economic advisor,
    Larry Lindsay, ``had long argued for weakening U.S.'s anti-
    money-laundering laws'' and Clarke said that former Treasury
    Secretary Paul O'Neill ``was lukewarm at best towards the
    multilateral efforts to `name and shame' foreign laundering
    havens.''
        Since then, we have taken some important steps, but I am
    concerned that we may still be ``behind the curve'' in areas
    such as enforcement, nontraditional banking, staff and
    resources, and communication.
        Our country and our international partners have put new
    laws on the books, but we must do a better job of enforcing
    them. We cannot allow companies like Riggs Bank to shelter
    their clients by ignoring critical Federal requirements to
    report large and suspicious cash transactions, especially
    transactions involving foreign nationals and unknown charities.
        Our money-laundering laws must be adhered to and enforced,
    and we must insist that Saudi Arabia and other nations follow
    through on their commitments to shut down suspect charities
    that are financing the recruiting of future terrorists and
    possibly terrorist attacks as well.
        We also need to stay a step ahead of those who would harm
    us by looking beyond traditional banking. We can expect
    terrorists to act like drug smugglers. As we successfully close
    down their access to cash in one area, they will move to
    another and we have got to stay a step ahead. That means we
    must close down their operations of smuggling gold, cash, and
    diamonds across borders. We also need to get our hands around
    the ``hawala'' money transfer system. We have got to be able to
    distinguish between the legitimate transactions of immigrants
    who are sending money to their families back home and dangerous
    transactions that move cash into the hands of terrorists.
        We also need to make sure that new government officials
    we've put in place have the resources, the staff, and
    communication to do their jobs effectively.
        Recently we have expanded the portfolios of several Federal
    agencies. We've appointed new Under Secretaries, Deputy Under
    Secretaries and Assistant Secretaries. That is a fine start but
    we need to make sure that these offices actually have the staff
    and resources to succeed and we must avoid the communication
    problems that have plagued the CIA and the FBI.
        Clearly, we have got a lot of work to do to stop the flow
    of money to terrorist organizations and that is one of the
    topics I will explore with the Secretary today.
        I also want to talk about outsourcing. Secretary Snow has
    been outspoken in his belief that moving American jobs offshore
    serves to benefit the American economy in the long run. Mr.
    Chairman, I represent the most trade dependent State in the
    Nation, and I have a strong record of supporting international
    trade.
        But I do not believe that expanding trade requires hundreds
    of thousands of American families to lose their jobs, their
    health care, and their dignity so that their employers can
    pursue cheaper labor elsewhere.
        One recent survey suggests that we may be on the leading
    edge of an outsourcing tidal wave, especially in areas like
    information technology (IT). According to a recent survey of
    182 companies conducted by DiamondCluster International, 86
    percent plan to increase the use of offshore IT outsourcing
    firms in the next 12 months. That compares to just 32 percent
    of the companies that responded the same way just 2 years ago.
        Those who defend outsourcing claim that the companies that
    are shipping jobs overseas today will increase their employment
    here in the United States down the road. That is little comfort
    to someone who has lost his job, particularly because his old
    job is not the one that will be coming back.
        There is a real mismatch between the skills needed for the
    jobs that are moving overseas and the skills needed for the
    jobs that may be open in the future. For example, an increasing
    number of U.S. engineering jobs have been moved to India. Right
    now the unemployment rate for engineers in the United States is
    twice the national average. That is really hurting a lot of
    families.
        There are fields where we have shortages like nursing, but
    I do not know how many engineers can go to school to become a
    nurse while they still have to feed their families. These
    mismatches are all around.
        The factory worker who is laid off from a manufacturing
    company cannot turn around tomorrow and take a job at a drug
    company that looks for pharmacological researchers.
        Simply put, the people who suffer from outsourcing today
    cannot move easily into available jobs. The skills they have
    today are not the ones that will be in demand tomorrow.
        Fortunately, we do know how to help people move from
    yesterday's jobs into the jobs that are open today and the jobs
    that will be open tomorrow. The answer is our Nation's job
    training system. This is the time to invest in that system so
    it can help all of the people who have lost their jobs through
    no fault of their own. Unfortunately, the administration is
    moving in the wrong direction.
        In addition to serving as the ranking member on this
    subcommittee, I also serve as the ranking member of the
    Employment Subcommittee in the Senate. I have analyzed in
    detail President Bush's proposal to increase job training, and
    here is the bottom line. His proposal does not add $1 to our
    Federal efforts to train our workforce. Not $1.
        In fact, the President's budget cuts $300 million from
    existing assistance for workforce training. Even worse, those
    new cuts for 2005 come on top of more than $500 million in job
    training and employment service reductions that have been
    recommended since President Bush took office. In my book, those
    who defend outsourcing should be the biggest advocates of a
    real increase in job training for American workers who end up
    on the losing end of the international trade, and I want to
    explore that later this morning with Secretary Snow as well.
        Finally, Mr. Chairman, I want to discuss my concerns over
    the Secretary's proposal to allow private contractors to
    collect unpaid tax debts owed to the IRS. This proposal is
    currently included in the FISC/ETI bill that will be debated
    again on the Senate floor in a few days. We all know that the
    IRS has done a very poor job of collecting unpaid tax debts. In
    fact, to my shock, it has become apparent that the IRS has not
    even collected unpaid taxes from several individuals who have
    been convicted in court of tax evasion. The Treasury Department
    should request sufficient funds so that IRS agents can collect
    those unpaid debts. But instead the Department has decided to
    invite the private sector to do the job. For anyone familiar
    with the Treasury Department's record on using contractors, it
    raises serious red flags about the privacy of individual
    taxpayers.
        The Department's abominable record on ensuring that
    contractors protect the privacy of our citizens is not
    speculation. It is fact. A little more than a year ago the
    Treasury Inspector General for Tax Administration (TIGTA) did
    an audit and observed that the IRS has no assurance that its
    contractors completed the required background investigations of
    their employees.
        Just last month, the Treasury Inspector General (IG)
    completed another audit that made it clear that the IRS
    continues to do a very poor job of monitoring the overall
    trustworthiness of its private contractors. According to the
    Inspector General, IRS contractors had ``committed numerous
    security violations that placed IRS equipment and taxpayer data
    at risk.''
        In some cases, contractors blatantly circumvented IRS
    policies and procedures, even when the IRS's security personnel
    identified inappropriate practices. One disgruntled contractor
    employee planted a computer time bomb on an IRS system that
    would have destroyed sensitive taxpayer data. Another
    contractor connected an unsecured computer to the IRS network
    and cost the agency $1.5 million in downtime and cleanup costs
    to eliminate a virus introduced by that contractor.
        The Treasury Department has given all sorts of verbal
    guarantees that taxpayers will not have their privacy
    compromised when private contractors start collecting tax debts
    from the public. But given the IRS's abysmal record in
    monitoring its own contractors, I am deeply concerned that
    these private collection agents will not respect the privacy of
    taxpayers.
        I hope this subcommittee will insist on nothing less than
    the strictest privacy guarantees and assurances before we allow
    the IRS to allow private contractors into the Federal debt
    collection business.
        Thank you very much, Mr. Chairman.
        Senator Shelby. Senator Bennett.

                     STATEMENT OF SENATOR ROBERT F. BENNETT

        Senator Bennett. Thank you, Mr. Chairman. This is the first
    time that I have served on the Treasury and General Government
    portion of this subcommittee. I have been involved in the
    Transportation portion. So I come to these issues, Secretary
    Snow, with less of a background than I do as the other issues
    that we have had.
        I listened to Senator Murray talk about the IRS and, of
    course, one of the great frustrations that I have had while I
    have been in the Senate is the inability of the IRS to get on
    top of the technological revolution and take advantage of the
    increase in productivity that IT makes available to everybody
    else.
        We all remember, and I cannot put a year on it out of my
    memory, but we remember the tremendous investment that the IRS
    made during the 1990s and came up totally empty-handed. I
    worked a little bit with that as Chairman of the Committee on
    the Year 2000 Problem and we were frustrated by the inability
    of the IRS to be as forward in their understanding of IT as
    some of the other departments.
        So, like Senator Murray, I would like to hear from the
    Secretary as to where the IRS is today in trying to get their
    computers up to speed and whether progress has been made from
    the unfortunate performance that existed in the 1990s.
        I have often thought if this were a business, given the
    amount of information that is provided to the IRS
    electronically, the IRS ought to be able to figure the tax
    return and on the 15th of April send the taxpayer either a bill
    or a check and the taxpayer would not have to be involved in
    figuring out his own taxes at all.
        But unfortunately, we are not at that point and I would
    hope that might be a goal that could be set for some point in
    the future, because with 1099s and W-2s and W-4s and K-1s and
    so on, all in the hands of the IRS to begin with, the computer
    system ought to be good enough that it could produce that sort
    of result.
        So recognizing that the bulk of, if I read your testimony
    correctly, Mr. Secretary, the bulk of your $11.7 billion
    request is for the IRS. I think that is an area we could
    profitably spend some time talking about.
        I thank the Secretary for his willingness to appear here
    and look forward to his testimony.
        Senator Shelby. Senator Dorgan.

                      STATEMENT OF SENATOR BYRON L. DORGAN

        Senator Dorgan. Mr. Chairman, thank you very much.
        I have another Appropriations Subcommittee hearing going on
    next-door, around the corner, so I will be going back and
    forth. I did read the Secretary's statement last evening and I
    do want to come back and ask some questions about a number of
    issues including, as he might expect, Cuban travel and the use
    of the Office of Foreign Assets Control (OFAC) to do what they
    have been doing recently.
        I hope the Chairman will give me an opportunity to pursue
    that at some length because I think that is a very important
    topic.
        Senator Shelby. We will have a number of rounds.
        Mr. Secretary, we welcome you again to the committee. Your
    testimony will be made part of the record in its entirety. You
    proceed as you wish.

                        STATEMENT OF SECRETARY JOHN SNOW

        Secretary Snow. Thank you very much, Mr. Chairman and
    Senator Murray, Senator Dorgan, Senator Bennett.
        It is a great privilege to appear before you and have an
    opportunity to talk about Treasury, its major thrust, how it is
    functioning in this new post-Homeland Security environment,
    where so many of the former enforcement functions are no longer
    a part of Treasury. Treasury continues to have major
    responsibilities in the financial war on terror, as the
    Chairman pointed out.
        As Senator Bennett pointed out, Treasury's budget is
    largely a function of the IRS. It is 90 percent of the total
    budget. The IRS is the biggest single management problem inside
    the Treasury Department. It is something that I try to spend a
    good deal of time on, now that we have a Deputy Secretary, Sam
    Bodman, who had been the Deputy Secretary at Commerce. In his
    role as chief operating officer of the Treasury Department, I
    have asked Sam to give particular attention to the IRS. There
    are a myriad of issues there that we can talk about, some of
    which have already been alluded to in your questions.
        A word on our budget, and I will be brief. It reflects
    increases in two areas basically. Everything else is either
    down or funded at the prior steady State levels.
        One is IRS enforcement. Here we feel that there is need for
    more attention on enforcement. And the budget proposes adding a
    number of additional positions in the IRS focusing on the
    enforcement activities. Of the $300 million we are asking for
    additional enforcement money, two-thirds of it will go to
    corporations to deal with auditing of corporations to get at
    abusive tax schemes and tax shelters and high income people,
    and the marketing of tax shelters and abusive tax schemes to
    them.
        The first area of increase is enforcement so that we get
    effective enforcement and better compliance. There seems to
    have been some erosion in that area over the last few years,
    and I think the IRS is doing a better job on respecting
    taxpayer rights, with taxpayer services, with treating
    taxpayers better, answering the phones better, giving better
    advice when calls come in. So the customer service side of the
    IRS has improved. Now we need to make equal improvements in the
    enforcement side.
        The second broad area of increase, and Mr. Chairman, this
    goes precisely to the issue you raised with me in your opening
    comments and otherwise in our correspondence, is Treasury's
    role in the war on terror.
        Our role, as we see it, is to lead the financial war on
    terror, to interdict the flows of funds, to be there as a
    guardian of the financial system of the United States so that
    the financial system is not used to move terrorist funds. And
    to enlist the finance ministers and central banks of the world
    at large to do the same thing, to create a broad coalition, a
    global coalition, in the financial war on terrorism.
        What we know about terrorism is that it knows no borders.
    So if we are going to effectively deal with it, we have to
    enlist all of the world. And I think we have made very good
    progress on that score.
        This weekend, the finance ministers of the world are in
    Washington for the International Monetary Fund (IMF) and World
    Bank and G-7 meetings. I have called a separate meeting of the
    finance ministers on the issue of global terrorism to make sure
    we are exchanging best practices and continuing to learn from
    each other and take appropriate actions.
        So the second area where we have asked for a budget
    increase is fighting the financial war on terrorism, and I
    greatly appreciate, Mr. Chairman, your support and the support
    of other members of the committee in setting up the new office
    in Treasury which will be the focal point for our anti-
    terrorist funding activities.
        The new Under Secretary will be responsible for the
    functioning office and the principal person in the United
    States Government, responsible day to day to think about how
    our financial system could be penetrated by terrorists to move
    money, with broad authority over the Office of Foreign Assets
    Control (OFAC) and Financial Crimes Enforcement Network
    (FinCEN) and the Bank Secrecy Act and the USA PATRIOT Act, and
    all those tools that Congress has made available to wage this
    war on terrorism.
        The Office has a new Assistant Secretary, approved by the
    Congress last fiscal year, so that Treasury will now have
    access to its own intelligence gathering, an Assistant
    Secretary for Intelligence. I commend the Congress for
    recognizing that need in Treasury, to put a priority on
    financial intelligence so that this Assistant Secretary can
    continue to speak to the Federal Bureau of Investigation (FBI),
    speak to the National Security Advisor (NSA), speak to the
    Central Intelligence Agency (CIA), speak to the
    intergovernmental intelligence gatherers about the role of
    financial intelligence.
        Everything else in the budget is basically static. I hope
    we will be able to satisfy you, Mr. Chairman. I know that it
    will be a long dialogue that we will have on this issue of
    Treasury playing its appropriate role.
        Deputy Secretary Bodman will be up before the Banking
    Committee next week to elaborate on these points.
        Finally, a word on the economy. A year ago, when I
    testified here, there were great questions about what course
    the American economy was on. You will recall at that time there
    was concern about the possibility of a double dip recession.
    There was concern about deflation.
        I think it is safe to say we have turned the corner and
    have the economy on a very good path. And clearly the tax cuts
    that Congress approved last year lie at the very center of the
    changed circumstances of the American economy, with growth for
    this quarter forecasted to be between 4 percent and 5 percent,
    with growth in the last half of last year, after the tax cuts
    took effect, of over 6 percent, with jobs coming back, 308,000
    jobs in March and over 500,000 for the first quarter.

                               PREPARED STATEMENT

        Corporate spending is up. Exports are up. Retail sales are
    strong. Construction is strong. Housing is strong. The economy
    is on a good strong path and, again, I appreciate the role
    Congress played in making that possible with the Jobs and
    Growth Bill.
        With that, Mr. Chairman, I thank you again for the chance
    to appear before you and look forward to responding to your
    questions.
        [The statement follows:]

                        Prepared Statement of John Snow

        Chairman Shelby, Senator Murray, and Members of the committee, I
    appreciate the opportunity to appear before you today to discuss
    President Bush's fiscal year 2005 proposed budget for the Department of
    the Treasury.
        The President's request for fiscal year 2005 of $11.7 billion for
    Treasury provides funding we need to support the core missions as
    identified in our new strategic plan--in promoting national prosperity
    through economic growth and job creation; maintaining public trust and
    confidence in our economic and financial systems; and ensuring the
    Treasury organization has the workforce, technology, and business
    practices to meet the Nation's needs effectively and efficiently. Two
    key strategic objectives are to collect Federal tax revenue when due
    through a fair and uniform application of the law and to disrupt and
    dismantle the financial infrastructure of terrorists, drug traffickers,
    and other criminals and isolate their support networks.
        One historic change at Treasury in the past year has been the
    movement of most of the Department's law enforcement divisions--
    affecting some 30,000 employees--to the Department of Homeland Security
    and the Department of Justice. This change has provided an opportunity
    for Treasury to refocus on its core missions as the Federal
    Government's economic policymaker, financial manager, and revenue
    collector. This puts us in a better position to fulfill our critical
    role in fighting the war on terrorist financing. In addition, the
    Department revised and completed a new strategic plan in September
    2003. To complement this strategic planning initiative, the Department
    and many of the bureaus underwent a restructuring of their budget
    activities and programs--discontinuing enforcement programs which no
    longer fit into the Treasury strategic vision and developing new
    performance goals and measures focused on getting value for taxpayers.
    As a result of these efforts, our fiscal year 2005 request reflects
    significant reengineering and reprogramming to ensure efficient and
    effective use of our resources.
        Mr. Chairman, we provided the Committee with a detailed breakdown
    and justification for President's fiscal year 2005 budget request for
    Treasury. I would like to take the opportunity today to point out some
    highlights of our request and then I'd be happy to take whatever
    questions you may have.

            PROMOTING PROSPEROUS AND STABLE U.S. AND WORLD ECONOMIES

        The aim of these strategic goals is to ensure that the United
    States and world economies perform at full economic potential. In order
    to perform at its full potential, the U.S. economy must increase its
    rate of growth and create new, high quality jobs for all Americans.
    Additionally, the legal and regulatory framework must support this
    growth by providing an environment where businesses and individuals can
    grow and prosper without being limited by unnecessary or obsolete rules
    and regulations. The Treasury Department and three of its bureaus, the
    Community Development Financial Institutions Fund, the Office of the
    Comptroller of Currency and the Office of Thrift Supervision play
    diverse roles in the domestic economy. From serving as the President's
    principal economic advisor to issuing tax refunds to millions of
    Americans, the Treasury has a significant influence on creating the
    conditions for economic prosperity in the United States. A prosperous
    world economy serves the United States in many ways. It creates markets
    for U.S. goods and services, and it promotes stability and cooperation
    among nations. For these reasons, the Department of the Treasury will
    work with other Federal agencies and offices to promote international
    economic growth and raise international standards of living through
    interaction with foreign governments and international financial
    institutions. Our budget requests $158.9 million to support these
    strategic goals.

     MAINTAINING PUBLIC TRUST AND CONFIDENCE IN OUR ECONOMIC AND FINANCIAL
                                    SYSTEMS

        Treasury's mission of managing the U.S. Government's finances
    effectively is the bulk of the President's fiscal year 2005 request for
    the Department. The budget request of $11 billion--the majority of
    which is for the Internal Revenue Service--will provide funds to ensure
    that the tax system is fair for all while maintaining high quality
    service to our taxpayers and ensuring compliance with the tax laws.
        In past years, IRS's focus has been on improving customer service.
    We believe that we have been successful in that effort and are
    committed to further enhancing customer service for the vast majority
    of American taxpayers who do their best to pay their fair share. For
    those who do not, fundamental fairness requires that our enforcement
    efforts in fiscal year 2005 continue moving us towards a tax system in
    which everyone is complying with the tax laws. Our fiscal year 2005
    request, which includes a net increase of $300 million, will focus our
    resources toward enforcement initiatives designed to curb abusive tax
    practices, end the proliferation of abusive tax shelters, improve
    methods of identifying tax fraud, identify and stop promoters of
    illegal tax schemes and scams, and increase the number and
    effectiveness of audits to ensure compliance with the tax laws. This
    request will allow the IRS to apply resources to areas where non-
    compliance proliferates: promotions of tax schemes, misuse of offshore
    accounts and trusts to hide income, abusive tax shelters,
    underreporting of income, and failure to file and pay large amounts of
    employment taxes.
        The President's request also provides $285 million to continue our
    effort in modernizing the Nation's tax system through investments in
    technology. During the fall of 2003, the IRS performed comprehensive
    studies to review its modernization efforts. From these studies, the
    IRS has resized its modernization efforts to allow greater management
    focus and capacity on the most critical projects and initiatives. The
    IRS is also responding to these studies by increasing the business unit
    ownership of the projects and revising its relationships with the
    contractor and ensuring joint accountability. While the IRS has thus
    far failed to deliver several important projects with which taxpayers
    are not directly involved, it is important to note they have had some
    notable successes. The IRS has made progress on applications such as
    improved telephone service and a suite of e-services to tax
    practitioners. For the first time, large businesses and corporations
    can electronically file. In addition, taxpayers can access refund and
    Advance Child Tax Credit information from the irs.gov website. The
    IRS's business systems modernization expenditure plan provides more
    detail on this request.
        In addition, IRS will work to improve customer service by making
    filing easier; providing top quality service to taxpayers needing help
    with their return or account; and providing prompt, professional,
    improved taxpayer access and helpful treatment to taxpayers in cases
    where additional taxes may be due.
        The provisions of the Trade Act of 2002 (Public Law 107-210)
    chartered the Treasury Department (through the IRS) with establishing
    and implementing a new health coverage tax credit program in 2003. This
    program provides a refundable tax credit to eligible individuals for
    the cost of qualified health insurance for both the individual and
    qualifying family members. The request provides $35 million to continue
    implementation and operation of the Health Insurance Tax Credit
    Program.
        The Alcohol and Tobacco Tax and Trade Bureau (TTB) was created when
    the Homeland Security Act of 2002 divided the Bureau of Alcohol,
    Tobacco and Firearms into two agencies. Our fiscal year 2005 request
    includes $81.9 million for TTB: $58.3 million to support the Collect
    the Revenue function, and $23.5 million to Protect the Public, both of
    which will facilitate their efforts in collecting $14.6 billion in
    revenue from the alcohol and tobacco industries and monitor alcohol
    beverages in the marketplace to detect contamination and adulterated
    products. Their focus this coming fiscal year is to promote voluntary
    compliance of existing regulations and to protect the consumer through
    efficient and effective service.
        Key to the U.S. Government's management of financial systems is the
    Financial Management Service (FMS), whose mission is to provide central
    payment services to Federal program agencies, operate the Federal
    Government's collection and deposit systems, provide Government-wide
    accounting and reporting services, and manage the collection of
    delinquent debt. The fiscal year 2005 request of $231 million for FMS
    includes legislative proposals to improve and enhance opportunities to
    collect delinquent debt through FMS' debt collection program. The
    proposals would: eliminate the 10-year limitations period applicable to
    the offset of Federal non-tax payments to collect debt owed to Federal
    agencies; increase amounts levied from vendor payments (from 15 percent
    to 100 percent) to collect outstanding tax obligations; allow the
    Secretary of the Treasury to match information about persons owing
    delinquent debt to the Federal Government with information contained in
    the Department of Health and Human Service's National Directory of New
    Hires; and allow the offset of Federal tax refunds to collect
    delinquent State unemployment compensation overpayments.
        The Bureau of the Public Debt (BPD) continues its management and
    improvement of Federal borrowing and debt accounting processes. BPD
    will provide vital support to the processing of applications and the
    operation of systems used for re-enforcing its mission of providing
    quality debt management services to financial institutions,
    individuals, foreign governments, and over 200 government trust funds.
        The activities of the United States Mint and the Bureau of
    Engraving and Printing (BEP) are vital to the health of our Nation's
    economy. These agencies share the responsibility for ensuring that
    sufficient volumes of coin and currency are consistently available to
    carry out financial transactions in our economy. Treasury, Mint and BEP
    will deliver a study to Congress regarding options to merge and/or
    streamline operations by consolidating certain functions and sharing
    costs between the Mint and the BEP.
       fighting the war on terror and safeguarding our financial systems
        Our goals in preserving the integrity of U.S. financial systems
    include ensuring that the U.S. financial system and access to U.S.
    goods and services are closed to individuals, groups and nations that
    threaten U.S. vital interests, ensuring that these systems are kept
    free and open to legitimate users while excluding those who wish to use
    the system for illegal purposes, and ensuring that the financial
    systems will continue to operate without disruption from either natural
    disaster or manmade attacks. To support such efforts, the President has
    requested $250.9 million for fiscal year 2005.
        The administration announced the creation of the Office of
    Terrorism and Financial Intelligence (TFI) within the Department of the
    Treasury on March 8, 2004. TFI will lead Treasury's efforts to sever
    the lines of financial support to international terrorists and will
    serve as a critical component of the administration's overall effort to
    keep America safe from terrorist plots.
        The TFI, which will include Treasury's newly established Executive
    Office for Terrorist Financing and Financial Crime (EOTF/FC), will have
    policy oversight over the Financial Crimes Enforcement Network
    (FinCEN), the Office of Foreign Assets Control (OFAC), and the Treasury
    Executive Office for Asset Forfeiture (TEOAF). This will create a
    single lead office in Treasury for fighting the financial war on terror
    and combating financial crime, enforcing economic sanctions against
    rogue nations, and assisting in the ongoing hunt for Iraqi assets.
        The Office of Foreign Assets Control (OFAC) is central to our
    efforts to disrupt financing of terrorist activities. Only days after
    September 11, 2001, OFAC drafted and implemented Executive Order 13224,
    which invoked Presidential authority contained in the International
    Emergency Economic Powers Act and froze the assets of 29 entities and
    individuals linked to Osama bin Laden and his al Qaeda network. Since
    then, OFAC research and investigation helped identify between 200 and
    300 additional entities and individuals as Specially Designated Global
    Terrorists under the Order. Since September 2001, OFAC and our allies
    have frozen over $136 million in terrorist assets and vested $1.9
    billion of frozen Iraqi assets.
        The President's fiscal year 2005 request also includes $64.5
    million for the Financial Crimes Enforcement Network (FinCEN) to
    enhance its ability to fight the war on terror and combat financial
    crimes such as money laundering. Its mission to safeguard the U.S.
    financial systems from the abuses imposed by criminals and terrorists
    and to assist law enforcement in the detection, investigation,
    disruption and prosecution of such illicit activity is accomplished
    through its statutory role as the administrator of the Bank Secrecy Act
    (31 C.F.R.) FinCEN issues and enforces regulations that require a wide
    gamut of financial institutions to implement anti-money laundering
    programs and report transactions that are indicative of money
    laundering, terrorist financing and other financial crimes, thus
    providing a wealth of information to assist law enforcement, both
    domestic and international, in pursuing such crimes. FinCEN also
    ensures that the information collected under these regulations is made
    fully accessible to law enforcement and the regulatory community in a
    secure manner and provides both tactical and strategic analysis to a
    variety of customers. In addition, FinCEN is the Financial Intelligence
    Unit (FIU) for the United States and has been central in the
    development of a consortium of FIU's around the globe that permits fast
    and effective sharing of financial intelligence on an international
    scale.
        The IRS's Criminal Investigative Division (IRS-CI) also plays a key
    role in investigating financial crimes. The request supports the unique
    skills and expertise of IRS-CI agents in investigating tax fraud and
    financial crimes not only support tax compliance, but also benefit the
    war on terror and our efforts to root out financial crimes.
        In addition, the Office of Critical Infrastructure Protection and
    Compliance Policy leads our efforts to safeguard the financial
    infrastructure. This Office works closely with the Department of
    Homeland Security, other Federal agencies, and the private sector to
    safeguard our infrastructure. That is essential, given that the
    majority of the critical financial infrastructure of the United States
    is owned and operated by the private sector. The financial system is
    the lifeblood of our economy and this Office leads our efforts to keep
    it safe.

     ENSURING PROFESSIONALISM, EXCELLENCE, INTEGRITY AND ACCOUNTABILITY IN
                             MANAGEMENT OF TREASURY

        The President has requested $229.6 million for ensuring proper
    stewardship of the Department. Included in this request is $14.2
    million for the Department's Office of Inspector General (OIG) and
    $129.1 million for the Inspector General for Tax Administration
    (TIGTA).
        The 1988 amendments to the Inspector General Act of 1978 created
    the OIG to conduct audits and investigations relating to Treasury
    programs and operations; to promote economy and efficiency, and detect
    and prevent fraud and abuse, in such programs and operations; and to
    notify the Secretary and Congress of problems and deficiencies in such
    programs and operations.
        The Internal Revenue Service Restructuring and Reform Act of 1998
    created the Inspector General for Tax Administration (TIGTA) to oversee
    operations at the Internal Revenue Service (IRS). TIGTA promotes the
    public's confidence in the tax system by assisting the IRS in achieving
    its strategic goals, identifying and addressing its material
    weaknesses, and implementing the President's Management Agenda.
    Further, TIGTA undertakes investigative initiatives to protect the IRS
    against threats to systems and/or employees.
        To maximize efficiencies and effectiveness, the administration has
    proposed to merge the Treasury Inspector General and the Treasury
    Inspector General for Tax Administration into a new Inspector General
    office, called the Inspector General for Treasury. The new organization
    will have all of the same powers and authorities as its predecessors
    have under current law. We will work with the Congress to move this
    legislation forward.
        Also included in this request is an increase of $10.8 million for a
    host of modernization activities of our systems including IT
    Governance, E-Government, operational security, and Treasury enterprise
    architecture.

           FOUNDATION FOR SUCCESS--THE PRESIDENT'S MANAGEMENT AGENDA

        As mentioned earlier, following the movement of the law enforcement
    bureaus to the Departments of Homeland Security and Justice, Treasury
    restructured and refocused its strategic goals and objectives based on
    the five initiatives of the President's Management Agenda (PMA).
    Treasury developed and issued its new Strategic Plan, which linked
    intricately with each of the five initiatives of the PMA. This new
    strategic vision, coupled with the efforts underway in the PMA,
    provides the mechanism and focus for continuous improvement throughout
    Treasury and its bureaus.
        In fiscal year 2003, Treasury achieved many significant milestones
    in implementing the President's Management Agenda. Specific
    accomplishments included:
      --In the past 18 months, Treasury has drafted the first-ever
            Department-wide Human Capital Strategic Plan, which addresses
            the Standards for Success as issued by the Office of Personnel
            Management (OPM) and the Office of Management and Budget (OMB).
            Treasury incorporated human capital into its strategic planning
            and budget formulation and execution processes, and the plan
            will guide future efforts in areas such as workforce and
            succession planning, diversity, performance management, and
            managerial accountability.
      --In competitive sourcing, Treasury completed 3 full competitions,
            over 20 streamlined competitions, and currently has studies
            involving approximately 4,500 positions in various phases of
            completion.
      --In budget and performance integration, Treasury revised the
            performance reporting requirement to facilitate review and
            assessment of bureaus' key performance data. Treasury also
            restructured some of the bureaus' budget activities to reflect
            alignment with the new strategic plan and the full cost of
            achieving results.
      --Treasury also maintained its government-wide lead in accelerated
            financial reporting. The Department implemented a 3-day monthly
            close and successfully issued its fiscal year 2003 Performance
            and Accountability Report on November 14, 2003, 2\1/2\ months
            ahead of the official deadline.
        Treasury will continue to work closely with OMB and other
    stakeholders to make improvements in implementing the initiatives set
    forth in the President's Management Agenda.

                 THE PRESIDENT'S SIX-POINT ECONOMIC GROWTH PLAN

        At the beginning of my testimony I talked about what the Treasury
    Department does to support our strategic goal of encouraging a
    prosperous and stable U.S. economy. I would also like to talk about our
    efforts across the administration to promote economic growth as
    embodied by President's six-point plan for growth.
        That includes making health care more affordable with costs more
    predictable.
        We can do this by passing Association Health Plan legislation that
    would allow small businesses to pool together to purchase health
    coverage for workers at lower rates.
        We also need to promote and expand the advantages of using health
    savings accounts . . . how they can give workers more control over
    their health insurance and costs.
        And we've got to reduce frivolous and excessive lawsuits against
    doctors and hospitals. Baseless lawsuits, driven by lottery-minded
    attorneys, drive up health insurance costs for workers and businesses.
        The need to reduce the lawsuit burden on our economy stretches
    beyond the area of health care. That's why President Bush has proposed,
    and the House has approved, measures that would allow more class action
    and mass tort lawsuits to be moved into Federal court--so that trial
    lawyers will have a harder time shopping for a favorable court.
        These steps are the second key part of the President's pro-jobs,
    pro-growth plan.
        Ensuring an affordable, reliable energy supply is a third part.
        We must enact comprehensive national energy legislation to upgrade
    the Nation's electrical grid, promote energy efficiency, increase
    domestic energy production, and provide enhanced conservation efforts,
    all while protecting the environment.
        Again, we need Congressional action: we ask that Congress pass
    legislation based on the President's energy plan.
        Streamlining regulations and reporting requirements are another
    critical reform element that benefits small businesses, which represent
    the majority of new job creation: three out of every four net new jobs
    come from the small-business sector! Let's give them a break wherever
    we can so they're free to do what they do best: create those jobs.
        Opening new markets for American products is another necessary step
    toward job creation. That's why President Bush recently signed into law
    new free trade agreements with Chile and Singapore that will enable
    U.S. companies to compete on a level playing field in these markets for
    the first time--and he will continue to work to open new markets for
    American products and services.
        Finally, we've got to enable families and businesses to plan for
    the future with confidence.
        That means making the President's tax relief permanent.
        Rate reductions, the increase in the child tax credit and the new
    incentives for small-business investment--these will all expire in a
    few years. The accelerated rate reductions that took effect in 2003
    will expire at the end of this year. Expiration dates are not
    acceptable--we want permanent relief.
        The ability of American families and businesses to make financial
    decisions with confidence determines the future of our economy. And
    without permanent relief, incentives upon which they can count, we risk
    losing the momentum of the recovery and growth that we have experienced
    in recent months.
        The tax relief is the key stimulus for increased capital formation,
    entrepreneurship and investment that cause true economic growth.

                                   CONCLUSION

        Mr. Chairman, I look forward to working with you, members of the
    Committee, and your staff to maximize Treasury's resources in the best
    interest of the American people and our country as we move into fiscal
    year 2005. I am hopeful that together we can work to make this
    Department a model for management and service to the American people.
        Thank you again for the opportunity to present the Department's
    budget today. I would be pleased to answer your questions.

                                ECONOMY AND JOBS

        Senator Shelby. Thank you, Secretary Snow. You referenced
    economic growth. Last month, you stated 308,000 jobs were
    created. That was robust.
        I have been told that up to 50 economists are predicting an
    average of about 180,000 new jobs a month for the next 6 or 7
    months. Some months might be smaller and some months larger
    than others. That is good news. Do you believe that is going to
    happen?
        Secretary Snow. Senator, I have seen those estimates. I
    think they are well supported and well reasoned estimates. And
    yes, very definitely, I think this economy will produce lots of
    jobs in the months ahead.
        Senator Shelby. If we could create 1 million new jobs or so
    in the next 6 or 7 months, it would be good for America and
    good for workers, would it not?
        Secretary Snow. It would be tremendous. It is what always
    occurs in a recovery, and the very fact that additional jobs
    come on stream helps the recovery to gain even further
    momentum.
        Senator Shelby. Later today, in the Banking Committee,
    among other people, we will have Chairman Greenspan testify,
    and we will talk about the economy and the state of the banking
    community.
        Are you concerned about inflation at all at this point?
        Secretary Snow. Mr. Chairman, not at this point I am not. I
    see the economy continuing to operate with lots of headroom to
    grow in a non-inflationary way. We still have considerable
    unused capacity in our factory and manufacturing systems. Real
    wage rates have only begun to move up a little bit. We still
    have unemployment higher than it should be.
        So we still have lots of unused resources in the economy
    that can be put to better use. And we live in this global
    economy where competition is ever present and affecting prices
    in the United States. And few executives who you talk to feel
    they have real pricing power.
        No, I think we have a lot of headroom to grow without
    inflation rearing its head.
        Senator Shelby. Mr. Secretary, how important, in your
    judgment, is making the tax cuts permanent?
        Secretary Snow. Mr. Chairman, I think it is absolutely
    critical. I think the evidence is clear that the tax reductions
    that Congress enacted last year have made this strong recovery
    possible.
        Senator Shelby. It has put money in people's pockets, their
    money, has it not?
        Secretary Snow. That's what it is about.
        Senator Shelby. Let them keep the money they have earned.
        Secretary Snow. And when they keep the money they earn,
    good things happen. They do good things with it. They spend it.
    And as they spend it, then businesses around the country find
    that they need to replenish their inventories. Their shelves
    are coming down. And that leads to demand for their suppliers,
    and so on and so forth. So good things happen when people have
    more money to spend.
        Senator Shelby. Mr. Secretary, a lot of people have
    characterized the tax cuts that we pushed through, and I
    certainly voted for every one of them, as tax cuts for the
    rich. But I do not buy that. I believe that it was a tax cut
    for everybody who works, in a sense, and it also eliminated
    taxes on a great portion of people where they pay hardly
    anything. Is that correct?
        Secretary Snow. You are absolutely correct, Mr. Chairman.

                              TERRORIST FINANCING

        Senator Shelby. I want to discuss terrorist financing. In
    fiscal year 2004, the Congress provided $3.5 million more than
    the budget request to fund and establish the Executive Office
    for Terrorist Financing and Financial Crimes (EOTF/FC) at
    Treasury. Would you update us on the creation of that office
    and explain how that office will mesh with the Office of
    Terrorism and Financial Intelligence (TFI) that you are
    proposing to create?
        Secretary Snow. Yes, Mr. Chairman, and thank you for the
    opportunity to do that.
        The Office of Terrorism and Financial Intelligence (TFI) is
    just now being set up. It will be headed by an Assistant
    Secretary who will be responsible for making sure that the
    Treasury Department has access to the intelligence being
    gathered across this government and across other governments,
    and has the intelligence it needs to carry out its role, its
    critical role.
        So more priority on financial intelligence. There is lots
    of intelligence being gathered. We want to see more priority on
    the financial side.
        Senator Shelby. Is Treasury not central to all of this?
        Secretary Snow. I think Treasury is right at the center of
    it. It has to be.
        Senator Shelby. It is your obligation.
        Secretary Snow. It is our obligation. We have the
    authorities from the Executive Orders of the President,
    implementing the statutes that you have passed. Treasury has
    the expertise, knowledge of the financial systems of the United
    States, knowledge of the people in the financial system of the
    United States, and knowledge of the international financial
    system.
        The office you mentioned will be headed by an Assistant
    Secretary for terrorist finance and will be responsible for
    giving broad policy direction to OFAC and FinCEN and overseeing
    the National Money Laundering Strategy (NMLS) and overseeing
    our relationship with the international institutions that are
    engaged in the global war on terrorist finance.
        Senator Shelby. Will Treasury share with the FBI and CIA
    and others, without impediment, the information that is central
    to terrorist financing?
        Secretary Snow. Absolutely.
        Senator Shelby. Because you notice with the 9/11 Commission
    and others, one of the problems is the lack of sharing
    information. If you do it begrudgingly, it is not timely and it
    does not work.
        Secretary Snow. Mr. Chairman, I will pledge that we will
    share the information that we gather. And by having a senior-
    level Senate confirmed person sitting at the table with the
    other intelligence gathering agencies, we will see that
    Treasury's priorities are given appropriate attention.
        Senator Shelby. How will this office interface with the
    Executive Office for Terrorist Financing and Financial Crimes
    and with the Bureaus at Treasury? Are you going to integrate
    this where we have some type of sharing or analysis center?
        Secretary Snow. Mr. Chairman, the two offices will be
    headed by a new Under Secretary. It was contemplated in the
    legislation Congress passed last fiscal year, for which I am
    very grateful. The Under Secretary will be the senior official
    in the United States Government on financial terrorism, will
    coordinate all the activities in Treasury, and be our point
    person. We will now have one person I can turn to and hold
    accountable for all of these activities. We have identified a
    first-rate individual to be the Under Secretary whose name I
    think will be released, or has very recently been released, for
    confirmation.
        Senator Shelby. With the new office, how will the Treasury
    function better than before?
        Secretary Snow. Yes, exactly. We did not have either the
    Under Secretary or the Assistant Secretary for Intelligence.
        Senator Shelby. Mr. Secretary, we all support resources and
    methods to fight terror financing because it goes to the heart
    of it. I am concerned that the Treasury may have abdicated, in
    certain areas, its statutory responsibility and missions
    relating to terror financing to other Federal agencies.
        I am also concerned, Mr. Secretary, that in the void, other
    Federal agencies are establishing or enhancing capabilities
    that duplicate what Treasury should be doing, and could lead to
    further interagency communication problems in the future.

                      COORDINATION WITH HOMELAND SECURITY

        Besides establishing a new office, what is the Treasury
    Department doing that the Homeland Security Department does not
    in this regard?
        Secretary Snow. We coordinate very closely with Homeland
    Security. I can see why it might appear to be duplication. But
    in reality, we have different roles to play, different core
    functions.
        Treasury's function is to play the lead in all
    relationships with financial institutions.
        Senator Shelby. The primary responsibility is Treasury's.
        Secretary Snow. Primary responsibility is Treasury's to
    play the lead in the money laundering, in the enforcement of
    the Bank Secrecy Act, in the bank and financial institutions
    knowing their customers, and in reaching out to all segments of
    the financial community. Now it is including jewelers and
    credit card companies and insurance companies--wherever money
    could be laundered or moved.
        Senator Shelby. On the Homeland Security web page,
    Secretary Ridge is quoted as saying ``safeguarding the
    integrity of America's financial systems is a key part of
    Homeland Security.''
        It seems to me that that is Treasury's mission. Are we
    duplicating this? And if so, what we are what are we going to
    do about it?
        Secretary Snow. I think what Secretary Ridge has in mind,
    in saying what he said, is to underscore the role they have
    which is protection of a physical sort, physical protection.
    But Treasury's role is the financial war on terror.
        But if a building is going to be penetrated by a terrorist,
    a bomb is going to be dropped, an explosive device is going to
    be detonated in a banking center, that would be properly their
    responsibility.
        But if it is penetrating the financial system, if it is the
    flow of money through the system, if it is interdicting those
    flows, then Treasury clearly has the lead.
        Senator Shelby. Treasury is going to keep that lead, are
    you not?
        Secretary Snow. Absolutely.
        Senator Shelby. You are going to fight for your turf, I
    hope.
        Secretary Snow. We are going to play the role you have
    assigned us and the President has assigned us. Yes sir, Mr.
    Chairman.
        Senator Shelby. Senator Murray.

                                  OUTSOURCING

        Senator Murray. Thank you, Mr. Chairman.
        Mr. Secretary, as I mentioned in my opening statement a
    recent private sector survey revealed that 86 percent of the
    companies questioned expect to expand the use of offshore IT
    outsourcing over the next 12 months. When that same question
    was asked of companies just 2 years ago the number was only 32
    percent.
        My home State of Washington has an extraordinary number of
    IT specialists who are now suffering as a result of this
    downturn in the industry. Is the Treasury Department monitoring
    this situation and the potentially explosive growth of
    outsourcing in certain select industries?
        Secretary Snow. Senator Murray, I have seen some studies on
    this and try and keep myself apprised to the extent I can in
    the area.
        Unfortunately the data is not all that we would like it to
    be on that score and we get different analyses and different
    estimates. I think the Commerce Department and the Labor
    Department are in a better position to talk technically to what
    the data shows.
        But what I have seen from the various surveys, Forrester
    Group I think is the one that is doing the study you are
    referring to, so far the effects have been relatively--that is
    relative to the total number of jobs that are being created in
    the United States economy. And the displacement rates are
    fairly small.
        Senator Murray. What other industries do you think, besides
    IT, might experience this outsourcing?
        Secretary Snow. Well, I guess we have seen radiology
    outsourcing. I think Massachusetts General Hospital is getting
    X-rays read overseas. Medical, health care, service industries,
    I am told, and telecommunications.
        Senator Murray. What is the Bush Administration doing to
    try and stem the fund of jobs that our country is losing?
        Secretary Snow. I think the best thing we can do, and of
    course we do not want to see any jobs lost anywhere, is to keep
    the American economy as vibrant and strong and creative as
    possible so that we are continuously creating as many new jobs,
    and good new jobs, jobs that point to careers, as we possibly
    can.
        Senator Murray. It is fine for economists and policymakers
    to argue back and forth over whether our country gains or
    benefits from outsourcing, but one thing that really is
    forgotten in this debate a lot is the people and the families
    that have lost their jobs.
        I recently read about a 40-year-old woman in Seattle whose
    name is Meara Bronstein. She worked at an IT job at a company
    called Watchmart Corporation. She worked there for 2 years. And
    one day she said that her entire department was informed that
    they would be laid off in a month. And worse, they were told
    they had to train their Indian replacements or lose their
    severance package.
        She is still without work after 10 months and her
    unemployment benefits just ran out. These are her words, let me
    read them to you. She says ``my life has changed drastically
    over my 10 months of unemployment. I have cashed in my 401(k),
    can no longer afford health insurance and can just barely pay
    the rest of the bills. I have even resorted to selling a number
    of my things on eBay to get money for essentials. I think that
    my biggest struggles throughout this experience are the
    constant feelings of powerlessness and paralysis. I did
    everything I could to succeed. I got a good education. I paid
    off big student loans. I worked hard at my job. But now I
    realize that it does not matter what I do to make myself a
    marketable employee if there are no policies in this country to
    protect our jobs from being sent overseas to someone who will
    work for 1/16 of the price. I cannot compete with that. You
    could say that I woke up from the American dream.''
        What you say, Mr. Secretary, to someone like that?
        Secretary Snow. Obviously, Senator, your heart goes out to
    anybody who finds themselves in those circumstances. Those are
    dreadful circumstances for anybody to find themselves in.
        Two things I think we can say. One is that we live in the
    most dynamic economy in the world. We live in an economy that
    is continuously changing, an economy in which there is
    continual regeneration going on, which means displacement is
    continuously occurring. There are about 40 million new jobs
    created every year in the United States. And there are roughly
    40 million people displaced from their old jobs. So we have
    this extraordinarily dynamic economy.
        What I think we need to do, and it is why those tax cuts
    were so important, is continuously focus on making sure
    aggregate demand is large enough to support employment for
    everyone.

                        OUTSOURCING AND JOB DISPLACEMENT

        Senator Murray. But if you are an IT person today, you
    cannot become a nurse tomorrow.
        Secretary Snow. I understand that, Senator. And the second
    part of the answer is we have to make sure, I think we have an
    obligation in an economy that is changing as fast as this one,
    because remember a lot of people are getting displaced not
    because of contracting out or foreign competition. They are
    getting displaced because of domestic competition.
        We have to make sure that opportunities for skills
    development and retraining and education are widely available.
        Senator Murray. So you would say investing in those are
    critical?
        Secretary Snow. Yes, I do. I think investing and making
    sure people have easy access to low-cost ways to acquire the
    skills to give them the jobs of the future is an obligation we
    must take on.
        Senator Murray. What about bridges like unemployment
    compensation for people like that?
        Secretary Snow. Yes, absolutely there is a role for that.
        Senator Murray. Mr. Secretary, one of the provisions that
    were included in last year's appropriations bill was a
    prohibition against using fiscal year 2004 funds to contract
    out any Federal job overseas. To my shock, the President's
    budget specifically requests that this provision be deleted
    from fiscal year 2005.
        Mr. Secretary, could you cite for me some instances at the
    Treasury Department where you might work that is currently
    being conducted by Federal employees and send that work
    overseas?
        Secretary Snow. Senator, I am not aware of any.
        Senator Murray. Then tell me why the President wants us to
    grant him authority to move Federal jobs overseas?
        Secretary Snow. Senator, I am not familiar with the
    background to that provision. I am sure somebody at OMB or DOD
    could talk about it better. I am just not knowledgeable enough
    to offer you a thoughtful opinion on that.
        Senator Murray. But you have no jobs in your department
    that you----
        Secretary Snow. Not that I am aware of and I will check----
        Senator Murray. So you would not object to us putting that
    provision in the bill?
        Secretary Snow. Well, there may be reasons beyond the
    Treasury Department. We are only a small part of this
    government. And there may be some compelling rationale in some
    other department for some access to that. But I am not aware of
    any at Treasury.
        Senator Murray. I know a lot of the comments have gone back
    and forth over this issue about whether outsourcing American
    jobs is beneficial to the economy but there is a different
    question that surrounds this issue that I want to take a second
    to discuss with you. And that is the question of whether it is
    ethical and patriotic to send these American jobs overseas.
        Many of the companies that are sending these jobs overseas,
    for the longest time benefited by being American companies. And
    they have benefited from being part of the most vibrant economy
    in the world. They have benefited from our substantial
    investments by us as taxpayers in our national defense, in our
    tax structure, in innovation and commitment of the American
    people.
        We can disagree on the issue of whether it is good
    economics to ship the jobs overseas, but I still do want to ask
    you this today. Do you think these companies that have
    benefited from the American experience for so long and are now
    shipping American jobs overseas are operating in an ethical
    manner? Is there anything we or they owe these American
    workers?
        Secretary Snow. Senator, the management of America's
    companies have a fiduciary duty to their shareholders. And that
    fiduciary duty, which they must under the law take seriously,
    and when they do not, we get into things like the Enron
    scandals. They have a fiduciary duty to pursue the best
    interests of their owners and that means staying competitive
    and producing good products and producing them at low-cost.
        So the first responsibility of management is in an ethical
    way to pursue the best interest of their shareholders.
        Senator Murray. Over the best interests of taxpayers that
    have invested in investments that make them profitable today?
        Secretary Snow. I am not sure there is a conflict there,
    Senator. If American companies do not stay competitive, then
    they are going to have a hard time creating good American jobs
    and competing effectively, and of course a lot of competition
    comes from firms that are located outside the shores of the
    United States. If they cannot stay competitive with those
    enterprises, they are going to cede market share to them, cede
    revenues to them, and ultimately America's ability to create
    good jobs here with high standard of living will be eroded.
        Senator Murray. Mr. Chairman, I am not sure I would agree
    but I know my time is up at this point. So I will move on and
    wait until my second round.
        Senator Shelby. Senator Bennett?

                           ACCESS TO OVERSEAS MARKETS

        Senator Bennett. Thank you, Mr. Chairman.
        I do not want to go too deeply into this but I am
    stimulated by Senator Murray's questions. And my thoughts go to
    Dell Computer, a company that has been attacked for making a
    number of their purchases overseas. And they make a huge amount
    of sales overseas.
        And at least the Dell management says if we were not able
    to buy at a world price the components that we put into Dell
    Computers, which are assembled in the United States and then
    shipped overseas, we would lose the American jobs that we now
    have. That is, we are indeed contributing to jobs overseas by
    purchasing overseas. But the people who assemble the Dell
    Computers, who run the company, who do the accounting, all of
    whom are American who work in America, would lose their jobs if
    we did not have access to the overseas markets, which access is
    controlled by our ability to purchase at lower prices.
        I do not like the word ``globalization'' because I think it
    carries connotations with it that have taken on emotional
    baggage. I think the correct description of the world in which
    we live is a borderless economy. And the biggest, meanest,
    toughest competitors in the borderless economy are the
    Americans. So I do not want to pursue policies that would hurt
    America's ability to compete in the borderless economy because
    the net effect of that ultimately will be the destruction of
    more American jobs than those that are currently gone overseas.

                            TREASURY BUDGET INCREASE

        But let us move on to the items that we are discussing
    here. You talk about your budget being essentially static, but
    the overall increase is 4.5 percent. The President is trying to
    hold discretionary spending at 4 percent. Homeland Security is
    going up substantially more than 4 percent. I am really asking
    questions that Chairman Stevens would be asking.
        But as we look at the overall attempt on the part of the
    President to deal with the deficit by holding discretionary
    spending at a relatively low level, at the same time funding
    Homeland Security, increase funding for education and some of
    the other areas where he has gone well above the 4 percent. We
    have got to find less than 4 percent some other places.
        I guess I am overly sensitive to this because as Chairman
    of the Agriculture Subcommittee, I find mine going negative. I
    would love to stay stable, but I am being pushed on the
    President's budget $500 million below last year, and last year
    was $1 billion below the year before.
        So as I come to this subcommittee and see you going up a
    little, you say basically static. I would like you to highlight
    the areas where there are increases that take you to that 4.5
    percent global number going up.
        Secretary Snow. The principal area where we are going up is
    IRS enforcement. That is over $300 million--it is about 10
    percent of their enforcement budget increase. And that is to
    make sure we are enforcing the code fairly and effectively in
    some areas where questions have arisen, questions about tax
    schemes, fraudulent tax schemes, abusive tax schemes used by
    wealthy people, promoted by tax promoters to corporations and
    wealthy people.
        There appears to be, according to statistics we have, a
    growing belief in the public that the code is not being
    effectively enforced and that people can get away with it. That
    is a serious issue of citizenship, and we cannot let that idea
    take hold.
        And I think we are leaving a lot of money on the table.

                              RETURN ON INVESTMENT

        Senator Bennett. That was going to be my next question.
    Have you done any studies to see what the return on that
    investment might be? Could we look forward to recovering, by
    virtue of increased enforcement, enough money--it does not show
    up in the way we do it here on the appropriations--but looking
    at your level, would the Treasury have any possibility of
    recovering more money than the enforcement money coming in? In
    other words, get a significant return on that investment?
        Secretary Snow. Senator, I cannot prove it, but I think it
    is the case and I think it is worth trying.
        Senator Bennett. Are there any studies?
        Secretary Snow. There are studies that suggest, and these
    you have got all to take with a grain of salt, that there is a
    so-called tax gap of a couple hundred, $250 billion I have
    seen. We are asking for $300 million more in enforcement.
        Senator Bennett. Three hundred million dollars, not $300
    billion?
        Secretary Snow. Yes, against a $250 billion tax gap.
        I am alarmed about some of the tax schemes I see out there,
    and unless we can catch them in the bud, are going to erode the
    revenue line of the Federal Government. There are some really
    abusive practices out there that we have to get at. The budget
    here provides resources to go after those really abusive tax
    schemes.
        I have asked the head of the IRS, a very able fellow named
    Mark Everson, to give me a report on what comes out of the $300
    million so that when we go to OMB next year, and come before
    you, we are going to have some idea of that, and not just
    something we pull out of thin air.
        I think right now while they do so--they call them ROI
    analyses, return on investment analyses. I think they are good
    efforts, but I would not bet the farm on them.

                     IRS INFORMATION TECHNOLOGY INVESTMENT

        Senator Bennett. Okay. And finally, I made reference to
    this in my opening statement.
        What is the status of the entire IT effort in the IRS? The
    complete collapse that we saw in the 1990s, the effort of the
    last IRS Commissioner under the Clinton Administration--I am
    trying to remember his name.
        Secretary Snow. Charles Rossotti.
        Senator Bennett. Rossotti. He was a very impressive fellow,
    as he tried to get his arms around that and deal with that.
    What progress have we made on that in the intervening years?
        Secretary Snow. I think Commissioner Rossotti brought a
    tremendous amount of good management to the IRS and helped put
    it on a good path. But it is no secret that the IRS technology
    modernization has not been a model of success. And it has come
    in consistently over budget and behind the timelines. It may
    have been because our reach exceeded our grasp. We tried to
    take on too much.
        This year's budget on the modernization side, the
    technology side, is pared back significantly. It is about $100
    million, but focused on more discreet and deliverable outcomes.
    And it is getting intense management from IRS Commissioner
    Everson, from Deputy Secretary Bodman and from me, because we
    cannot afford not to have these systems proceed the way they
    were supposed to proceed, because they are the foundation for
    all of our tax collections.
        I think of this, Senator, in terms of a first-rate credit
    card company. That first-rate credit card company knows how
    much you owe them. They know when you made your last payment.
    They know what the interest due is. They know how to get a hold
    of you. They have got all of your payment records. That is
    where we need to go. And the efforts that are underway are to
    put us in a position where in the future we will be a
    counterpart, the IRS, which is a scale that is way beyond any
    credit card company. But it would have that capability, closer
    to the capability you talked about in your opening statement.
        Now there has been some real progress made. This year some
    50 million Americans are going to do e-filing. That is made
    possible by these modernization systems. You can now go to
    IRS.gov, and hit ``Where is my refund?'', and get good
    information on how to go about getting the status of your
    refund. That is real progress from where we have been.
        These e-services, including online tax identification
    numbers, are becoming more readily available. Some significant
    number of small businesses are now able to go online and file
    their taxes.
        We are a long way from being where we need to be and I
    think the IRS is approaching this in a more realistic way, by
    taking smaller bites at the apple, and making sure that the
    bites are digestible.
        Senator Bennett. Thank you.
        Senator Shelby. Senator Dorgan.

                    OFFICE OF FOREIGN ASSETS CONTROL (OFAC)

        Senator Dorgan. Mr. Chairman, thank you very much.
        First, Mr. Secretary, I said good things when the President
    selected you. I like you. I think that you are a good Secretary
    of the Treasury and I remain pleased that I supported your
    confirmation.
        Secretary Snow. Thank you, sir.
        Senator Dorgan. Having said that, we disagree on some
    policy issues, as you might well imagine. And I do want to ask
    you some questions about fiscal policy because I was really
    intrigued by a couple of your answers, both to my colleague
    from Utah.
        And incidentally, with respect to that subject, the
    question of a U.S. firm that moves overseas to sell back into
    the United States is a construct that is slightly different
    than the one the Senator from Utah posed. I would like to ask
    about that, as well.
        But having said that, I want to ask you a series of
    questions that I asked Secretary O'Neill before he left, and it
    deals with travel to Cuba.
        I am going to tell you something. I am embarrassed at the
    public policy of this country and furious with what is
    happening at OFAC. So I wanted to say nice things before I
    described to you my concern about this.
        Let me hold up a couple of these charts, if I might. Let me
    hold this one up, first.
        This woman is Joanie Scott. She traveled to Cuba 4\1/2\
    years ago to distribute free Bibles and help organize a prayer
    group. Four years later she received a fine, just recently,
    from the U.S. Treasury Department for $10,000. She went to
    distribute free Bibles in Cuba.
        Let me show you another one. This is Joan Sloate. She is
    74, a grandmother. She is a senior Olympian bicyclist. She went
    to ride her bicycle in Cuba. And OFAC fined her and, in fact,
    has attempted to take her Social Security payments in
    satisfaction of the debt. So that is Joan Sloate. I have met
    Joan Sloate, but I do not know her well.
        Let me describe another one. This is a group of Olympians
    and they are disabled. And they are out $8,000 in their attempt
    to travel to Cuba to participate in the team sports--the World
    Team Sports for Disabled Americans was abruptly cancelled
    despite the fact that they had been allowed to do that
    previously. It was abruptly canceled. They are out $8,000. Many
    of these athletes have lost the money they paid on non-
    refundable flights to Miami.
        This is what is going on in OFAC. And there are more.
        Doctors, incidentally, have just been told by OFAC that
    they cannot go to Cuba and lecture and train Cuban doctors
    because the physicians in this country who have been doing
    that, to lecture and train Cuban doctors, that is an export of
    services to Cuba and Treasury says they are prohibited from
    exporting a service such as teaching Cuban doctors such things
    as strokes and comas.
        You were just in Miami. Asa Hutchinson was in Miami
    December 10. He gave a big old speech about this. And then you
    followed him in Miami on February 9, gave a big old speech, and
    both put out press releases about how you were cracking down on
    all of this.
        And my understanding is that you are, at OFAC and also in
    Transportation Security and Homeland Security, you are working
    with Customs agents and OFAC on all direct flights from Cuba
    from Miami, JFK, Los Angeles, hundreds of aircraft, tens of
    thousands of passengers--I am now quoting you--and the agents
    are being extremely meticulous.
        So apparently the results of that so far, as reported by
    Homeland Security, 215 of 45,000 travelers were suspected of
    attempting to vacation--that is a pretty serious crime. Two
    hundred eighty alcohol and tobacco violations were uncovered.
    Actually this was almost exclusively a small amount of cigars.
    Forty-two narcotic seizures, and these all involved
    prescription drugs, not heroine for example. And one hazardous
    material violation, which appears to have been carbon dioxide
    for adding fizz to seltzer water.
        So we are trying to track terrorists in this country and
    you have an organization called OFAC. I used to chair this
    subcommittee and I asked hard questions of Secretary O'Neill. I
    do not see any excuse for one person at OFAC to be doing what
    they are now doing.
        I know you are required to do it because the President and
    the White House and others are sending you to Miami to give
    speeches and ramp up this enforcement.

                                 OFAC RESOURCES

        But I am going to tell you something. I am going to offer
    again an amendment to strike the money for the people that you
    have got doing this. You know and I know that the issue of
    travel to Cuba, eliminating the travel restriction, would pass
    easily in both the House and the Senate. And trying to slap
    Fidel Castro around, which is probably a pretty good thing to
    do in my judgment, but doing so by injuring the right and the
    freedom of the American people to travel is an outrage. Fining
    somebody who is distributing free Bibles in Cuba is a shame.
        So Mr. Secretary, what I would like to do, I am sorry you
    had to listen to a lecture about that but it is the only
    opportunity I have.
        I am going to ask you to identify for me, in a submission
    to this subcommittee, the amount of resources that OFAC is now
    using, the number of people, the number of dollars, the amount
    of time to engage in this approach, to chase women who are
    distributing free Bibles in Cuba, to chase retired women who
    are bicycling in Cuba, to try to stop doctors who would teach
    Cuban doctors about stroke and comas and so on.
        And then I will tell you that I will be asking if we can
    have an amendment and have a vote on the amendment about
    whether that is an effective and an appropriate use of
    resources.
        It would be unfair for me not to allow you to respond, to
    give the standard response to this. But Mr. Secretary, go
    ahead.
        Secretary Snow. Thank you, Senator.
        I know how strongly you feel on this issue, from our
    correspondence.
        What I would say is that in those areas that you
    elaborated, humanitarian aid, education, travel, medicine,
    religious efforts, my understanding is that licenses are
    available and the problem is that people are going without
    getting the appropriate licenses. Maybe we need to do a better
    job of simply making clear that people can go if they have the
    appropriate licenses.
        I hope OFAC, and I am going to check on this when I get
    back to Treasury, is putting appropriate resources into making
    available knowledge of when such travel is appropriate pursuant
    to the appropriate license.
        [The information follows:]

                              Resource Information

        OFAC's Salaries and Expenses for fiscal year 2004 enacted budget is
    $21.726 million and 138 full time equivalent (FTE) level. Currently,
    the total amount of funds directly attributable to the Cuba sanctions
    regime is $3.3 million. OFAC has the equivalent of 21 FTEs who work on
    a wide variety of Cuban embargo matters, including travel-related
    matters. Supervisory personnel are also actively involved in the
    process.

                        LICENSING INFORMATION RESOURCES

        Treasury's Office of Foreign Assets Control (OFAC) has taken
    measures to make information available to the public concerning the
    U.S. policy with respect to travel to Cuba. They have published a
    brochure entitled ``Cuba: What You Need to Know About the Embargo,''
    which is available through their fax-on-demand service and on their
    Internet website at www.treas.gov/ofac, that provide information in lay
    terms. This brochure summarizes the most salient features of the
    sanctions program, including the travel provisions. There is also a
    separate two-page brochure, in both English and Spanish, covering just
    the travel restrictions and licensing provisions. There are also
    approximately 200 travel and carrier service providers authorized to
    engage in transactions with Cuba to make travel arrangements for
    licensed travelers. OFAC's Miami office provides training and ongoing
    guidance to the service providers who pass on information about U.S.
    Government requirements for travel to Cuba.
        Last year, OFAC's Licensing Division issued ``Comprehensive
    Guidelines for License Applications to Engage in Travel-Related
    Transactions Involving Cuba'' which is available on OFAC's website. The
    Application Guidelines have an introduction discussing the policy
    surrounding travel to Cuba, including statutory restrictions limiting
    travel licensing to 12 categories of activities, information on what is
    covered under each licensable category of travel, and information to
    applicants of what information should be furnished in the application
    in order to receive a license. For each category of travel, the
    Application Guidelines provide examples of activities that are
    licensable and not licensable in order to give applicants an idea of
    what would be appropriately within the scope of current U.S. policy
    with respect to travel to Cuba. The Licensing Division also has
    information in the travel advisory on Cuba that the State Department
    makes available in its travel advisory system where information is
    provided to the public covering most countries of the world.

        Senator Dorgan. Mr. Secretary, in fact it is not the case
    that those activities are acceptable and approved by the
    Treasury Department. I mentioned to you the circumstance of the
    disabled athletes. They were specifically denied the
    opportunity to travel, despite the fact that they had been
    allowed to travel previously.
        I mentioned that the physicians, who have previously gone
    to Cuba to teach and to lecture, are now told that constitutes
    the delivery of a service to Cuba, which is not legal and
    therefore will not be allowed.
        So my point to you is, while I think most people believe
    this travel research is being administered reasonably, it is
    not the case that humanitarian activities, educational
    activities, medical activities and others is routinely
    excepted.
        There is in this administration, both at the State
    Department and in other areas and at OFAC, and it is trumpeted
    in press releases from your office as well as Asa Hutchinson
    and Homeland Security, that there is this crackdown.
        And the other point of it is that we have apparently people
    checking every passenger on every plane. And I am going to
    spend a little time trying to determine whether we are doing
    quite as much to try to keep terrorists out of the country as
    we are to try to keep a few cigars out of the country. I do not
    know quite how I will get to all of that.
        My only point to you this, I hope you will look into that
    because I think you have an understanding that is different
    than is actually occurring with respect to OFAC.
        But my point is I think this policy is bad policy and
    things have changed dramatically in the crackdown with respect
    to trying to injure the American people who in many cases--the
    young woman who took Bibles to Cuba did so 4\1/2\ years ago.
    She did not have the foggiest idea she needed a license. So she
    apparently made a mistake, the mistake of taking free Bibles to
    distribute in Cuba. Now she is being slapped with a $10,000
    fine.
        Mr. Chairman, I had indicated that I wanted to ask a couple
    of questions about fiscal policy. I will wait for another
    round, if that is appropriate.

                           PUBLIC POLICY ON TAX CODE

        Senator Shelby. Okay, thank you, Senator Dorgan.
        Secretary Snow, let me offer a comment to your exchange
    with Senator Murray a few minutes ago. I think there is a big
    difference, and I would hope that you would agree with me,
    about the fiduciary duty that an executive of a company owes to
    the stockholders. We know who owns the companies: the
    stockholders own the companies. Management does not own
    companies. And they did have a duty, I totally agree, to
    enhance profits to make money. That is why they are created,
    primarily.
        But making public policy is a totally different thing from
    that responsibility. I think you are dealing with apples and
    oranges.
        If we have a tax policy that encourages our companies to go
    overseas, I think that is bad public policy. I understand we
    have to trade. We have got to trade; it is a two-way street.
        I would like to see us make public policy in our tax code
    that would encourage people to invest here rather than
    overseas, as I think do most people. I do not know how you feel
    about that, but that is my own observation.
        Secretary Snow. Senator, we have incorporated in this
    year's proposals that we have sent to the Congress, some
    efforts to deal with tax havens, with the interest stripping
    provisions which create the juice in the transactions that take
    firms to these tax havens, and so on. So I agree broadly with
    what you say, that the tax code certainly should not encourage
    that sort of activity.

                      COORDINATION WITH HOMELAND SECURITY

        Senator Shelby. I want to touch again on Homeland Security.
    I am looking at a statement sent out by the Department of
    Homeland Security, by Secretary Ridge.
        Among other things, he said under the SHARE program, which
    is the Systematic Homeland Approach to Reducing Exploitation
    Program, officials from ICE will be joined by the Secret
    Service to jointly conduct semiannual meetings with the
    executive members of the financial and trade communities
    impacted by money-laundering, identity theft and other
    financial crimes to share data on specific investigative
    outcomes from investigations into money-laundering, identity
    theft, and other financial crimes.
        Now, you are not ceding any of your jurisdiction to
    Homeland Security by what they do? You are trying to coordinate
    with them--is there not a difference here?
        Secretary Snow. Absolutely, and we coordinate very closely
    through intergovernmental task forces. And I think the roles
    really are well understood.
        Our primacy comes with respect to the national money-
    laundering strategy. It comes with respect to enforcing the
    various provisions of the Bank Secrecy Act and the executive
    order dealing with terrorist finance.
        Senator Shelby. Also, from your statutory authority over
    the financial institutions.
        Secretary Snow. And the statutory authority over financial
    institutions. And that Treasury chairs the President's Working
    Group on Financial Institutions which is the Federal Reserve
    and the Securities and Exchange Commission (SEC) Chair and the
    head of the Commodities Futures Trading Commission. And where
    necessary, we will share information with--and desirable--with
    the Department of Homeland Security (DHS). But their role is
    really different. Ours is more the broad policy, implementing
    those statutes and executive orders, interdicting the flow of
    money, and making sure that banks know their customers. Making
    sure that the information is being shared, and that we get
    through our databanks at FinCEN, with local, State and other
    Federal authorities.
        DHS has an important role to play, but it is a different
    role.

                        EARNED INCOME TAX CREDIT (EITC)

        Senator Shelby. Mr. Secretary, I want to discuss the Earned
    Income Tax Credit (EITC) for just a minute. We have been told
    by the IRS Commissioner last year that there are a lot of
    erroneous and fraudulent EITC claims that are estimated to cost
    the government between $8 billion and $10 billion annually.
        We all want people who would qualify for this benefit to
    get it. But where you are duplicating the benefits, it seems to
    me that the IRS and Treasury are in dire need of some kind of
    systems reform to be able to check who is doing what.
        You referenced some of the financial institutions. If it
    were American Express or any of these credit card companies,
    they certainly would cross-reference everything. I cannot
    imagine them letting happen what is happening with EITC claims.
        Are you interested in more money to go after cheats and
    fraudulent things? Heck yes, and we want to make sure you do
    it. But you are sitting on tons of money if you would do your
    job properly. Not just you, but others at the Department.
        And if we are losing $8 billion to $10 billion a year
    because of fraud or fraudulent and erroneous claims, something
    is wrong, big time. And we are talking about billions, not
    hundreds of millions.
        Secretary Snow. Senator, there is something wrong here.
        Senator Shelby. What are you going to do about it?
        Secretary Snow. We are engaged in some pilot projects right
    now to try to figure out what to do about it, to be honest with
    you, because we do not have all the answers readily at hand.
        Senator Shelby. Have you thought about outsourcing this?
    Private-sector banks that do this every day are getting
    consultants in there. We can not afford to wait 2 years from
    now for answers and have the same rate of fradulent and
    erroneous claims that you had 2 years ago.
        Secretary Snow. I think we can fix this, but this is an
    extraordinarily complex program where----
        Senator Shelby. But complexity does not mean you cannot run
    it with integrity.
        Secretary Snow. We can run it and we will. The key to it is
    getting eligibility criteria well-established so the people who
    are eligible get the payments.
        Senator Shelby. Absolutely.
        Secretary Snow. And those who are not do not. And
    unfortunately, these error rates are just extraordinary.
        Senator Shelby. Let us stop a minute.
        How are you going to come about with the eligibility
    criteria that you need?
        Secretary Snow. By getting databases that tell us when two
    people not living in the same household are claiming the same
    child. And that is happening.
        Senator Shelby. Looks like a computer or good software
    system could do this for you. That is what we have been told.
        Secretary Snow. We are doing pilot projects right now to
    try and get at that very problem. A lot of the cost of this
    program, and it is a shame for the eligible participants who
    were properly getting the checks, is we do an extraordinary
    amount of post-audits and burden people who are properly
    getting the monies with post-audits and are sending checks to a
    lot of people who do not deserve the checks.
        I do not know whether it is fraud as much--there is
    probably some in this.
        Senator Shelby. But it is wrong.
        Secretary Snow. It is just wrong. It is errors--mistakes
    and errors.
        Senator Shelby. Let us say it is not fraud, but it is
    erroneous and the people mean well. You need the criteria to
    separate what is the real from the apparent, do you not?
        Secretary Snow. Yes, we do.
        Senator Shelby. And how are you going to do this? I know I
    heard last year that you had a pilot program. I may have heard
    it the year before.
        But these erroneous payments and so on could have cost the
    Treasury $100 billion. That is not chicken feed.
        Secretary Snow. You mean over a 10-year period or
    something?
        Senator Shelby. Yes, sir. It is nothing to ignore.
        Secretary Snow. We owe you an answer. We owe the American
    taxpayers an answer on this.

                              TAX CODE DEFINITIONS

        Senator Shelby. I think you owe the American taxpayer an
    answer.
        Secretary Snow. For certain, we owe the American taxpayers
    an answer.
        One thing is getting a uniform definition of a child.
    Apparently in the code today, one of the complexities is we
    have six, I am told, different definitions of a child. If we
    could settle on one definition of a child.
        Filing status is an issue. What is the filing--is that
    person really the head of the household and the parent or not?
    When various people are claiming the child as their dependent.
    So getting the databases fixed.
        Senator Shelby. Looks to me like a good software program is
    needed to keep you from paying the EITC benefit here and from
    paying it there for the same child. It looks like you could
    find that the government is allowing someone in Alabama to
    claim EITC and someone else in Illinois or somewhere else for
    the identical benefit. And especially with the enormous amounts
    of money involved, I do not understand why you would not want
    to eliminate these erroneous and fraudulent payments.
        Secretary Snow. This program does involve tens of millions
    of Americans.
        Senator Shelby. We understand what it involves.
        Secretary Snow. Which adds to the complexity.
        Senator Shelby. But what is right and honest is right and
    honest, is it not?
        Secretary Snow. It is, and to make it right and honest, we
    need the systems in it at the front end of the EITC program
    rather than what happens today, which is an awful lot of
    checking and rechecking and checking and rechecking.

                             ADMINISTRATION OF EITC

        Senator Shelby. Mr. Secretary, who administers the EITC
    program?
        Secretary Snow. It is administered by the IRS.
        Senator Shelby. The Internal Revenue Service. The Internal
    Revenue Service is part of Treasury, is that correct?
        Secretary Snow. Yes, it is.
        Senator Shelby. So the buck stops here with the
    Commissioner of the Internal Revenue Service.
        Secretary Snow. That is right. And the Commissioner of the
    Internal Revenue has pledged to me that this issue is getting
    his full attention, that he is on top of these pilot projects.
    In fact, he made the decision last year to modify the pilot
    projects and not put into place the fixes on the EITC before we
    had the real results back.
        I think this is as complex as it is is a little baffling,
    but it involves the fact that there are just so many claimants
    in an environment that it is so hard to really manage, with
    definitions of child that are not uniform, with poor
    information about dependents and who can claim dependents, poor
    information about actual parentage. We have got a real data
    collection and management problem here.
        But there are three pilot projects going after the major
    components of the problem.
        Senator Shelby. I hope that we hear good news down the road
    to stop all people who are either fraudulent or erroneously
    filing things with the IRS.
        Senator Murray.
        Senator Murray. Thank you, Mr. Chairman.
        Let us just not forget that there is another side to the
    EITC issue which is many, many poor taxpayers who do not know
    they are eligible who we are not giving their payments to. And
    that is part of the error rate that we do not want to lose in
    this.
        Secretary Snow. Senator, I agree with you. That is a part
    of the whole problem.

                          PRIVATE COLLECTION AGENCIES

        Senator Shelby. We do not want to hurt anybody.
        Senator Murray. Mr. Secretary, as I talked about in my
    opening statement, IRS has proposed the use of private debt
    collectors to collect tax debts. And as I said, I am really
    uneasy about this proposal because of the abysmal record of the
    IRS in protecting the privacy of taxpayers.
        In fact, when the IRS tried the use of private collection
    agencies in a pilot a couple of years ago, it was just fraught
    with problems. Then, in February of 2003, the IG noted the
    extraordinarily lax record of IRS in administering background
    checks for IRS contractors, including contractors that have
    access to sensitive tax data.
        And then just last month the IG found that contractors
    committed numerous security violations that placed IRS
    equipment and taxpayer data at risk. In some, cases contractors
    blatantly circumvented IRS policies and procedures, even when
    security personnel identified inappropriate practices.
        For example, one disgruntled contractor employee planted a
    computer time bomb on a computer system that would have
    destroyed sensitive taxpayer data. And another contractor
    employee connected an unsecured computer to the IRS computer
    network, which permitted the introduction of a virus into the
    IRS computer system costing $1.5 million in downtime and
    cleanup costs.
        Mr. Secretary, given the fact that some of these findings
    were published just last month, why should we believe that the
    IRS is in a position to protect taxpayer information and
    privacy when they hand over the responsibility to collect tax
    debts to private contractors?
        Secretary Snow. Senator, I would agree with you that the
    prior experience with the private collection agencies did not
    go well. It was not a success. It was not as well-planned, as
    well thought out, as well structured as it should have been.
        I think we have learned a lot of lessons from that prior
    experience that will be applied here if Congress authorizes IRS
    to go forward with the private collection agencies.
        We are acutely aware of the protection of the taxpayer
    rights, the private collection agencies would have no
    enforcement power. They would go through intensive training
    about their role, which is not enforcement but just collection.
    They would go through intensive training on their legal
    responsibilities to taxpayers, including protection of
    confidentiality of taxpayer information.
        This is really an effort on the part of the IRS to free up
    highly trained IRS auditors and examiners to do more complex
    work and use the collection agencies for what you might call
    the low hanging fruit. That is, calling people up, notifying
    them, reminding them that they have got an overdue tax bill,
    but not bringing any enforcement action of any kind.
        The thought here is that a lot of people, if they are
    notified that they have an overdue tax bill and somebody calls
    them up and pays some attention to them, they are compliant and
    they would therefore be prepared to make their appropriate
    payments. These are paid immediately or with some installment
    plan.

                         PROTECTION OF TAXPAYER RIGHTS

        Senator Murray. Mr. Secretary, I want to see what specific
    steps have been taken and what specific steps will be taken to
    protect privacy and to protect individual taxpayer data before
    I think this committee should move forward in moving in some
    kind of direction like that. I think that is extremely
    critical.
        Secretary Snow. Senator, I agree with you. I think it is
    absolutely critical that taxpayer rights be protected here and
    our proposal would mandate that the IRS monitor the activities
    of these private collection agencies closely, monitor their
    performance and deal----
        Senator Murray. Monitoring is after-the-fact.
        Secretary Snow [continuing]. Appropriately with it. There
    is the prior training. There would be intensive training, and
    there would be continuous monitoring. And then there would be
    penalties for those who hopefully----
        Senator Murray. If somebody has already planted a computer
    time bomb, monitoring is not going to do anything but show you
    that it has happened.
        Secretary Snow. Senator, there is a big opportunity here to
    help collect some overdue monies using these resources that
    will not cost the Federal Government anything. And we are very
    sensitive to the issues you are talking about and we will go to
    great lengths to see that, as I say, the confidentiality and
    the information is protected and that taxpayer rights are fully
    protected.

                     TERRORIST USE OF CHARITY ORGANIZATIONS

        Senator Murray. I will be following this issue very closely
    because I am deeply concerned about that, but my time is
    limited and I do want to ask you about funneling cash to
    terrorist organizations, as I also mentioned in my opening
    statement.
        As you know, our government has linked some 23 charitable
    organizations with the al Qaeda network. And it has been a
    long-standing practice for terrorist organizations around the
    globe to use charitable giving as an avenue for their
    resources.
        There appear to be some continuing disagreements between
    our government and the governments of the European Union as to
    which charities should be designated as being associated with
    these terrorist organizations. A number of international
    charities that are listed by the United States have not been
    listed by the European nations.
        Do you believe the nations of Europe attach a significant
    amount of importance and commitment to combat terrorist
    funding?
        Secretary Snow. Senator, I think we have made a lot of
    progress, but not enough. I think there needs to be more focus
    on the issue you are talking about here. I do not buy the
    distinction that some countries make between funding for a
    charity that goes for charitable purposes and funding to a
    charity that ends up going for terrorist purposes.
        Our policy is that if a charity is getting funding that
    goes for terrorist purposes, we designate that charity, as we
    have done on a number of occasions where urging other countries
    who are part of this FATF, the Financial Action Task Force, on
    Terrorist Finance to do the same. We have made progress in some
    places, not total progress in others.

                            DESIGNATION OF CHARITIES

        Senator Murray. Which ones have we made progress with and
    which ones do we need to make progress with?
        Secretary Snow. We have made actually a lot of progress on
    the whole subject. In the last several months, with Saudi
    Arabia, we have named any number of Al-Haramain branch offices
    around the world. And I can give you a full listing of all the
    designations. But there are a number of designations of
    charities now that have occurred.
        In Europe, there is some reluctance to designate a charity
    in its totality. Money is money, and money that goes into a
    charitable organization is fungible with money that is used for
    good purposes and terrorist purposes.
        [The information follows:]

                            Designation Information

        Not all of the charities designated by the United States are linked
    to al Qaida. Those that are have been submitted to the United Nations
    1267 Sanctions Committee, where most have now been added to their
    consolidated list. Several others, however, were designated by the
    United States solely because of their ties to Hamas, e.g., the U.S.-
    based Holy Land Foundation for Relief and Development, the Al Aqsa
    Foundation, and the five mostly-European based charities designated by
    the United States last August.
        To the extent a person or entity is designated by the United
    Nations because of its ties to al Qaida, the Taliban, or Usama bin
    Ladin, the mechanism within the European Union automatically triggers
    designation by the E.U. Clearinghouse (requiring all member countries
    to freeze the assets of the designated entity).
        The U.N./Clearinghouse-linked process does not capture the U.S.
    designations of charities that are tied to HAMAS or Hizballah.
    Designation by the E.U. Clearinghouse without a U.N. designation
    requires unanimous consent. Absent a Clearinghouse decision, many E.U.
    countries do not have independent national authority to freeze assets,
    others lack the political will to take unilateral action.
        The European Union's decision last September to designate Hamas as
    a terrorist group in its entirety represents an important first step
    towards our position. We continue to push them on implementing this
    decision by designating Hamas charities operating in Europe. As of this
    date, the European Union has not designated any of the Hamas-affiliated
    charities designated by the United States.
        As a government, we are approaching this issue from many levels. We
    have made clear our position on Hamas, and other such terrorist groups,
    to our partners around the world. We are beginning to see a ``sea
    change'' of the European attitude on this matter, based in large part
    on the U.S. efforts to change attitudes and policies.
        Part of these efforts include aggressive education on the
    requirements of UNSCR 1373, which requires all member countries to
    respond with actions to freeze assets when presented with credible
    information from another country that the individual/entity to be
    designated has been providing support to terrorists and terrorist
    organizations. This is also one of the requirements adopted by the
    Financial Action Task Force. Accomplishing this task will require a
    change in the E.U. Clearinghouse process and/or countries enacting
    separate authority to designate independent of the European Union and
    having the political will to use such authority.

        Senator Murray. But what about Indonesia and Pakistan?
        Secretary Snow. When I was in Indonesia, we designated JI.
    I will get you a complete list of all these designations, but
    more need to come.
        But it is interesting that Saudi Arabia has taken the steps
    that they have taken.
        Senator Murray. Are you satisfied that they are actually
    enforcing the new restrictions that they have put in place?
        Secretary Snow. I think they are. Yes, I do. I think they
    take this very seriously. And of course, Al-Haramain is to them
    what the United Way is to us. It is their major charity. So
    good important progress is being made, but I think the
    distinction that some countries make between the good functions
    of charities and the terrorist functions of charities is an
    artificial and false distinction.
        Senator Murray. Thank you, Mr. Secretary. And I know my
    time is limited. I need to go to another committee, as well.
        I would like to submit my other questions for the record.
        Senator Shelby. Without objection, it will be ordered.
        Also along those lines, Senator Dorgan has a number of
    questions, Mr. Secretary, that he would submit for the record.
        Secretary Snow. I would be happy to respond, Mr. Chairman.
        Senator Shelby. I also have a number of questions that I
    will submit for the record. You usually are very prompt in
    answering, and we appreciate that.
        Mr. Secretary, what are your thoughts on Chinese currency?
    We have talked about that privately. We have both been to
    Beijing to talk with them about floating their currency, or at
    least within a more realistic band as to its real worth. They
    are buying a lot of the commodities of the world. Commodities
    have gone up in price. Not just steel scrap, of which they are
    buying a lot, but ore, metals, you name it. So they are going
    to have a problem there.
        Do you have any observations on that?
        Secretary Snow. Well, I do, Mr. Chairman. I thank you for
    raising the question and giving me an opportunity to discuss it
    with you and compliment you on the good work you did on your
    mission last fall.
        Senator Shelby. We think they heard us, but they did not
    change anything, at least then, did they?
        Secretary Snow. I think the fact that they hear us is
    important and I think what we are saying is being listened to.
    They have committed again to move towards flexibility in the
    currency. They are taking a number of steps to prepare the way
    to do that, going after the bad loans in the banking system,
    taking steps to widen the amount of funds that can be brought
    in and out of the country, relaxing capital controls, putting
    in place a strong bank regulator, allowing non-Chinese firms to
    buy bad loans and take them off the government books which is
    important as we did back with the RTC, with the savings-and-
    loan crisis, advice we gave them and suggested they might want
    to study our savings-and-loan experience.
        Senator Shelby. But will that reoccur, though, as long as
    they have state-owned industries and state-owned banks making
    loans to state-owned industries which are not making any money
    because of the political equation?
        Secretary Snow. Mr. Chairman, that is the root problem,
    that is the root issue. And they understand that and are
    working to see that the capital that goes into the banking
    system goes to support real liable private enterprises and
    withdrawing more and more from the state enterprises.
        I think that is the course they are on because they
    recognize that capital going to the state enterprises is not
    getting the return for the Chinese people that capital going
    into the private enterprises is. And it is perpetuating the
    problem.
        Now they have an awful lot of people working in those state
    enterprises, and their dilemma is to create the jobs.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Shelby. They have got a political problem there.
        Secretary Snow. They have got a political problem.
        We appointed last week Ambassador Speltz, who is our
    representative to the Asian Development Bank, to be the
    Treasury's Personal Representative to the Chinese government on
    these currency and financial market issues. And it was well
    received by the Chinese.
        Treasury has an ongoing, very productive, dialogue with
    China. A technical team is just back from China where we
    interacted with the Chinese on a whole range of financial
    market issues.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard C. Shelby

                              DEPARTMENTAL OFFICES

        Question. Please update the committee on the status of hiring for
    initiatives that were funded in Fiscal Year 2004 Transportation-
    Treasury Appropriations bill.
        Answer. The Executive Office for Terrorist Financing and Financial
    Crimes hired 11 of its 14 positions; International Affairs has hired 1
    of its 10 positions and made offers for the remaining 9 positions.
        Question. In fiscal year 2004, the Departmental Offices received
    $2.285 million to hire 19 positions for the Office of Terrorist
    Financing and Financial Crimes and $2.73 million to hire 10 positions
    for International Affairs. Please provide a financial plan for each of
    these initiatives and the hiring status of these positions, including
    the types of positions and responsibilities devoted to these new FTEs.
        Answer. The financial plans are shown below:

       FINANCIAL PLAN FOR FISCAL YEAR 2004 EXECUTIVE OFFICE FOR TERRORIST
                         FINANCING AND FINANCIAL CRIMES
                            [In thousands of dollars]
    ------------------------------------------------------------------------
            Budget Object Class             Amount             Status
    ------------------------------------------------------------------------
    Salaries..........................           1,622  The Conference
                                                         Report limits the
                                                         office to 14 FTE of
                                                         which 11 have been
                                                         hired and the
                                                         remaining 3 will be
                                                         on board by the end
                                                         of the fiscal year.
    Benefits..........................             260
    Travel............................             100
    Rent, Utilities...................              25
    Other Services\1\.................             263
    Supplies..........................               9
    Equipment.........................               6
                                       -------------------------------------
          Total.......................           2,285
    ------------------------------------------------------------------------
    \1\ Includes SEAT Management computer equipment and software as well as
      security reviews/clearances.

        Type of Positions:
      --Deputy Assistant Secretary (1)
      --Director, Money Laundering and Financial Crimes Policy (1)
      --Senior Policy Analyst (1)
      --Financial Crimes Specialist (3)
      --Senior Advisor (2)
      --Terrorist Financing Specialist (1)
      --Program Analyst (3)
      --Review Analyst and Schedule Coordinator (1)
      --Clerk (1)
        However, it should be noted that the fiscal year 2004 bill provided
    for 14 positions, not 19.

      FINANCIAL PLAN FOR FISCAL YEAR 2004 INTERNATIONAL AFFAIRS INITIATIVE
                            [In thousands of dollars]
    ------------------------------------------------------------------------
            Budget Object Class             Amount             Status
    ------------------------------------------------------------------------
    Salaries..........................             961  The 10 positions are
                                                         International
                                                         Economists. Of the
                                                         10, 1 position has
                                                         been filled and
                                                         offers have been
                                                         made to qualified
                                                         individuals to fill
                                                         the other 9.
    Benefits..........................             215
    Travel............................             200
    Rent, Utilities, Misc.............             100
    Other Services\1\.................           1,233
    Supplies..........................               7
    Equipment.........................              14
                                       -------------------------------------
          Total.......................           2,730
    ------------------------------------------------------------------------
    \1\ Includes SEAT Management computer equipment/software, training,
      translation services, security review/clearances, and other services.

        Question. How many FTE are currently working in the Office of
    Terrorist Financing?
        Answer. Currently, there are 11 FTEs in the Executive Office for
    Terrorist Financing and Financial Crimes.
        Question. Please provide the justifications and the methodology for
    determining the business strategy adjustments included in the fiscal
    year 2005 budgets of the Fiscal Bureaus.
        Answer. Treasury encourages its bureaus to review program
    performance for opportunities to redirect resources from obsolete and
    low performing programs to those which are mandatory or higher
    priority.
        The fiscal year 2005 budget request reflects these efforts for two
    of Treasury's bureaus which identified business strategy adjustments as
    follows:
      --The Financial Management Service request includes a reduction of
            $5.163 million. It is proposed that these costs will be
            reimbursed through the Debt Collection Program.
      --The Bureau of Public Debt request includes a $967,000 reduction as
            a result of withdrawal of the Series HH bonds.
        Question. A large portion of the Law Enforcement function was
    transferred from Treasury to Homeland Security and Justice in fiscal
    year 2003. Please define the Department's current role in the area of
    Law Enforcement.
        Answer. Treasury still plays an important role in law enforcement--
    our expertise, data, and resources are crucial for following the money
    and stopping financial crimes, including money laundering, terrorist
    financing, and tax-related fraud. Treasury is responsible for
    administering the Bank Secrecy Act, including many of the provisions in
    the USA PATRIOT Act. It also has the authority to employ Geographic
    Targeting Orders (31 USC 5326) to attack money laundering systems
    domestically, and to employ USA PATRIOT Act Section 311 ``special
    measures'' for foreign financial threats. A description of Treasury's
    Law Enforcement function by office follows:
      --Internal Revenue Service-Criminal Investigation Division (IRS-CI)
            is a crucial player investigation of criminal tax-related
            offenses and in the areas of money laundering and terrorist
            financing. IRS-CI has demonstrated its expertise by
            identifying, tracing and attacking the laundering of drug and
            other criminal enterprise proceeds, and assisting in the
            government's anti-terrorist financing investigations.
      --Treasury Inspector General for Tax Administration (TIGTA) is
            responsible for oversight of IRS operations and investigation
            of criminal assaults and threats against IRS facilities,
            personnel, and infrastructure. TIGTA plays an integral role in
            Treasury's liaison with the FBI Joint Terrorism Task Force and
            other Federal entities that share intelligence relating to
            threats.
      --Financial Crimes Enforcement Network (FinCEN) is the keeper of Bank
            Secrecy Act data, and serves as an information hub for the law
            enforcement community, working directly with law enforcement to
            provide support in the field.
      --The Office of Foreign Assets Control (OFAC) works directly with the
            law enforcement community--such as the former Customs bureau
            and the FBI--to ensure the application of the criminal law to
            those violating U.S. sanctions.
      --The Treasury Executive Office of Asset Forfeiture (TEOAF) manages
            asset forfeiture funds for the Treasury Department and the
            Department of Homeland Security. Treasury uses this
            responsibility to provide resources to law enforcement for key
            projects and initiatives that combat crime.
        Question. The fiscal year 2005 budget requests $20.3 million to
    complete the Treasury Building and Annex Repair and Restoration
    project. When is the scheduled completion date?
        Answer. The anticipated final completion date is December 2005.
    Phases 1 and 2 have been completed and Phase 3 is on schedule to be
    completed by August 2004. Phase 4 (final phase) has begun and all
    construction activities are planned for completion by December 2005.
    This completion date assumes the availability of the $7 million
    withheld from the fiscal year 2004 appropriation until further
    committee approval and full funding of the fiscal year 2005 budget
    request of $20.3 million.
        Question. Will this be the last year that an appropriation is
    necessary for this account?
        Answer. Yes, fiscal year 2005 will be the last year that we request
    funding for the TBARR account. However, some critical repairs to the
    Main Treasury building have been deferred or cancelled in order to meet
    the December 2005 deadline with no additional resources. It is
    anticipated that additional funding will be required in future years to
    complete these critical repairs and other deferred maintenance projects
    in the Main Treasury and Annex buildings. This funding will not be
    requested under the TBARR account but as on-going maintenance and
    replacement expenses through the Salaries and Expenses, no-year,
    Repairs and Improvements account.
        Question. The fiscal year 2005 budget request includes $1.9 million
    for the establishment of an Office of Emergency Preparedness. What will
    be the responsibilities of this new office? What office carried out
    this function in the past? Were there any appropriated expenses for
    this function/office in fiscal year 2004 and prior years?
        Answer. During this current fiscal year, the Department of Treasury
    recognized the importance of a more focused effort to establish and
    maintain viable and executable plans (in accordance with Presidential
    Decision Directive (PDD) 67, ``Enduring Constitutional Government'' and
    Executive Order (EO) 12656, ``Assignment of Emergency Preparedness
    Responsibilities''), to ensure the continuity of its essential
    functions during any conceivable emergency condition--especially
    conditions denigrating or eliminating Treasury's ability to operate
    from its downtown locations. More specifically, the Department of
    Treasury's Office of Emergency Preparedness (OEP) will be responsible
    for improving the operating capabilities in a number of critical areas
    listed below:
      --Treasury Emergency Management Center Operations;
      --Continuity of Operations (COOP) Planning, Operations, and Alternate
            Operating Facility;
      --Continuity of Government (COG) Planning, Operations, and Alternate
            Operating Facility;
      --Emergency Management Policy and Guidance;
      --Treasury Emergency Preparedness Test, Training & Exercise (TT&E)
            Program;
      --Coordination and Oversight of Treasury Bureau Emergency Management
            Programs;
      --Treasury Headquarters Evacuation and Shelter-in-Place Planning and
            Operations.
        The function of National Security Emergency Preparedness was
    previously in the Office of Security and Continuity Planning, in the
    Office of the Chief Information Officer. There were no expenses for
    this office in fiscal year 2003 and prior; however, we expect to
    obligate $177,000 in fiscal year 2004.
        Question. A large part of the Treasury request for Departmental
    Offices is related to reimbursing the Secret Service $2.4 million for
    protective service. Is the USSS the only force available to provide
    this protection? What were the costs related to this activity in fiscal
    year 2004?
        Answer. The USSS provides protection to the Secretary of the
    Treasury. In fiscal year 2004, the United States Secret Service (USSS)
    and the Department of the Treasury signed a Memorandum of Understanding
    whereby the Department of the Treasury would reimburse USSS for only
    the travel costs incurred protecting the Secretary, which were
    estimated at $1.2 million. Starting in fiscal year 2005, the Department
    of the Treasury will reimburse the USSS for the full cost of protecting
    the Secretary of the Treasury (including personnel compensation and
    overtime pay), currently estimated at $2.5 million.
        Question. How was the amount of $2.4 million derived (please
    provide detail)? With the payment by the Treasury Department of such
    expense, what is the likelihood that the USSS will begin to charge the
    Department for other costs associated with protection of the White
    House Complex that Treasury is a part of?
        Answer. On March 4, 2003, the President of the United States issued
    a memorandum to the Secretary of Homeland Security directing the USSS
    to continue providing physical protection for the Secretary of the
    Treasury. The funding estimates for providing this security were
    prepared by the USSS and a copy is provided below. We do not anticipate
    other additional costs associated with the protection of the Secretary
    of the Treasury. In addition to the protection provided by the USSS for
    the Secretary of the Treasury, the USSS also protects the Treasury
    Headquarters Building located to the east of the White House. Since the
    USSS is mandated by statute to protect the buildings in the White House
    complex, it has no authority to request reimbursement from the
    Department of the Treasury for protection of that building.

        Question. Has the analysis and proposal of this budget request
    included a cost analysis of other Government Building Security
    operations to determine that this is the best and most cost effective
    alternative for the Department?
        Answer. A cost analysis of other protective services was not
    performed because the Secret Service has traditionally protected the
    Secretary of the Treasury.
        Question. Does the budget proposal cover all costs that USSS can
    charge the department in fiscal year 2005?
        Answer. The Department anticipates the fiscal year 2005 cost will
    reflect increases for salaries, benefits and inflation. The USSS has
    not notified the Department of any other increases in fiscal year 2005.
        Question. Do other agencies pay the USSS for fulfilling their
    protective mission?
        Answer. Currently, the Secretaries of Homeland Security and
    Treasury are the only Federal agency heads who receive USSS protection.
    Since the USSS is part of the Department of Homeland Security, it
    provides physical protection to the Secretary of Homeland Security
    without reimbursement. Because the USSS is no longer a component of the
    Department of the Treasury, it is reimbursed for the cost of physical
    protection of the Secretary of the Treasury.
        Question. Please provide the total program costs for implementing
    and running HR Connect. With well over $200 million invested, is
    Treasury getting the value promised from this investment?
        Answer. Yes, Treasury is getting the value promised from its
    investment in HR Connect. The web-enabled system, now operational in
    all but one Treasury bureau, has the ability to replace the more than
    100 paper-intensive, bureau-unique systems that cost more than $23
    million annually to maintain. Of the 30 features envisioned for the
    system, 20 have been implemented, 6 are being developed now, and 4 have
    been subsumed by other efforts. In addition, the centralized system has
    provided Treasury with enterprise-wide reporting and sophisticated HR
    management tools. Unforeseen benefits have resulted, as well. The
    system has elevated Treasury's e-Government compliance level, and OPM
    has nominated HR Connect as one of four ``Best in Breed'' interoperable
    common HR solutions.
        Question. Is this system providing savings? If so, please provide
    the savings achieved since the program became operational.
        Answer. Significant savings have been realized with HR Connect. To
    date, quantitative benefits have been captured in three distinct
    categories: $7.8 million in productivity savings, $17.9 million in
    reduction of 222 staff from the HR organization, and $2 million annual
    operational savings through legacy systems retirement. (Productivity
    savings are attributable to time saved by line organizations, or non-HR
    staff. The HR Connect Program Office (HRCPO) anticipates that the saved
    time will not result in reduction of line staff, but rather in re-
    direction of staff to other mission critical activities.) In subsequent
    years, additional savings are anticipated. In fiscal year 2005, HRCPO
    estimates $10.0 million in productivity savings, $33.9 million in staff
    reductions, and $12.4 million in legacy savings. Additional staff
    reductions are expected throughout the 15-year program lifecycle, for a
    total staff reduction and redirection savings of $633.1 million. Legacy
    savings attributable to HR Connect should total $116 million by fiscal
    year 2012.
        Question. What is the yearly cost to maintain this system?
        Answer. The system requires approximately $20 million annually for
    operations and maintenance, excluding staffing costs. Technology
    refreshes and system upgrades will be conducted every 3 years for an
    additional cost of approximately $3 to $5 million.
        Question. Are all Treasury bureaus connected to this system?
        Answer. Eleven of Treasury's 12 bureaus have deployed and are
    operating HR Connect, except the Office of Thrift Supervision (OTS),
    which must convert to HR Connect's required e-Payroll provider, the
    National Finance Center (NFC), before deploying HR Connect. OTS is
    contemplating a delay in NFC conversion until April 2005, and
    deployment of HR Connect will follow shortly thereafter. Additionally,
    two former Treasury bureaus continue to operate HR Connect, despite a
    divestiture that moved them to other agencies. Those bureaus are
    Alcohol, Tobacco, Firearms, and Explosives, now in the Department of
    Justice, and the United States Secret Service, now in the Department of
    Homeland Security.
        Question. What is the annual cost of each bureau to run this
    system?
        Answer. During HR Connect's development and deployment phase, the
    primary source of program funding has been Congressional contributions
    to the DSCIP fund. In fiscal year 2005, the HRCPO requested
    approximately $17.5 million from Congress to fund the program's
    transition year to full operations and maintenance mode. Based on
    current estimates and new program requirements, which include the
    implementation of an ePerformance module to support the SES Pay for
    Performance initiative, the HRCPO predicts an additional $3 million
    will be needed in fiscal year 2005. Funding for this gap will be
    requested from the bureaus based on their proportionate share as
    presented in the table below.
        HRCPO is also recommending that, as an enterprise-wide solution,
    Treasury continue to request Congressional funding for program
    operations in the out years. If the recommendation is approved, the
    bureaus will not incur operations and maintenance costs for HR Connect
    in fiscal year 2006. If the recommendation is not approved, then the
    bureaus will contribute their proportionate share of the annual costs
    as presented below:

        Question. The budget request includes $1 million for a Turkey
    Financing facility. What will this facility provide?
        Answer. The Emergency Wartime Supplemental Act signed by the
    President on April 16, 2003 includes $1 billion in appropriations and
    authorization for up to $8.5 billion in loans to Turkey to help protect
    its economy from shocks from the war in Iraq and to maintain economic
    stability in a key regional ally. Treasury estimates that it will cost
    the Office of International Affairs an additional $1 million to
    continue to administer the Turkey Financing Facility.
        Question. Is this a one-time item or will it require funding over a
    number of years?
        Answer. The Facility anticipates making disbursements during fiscal
    year 2005 and fiscal year 2006, but this depends on when the Turkish
    government ratifies the Financial Agreement. Since disbursements from
    the Facility could be imminent and the work demand is front-loaded,
    Treasury has already received $1 million from the $1 billion
    appropriated under the Economic Support Fund (ESF) in the fiscal year
    2003 Emergency Wartime Supplemental for Turkey to cover expenses for
    fiscal year 2004.
        Question. The Department's budget includes over $5 million in E-gov
    initiatives. Please describe Treasury's initiatives.
        Answer. Treasury believes in the importance of E-government
    initiatives and has developed partnerships with industry and other
    Federal agencies to improve its interactions with citizens, businesses,
    and other Federal, State, and local government entities through the use
    of the Internet. Treasury is the lead agency for two E-government
    initiatives: Internal Revenue Service Free File and Expanded Electronic
    Tax Products for Businesses. The budget request for fiscal year 2005 is
    for the following initiatives:
      --Business Gateway.--The Small Business Administration (SBA) is the
            lead agency. This initiative will create a single business
            gateway portal to reduce the burden on businesses by making it
            easy to find, understand, and comply with Federal laws and
            regulations. Treasury assists the SBA with consolidation and
            synchronization of Federal paperwork requirements. Small
            businesses will be able to submit all of their information
            electronically to the Federal Government which then can be
            shared securely across Federal agencies.
      --E-Authentication.--The General Services Administration (GSA) is the
            lead agency. Treasury's Chief Information Officer (CIO) is the
            Chairperson for the Executive Steering committee. This
            initiative will minimize the burden on businesses, public, and
            government when obtaining online services. It is designed to
            provide the trusted and secure infrastructure--gateway,
            confirming the identity of electronic transaction participants.
            This initiative will enable Treasury to offer enterprise-wide
            applications with different assurance levels.
      --E-Records Management.--The National Archives and Records
            Administration (NARA) is the lead agency. This initiative will
            enable Treasury to increase the percentage of eligible data
            archived/preserved electronically. Unified guidance will
            provide consistency in implementing E-records management
            applications. It will also improve Treasury's ability to
            access/retrieve records.
      --E-Rulemaking.--The Environmental Protection Agency (EPA) is the
            lead agency. This initiative will enable citizens to search for
            agency rules from any desktop computer, and to post remarks
            online. E-Rulemaking will help Treasury and other agencies
            integrate their applications into the government-wide system.
            This will allow for a more citizen centric approach to the
            regulatory process by providing more centralized online access
            to regulatory material via Regulations.gov.
      --E-Training.--The Office of Personnel Management (OPM) is the lead
            agency. This initiative creates a premier E-training
            environment that supports development of the Federal workforce
            through simplified, one-stop access to high quality E-training
            products and services, advancing the accomplishment of agency
            missions.
      --E-Travel.--The General Services Administration (GSA) is the lead
            agency. This initiative will improve the internal efficiency,
            administrative performance, and regulatory compliance relative
            to travel. Redundant and stovepipe travel management systems
            will be eliminated through a buy-once/use many shared services
            approach. Therefore, capital investment, operations, and
            maintenance costs for travel management services will be
            minimized. Treasury will use this to bring world-class travel
            management and superior customer service to the Federal travel
            process.
      --Integrated Acquisition Environment (IAE).--The General Services
            Administration (GSA) is the lead agency. This initiative will
            reduce the burden for vendors doing business with the Federal
            Government. Achieve cost savings through consolidated vendor
            information, procurement data systems, use of common processes
            and reduce the cycle time of the procurement process. Treasury
            will benefit from the integration of IAE applications into
            Intra-governmental Transactions Exchange and the accessibility
            it will have to vendors.
        The following chart provides a summary of the Department's
    contributions for these E-government initiatives. Of the $7.5 million
    shown, $5.5 million will be paid from the Department-Wide Systems and
    Capital Investment Program (DSCIP) and the remainder from bureau
    appropriations. Departmental contributions to the Federal E-government
    initiatives listed above are in compliance with the President's
    Management Agenda to eliminate redundant systems, use improved
    Internet-based technology to make it easy for citizens and businesses
    to interact with the government, save taxpayer dollars, and streamline
    citizen-to-government communications.

                                   TREASURY CONTRIBUTIONS FOR E-GOVERNMENT INITIATIVES
    ----------------------------------------------------------------------------------------------------------------
                                                                                                        Fiscal Year
                                                                        Fiscal Year     Fiscal Year        2005
                               Initiative                              2003 Treasury   2004 Treasury    President's
                                                                          Actuals         Actuals         Request
    ----------------------------------------------------------------------------------------------------------------
    Business Gateway................................................              $0              $0      $2,500,000
    E-Authentication................................................       3,178,572         377,000         393,000
    EHRI............................................................               0               0               0
    E-Rulemaking....................................................         100,000         775,000         885,000
    E-Training......................................................               0       2,630,000       2,200,000
    E-Travel........................................................               0               0         988,832
    Expanding Electronic Tax Products...............................               0       3,200,000               0
    Grants.gov......................................................               0               0               0
    Integrated Acquisition Environment..............................         557,205         443,280         394,593
    IRS Free File...................................................               0               0               0
    E-Records Management............................................               0               0         100,000
                                                                     -----------------------------------------------
          Totals....................................................       3,835,777       7,425,280       7,461,425
    ----------------------------------------------------------------------------------------------------------------

        Question. What benefits are these initiatives providing to the
    Department?
        Answer. The President's Management Agenda (PMA) set the stage for
    Treasury to build upon its goal of simplifying and unifying IT efforts
    to optimize services. Treasury's involvement in these initiatives is
    based on benefits projected by the Managing Partners to each
    participating agency by providing an enterprise-wide application,
    elimination duplicative services, management of processes, and timely
    and responsive service to all citizens. The Managing Partners of each
    initiative can provide specific details on the costs savings to be
    realized overall by undertaking each initiative.
        Question. Does any of the funding relate to initiatives outside the
    Department of the Treasury?
        Answer. The funding request of over $5 million represents
    Treasury's contribution to these E-government initiatives. Treasury is
    partnering with these agencies to support of the President's Management
    Agenda (PMA). As one of the five pillars of the PMA, E-government is
    statutorily supported by the E-government Act, Clinger-Cohen Act, the
    Government Paper Elimination Act, and other legislation seeking to
    streamline electronic transactions and placing the Federal Government
    at citizens' fingertips through the use of digital technologies.
        Question. Please provide an update of the activities of the Office
    of Critical Infrastructure.
        Answer. The financial infrastructure of the United States is
    extremely resilient. It has been tested time and again by hurricanes,
    black outs, and terrorist attacks. Leaders within government and the
    private sector are continually enhancing the resilience of this
    financial infrastructure. Americans and, indeed, the world can have
    confidence that the financial infrastructure of the United States is
    better prepared than ever to handle man-made or natural disruptions.
        In the event of an increase in the threat level, the Department of
    the Treasury communicates regularly with the other Federal financial
    regulators regarding the situation and whether additional actions are
    necessary. In addition to these communications, Treasury and other
    Federal and State financial regulators, working in close cooperation
    with the Department of Homeland Security and the private sector, have:
      --Identified the payments, custodial, clearing, exchange, banking,
            trading, and other financial institutions that are most
            critical to our financial infrastructure.
      --Arranged for expert assessments of physical and cyber-
            vulnerabilities in critical financial institutions.
      --Arranged for critical financial institutions to have access to
            priority telecommunications services--both land-based and
            wireless--to help their voice and data communications get
            through during times of crisis.
      --Assisted in coordinating the protective response of State and local
            authorities with critical financial institutions.
      --Arranged for additional physical protection of critical financial
            institutions, consistent with available protective resources
            and the available threat information.
      --Established systems and procedures that enable the Federal
            financial regulators to communicate among themselves and with
            the private sector during times of crisis as well as in advance
            to mitigate risks to the financial infrastructure.
      --Promoted industry measures that maintain crucial financial
            communications among private sector participants.
      --Conducted numerous tests, drills, and exercises to ensure that back
            up systems work and to ensure that financial professionals know
            what to do in times of either a heightened alert or an actual
            attack.
      --Worked with the Financial Services Information Sharing and Analysis
            Center (FS-ISAC) to develop a more inclusive next-generation
            FS-ISAC business model that embraces all elements of the
            financial sector. The Treasury also acquired nearly $2 million
            in services from the FS-ISAC, which had the added benefit of
            making the next-generation FS-ISAC a reality. This next-
            generation FS-ISAC now delivers integrated physical and cyber
            alert information to Treasury and to thousands of financial
            institutions and provides a secure, confidential platform to
            help financial institutions respond to potential or actual
            disruptions.
      --Issued updated guidance on business continuity planning, including
            benchmarks for systemically critical payments and clearing
            organizations.
      --Enhanced the security of the government's critical financial
            functions, including: borrowing money; making payments--
            including social security payments; and raising revenue through
            the Internal Revenue Service.
      --Documented lessons learned by consumers, financial institutions,
            and government agencies in fighting the recent, dramatic rise
            in phishing attacks so that other consumers, financial
            institutions, and agencies could benefit from their experience.
      --Established a plan for working with the telecommunications, energy,
            information technology, and transportation sectors to address
            vulnerabilities introduced into the financial sector by
            interdependencies with these other sectors.
      --At the customer level, through the Office of Critical
            Infrastructure Protection, the Treasury leads administration
            efforts to improve policies and efforts to improve the security
            of personal financial information, particularly through efforts
            to fight identity theft. The Fair and Accurate Credit
            Transactions Act of 2003, and its implementation this year, are
            examples of how the Treasury has worked closely with Congress
            in this effort.
        In addition to these government activities, the private sector,
    with encouragement from and in cooperation with the Treasury, has taken
    important actions to protect the critical financial infrastructure. For
    example, the private sector has:
      --Greatly reduced single points of failure in the telecommunications
            infrastructure that supports the most critical financial
            institutions by, for example, establishing private, self-
            healing fiber-optic telecommunications circuits over
            alternative pathways.
      --Established improved business continuity plans.
      --Developed security guidelines for institutions of different sizes
            and locations to follow in response to changing threat levels.
      --Created new backup facilities at greater distance from their
            primary operations centers.
      --In many cases, geographically dispersed executive and operational
            leadership.
        Question. Please provide an update to the committee on the
    Department's efforts to meet its staffing divestiture goals as they
    relate to the final FTE transfers to the Department of Homeland
    Security.
        Answer. For a complete response, please see the attached report (as
    required by House Report 108-243) that the Department submitted to the
    Congress on June 3, 2004.
        [Clerk's Note.--The documents referred to have been retained in
    Committee files.]
        Question. The committee viewed the additional funding of 60
    positions in fiscal year 2004 as stopgap funding during the transition
    of deployment of personnel from Treasury to the new Homeland Security
    Department. The Treasury Department's fiscal year 2005 budget proposes
    permanent funding in the Departmental Offices base for the foreseeable
    future. The committee had requested a report on the status of reducing
    the remaining FTE, which were not reduced by the beginning of fiscal
    year 2004 as planned. What is the status of this important report?
        Answer. The report was submitted to the House and Senate
    Appropriations committees on June 3, 2004.
        Question. Is the original goal of transferring 226 FTE to Homeland
    no longer valid?
        Answer. For a complete response, please see the attached report (as
    required by Senate Report 108-146) that the Department submitted to the
    Congress on June 3, 2004.
        [Clerk's Note.--The documents referred to have been retained in
    Committee files.]
        Question. Has DHS communicated that they can now operate at the
    lower level and will require no further transfers from Treasury?
        Answer. DHS has not communicated the need for additional resources.
        Question. Has Treasury sought any technical assistance in reviewing
    its secure IT systems from any private entity or government agency?
    What entity or agency? What is the status of the review? If the review
    is concluded, what corrective actions were taken? What has Treasury
    done to address the concerns raised by the IG related to Departmental
    Offices computer system vulnerabilities?
        Answer. The Department of the Treasury has sought and received
    technical and administrative assistance from private entities. Booz
    Allen Hamilton, Inc. (BAH) and SRA International, Inc. have performed
    FISMA/Critical Infrastructure Protection (CIP) reviews of the security
    practices at the Departmental Offices (DO). Based on initial reviews,
    Treasury has already completed, or is in the process of completing, the
    following:
      --Conducted appropriate IT security training and awareness sessions.
      --Implemented applicable security policies and compliance programs.
      --Established a DO Computer Security Incident Response Center
            (CSIRC), reporting to Treasury's CSIRC.
      --Assessing and validating DO system applications inventory and
            conducting associated risk assessments and Certification and
            Accreditations (C&As), as necessary.
        Question. Does the Department have a fully operational COOP plan?
    Does the Department have what it needs to implement and operate their
    plan?
        Answer. The Department does have a fully operational COOP plan;
    however, there are still improvements required as identified in last
    year's GAO audit. In addition, as a result of lessons learned from the
    most recent FEMA exercise, Forward Challenge 2004, Treasury has
    identified other areas that require attention and improvement. For
    instance, Treasury still needs more robust communications for
    interoperability at the alternate sites to support its essential
    functions for COOP as stated in the GAO audit and the Federal
    Preparedness Circular (FPC) 65.
        Question. Please explain the policy, procedures and specific
    processes that Treasury applies to oversee and manage the Departmental
    Offices' resources (both FTE and dollars), including the salaries and
    expenses, DSCIP, and TBARR accounts.
        Answer. DO's Office of Financial Management prepares monthly
    reports for all appropriations that track both funding balances and FTE
    utilization. These reports are provided to the Assistant Secretary for
    Management, as well as office officials so that they can monitor their
    spending and make program decisions based on accounting reports. In
    addition, policies and procedures are in place for internal control
    purposes. At present, Management staff is reviewing, and updating as
    needed, all Departmental Office Orders and policies. We are also
    working with our policy offices to ensure that key department-wide
    directives are current. Our goal is to provide clear, transparent
    documentation and guidance to support optimal performance and
    decentralized oversight where possible--working together with all DO
    offices to maintain and observe proper financial and budgetary
    controls.

                                     DSCIP

        Question. How much does Treasury currently spend on Information
    Assurance? What IT security and functionality issues will the request
    in fiscal year 2005 provide that currently do not exist?
        Answer. Treasury supports internal cyber Critical Infrastructure
    Protection (CIP), bureau Federal Information Security Management Act
    (FISMA) program reviews, President's Management Agenda (PMA), and
    Public Key Infrastructure (PKI) policy management through the
    Department-wide Systems and Capital Investment programs (DSCIP)
    account. The $1 million requested for Information Assurance in fiscal
    year 2005 will build on the work being done in these areas to
    specifically address the assurance of secure internet communications
    with the Department, preventing cyber attacks and protecting against
    identity theft in key information systems.
        The fiscal year 2005 request provides for an automated Department-
    wide Patch Management and Verification Process. Treasury currently
    utilizes manual intensive processes to address its computer
    vulnerabilities from a reactive mode. The fiscal year 2005 request will
    be used to support the planning and implementation of this network
    security functionality as well as asset identification, protection and
    interdependency analysis.
        Question. The fiscal year 2005 budget requests $1 million for
    Operational Security. How was this program funded in the past? What
    added functionality will $1 million provide? Please provide the
    committee a detailed breakout and a spending plan for this request.
        Answer. The fiscal year 2005 funding request of $1 million provides
    for the implementation of a cohesive and comprehensive Security program
    for Treasury's Headquarters offices, including the Office of the
    Secretary and Policy Offices. Treasury's Headquarters offices have been
    without a formal IT security program for a number of years. This has
    been described by the Treasury Inspector General as a continuing
    material weakness and must be addressed.
        Efforts to address security training and awareness are a priority.
    The request of $1 million will provide for the following:
      --Issuance of policy and procedures ($100,000)
      --Certification and Accreditation of applicable systems (19 Systems--
            $300,000)
      --Project management ($100,000)
      --Compliance monitoring ($150,000)
      --Security Engineering and Network Services support ($350,000)
        Question. The budget requests $1 million for Treasury Enterprise
    Architecture. Please provide a detailed justification for this request.
        Answer. The request for $1 million is required to develop,
    validate, and begin implementation of a Treasury Enterprise
    Architecture (EA) management system. This funding requirement covers
    three functional areas in moving the Treasury EA to the end state ``To
    Be'' structure:
      --Enterprise Solutions--$500,000.--Development of the business case
            and management plans for the implementation of the ``To Be''
            consolidated infrastructure and Enterprise Architecture. It
            also includes contractor support to work with Treasury Bureaus
            in the identification of three to four enterprise solutions
            where Treasury can gain efficiencies. Currently, Treasury has
            identified office automation, telecommunications, and
            infrastructure as focus areas for possible cost avoidance/
            savings. Funding provided in this area will allow Treasury to
            ``drill down'' in each of these areas in the development of the
            EA.
      --Reusable Components--$300,000.--Funding is required for contractor
            support to identify and capitalize on opportunities to achieve
            economies of scale and leverage the collective buying power of
            the Department. Several Treasury Bureaus support the
            President's Management Agenda e-Government initiatives;
            however, managing IT activities from an enterprise level
            requires refinement and streamlining with the Federal e-
            Government managing partner. Bureaus are funding investments
            that overlap with one or more of the 24 Federal e-Government
            Initiatives to which the Department is already contributing.
            This requested funding supports the development of three to
            four reusable service components business cases and plans for
            implementation, transition plans, standard profiles, and
            elimination of duplicated e-Government services.
      --Federal EA (FEA) Reference Models--$200,000.--Funding is required
            for contractor support to develop the OMB FEA reference models.
            The FEA is constructed through a collection of interrelated
            ``reference models'' designed to facilitate agency analysis and
            the identification of duplicative investments, gaps, and
            opportunities for collaboration within and across the Federal
            Government. The models are the Performance Reference Model
            (PRM), the Business Reference Model (BRM), the Service
            Reference Model (SRM) and the Data and Information Reference
            Model (DRM). Completing these models facilitated the
            improvement in the Treasury Capital Investment Program. The
            data from these reference models will be incorporated into our
            portfolio management system. Development of these model works
            to ensure that the budget is allocated per Treasury priorities
            and key initiatives during the IT portfolio management process.

                 OFFICE OF TERRORISM AND FINANCIAL INTELLIGENCE

        Question. Please provide a detailed breakout of the total numbers
    of FTEs available to the organization, including all appropriated and
    non-appropriated funds from Departmental Offices, any other Treasury
    bureau funding, and any funding from another Federal agency that
    supports this office.
        Answer. Complete details of total FTE have not yet been finalized;
    however, Treasury anticipates that the Office of Terrorism and
    Financial Intelligence will oversee a staff of approximately 203
    employees. These FTEs are our current estimate; however, the numbers
    could change once the leadership is in place. With the exception of
    staff detailed from the Financial Crimes Enforcement Network (FinCEN),
    no bureau funding will be used to fund this office, nor will other
    Federal agencies fund this office. This organization will consist
    primarily of pre-existing offices that include the Executive Office for
    Terrorist Financing and Financial Crimes (EOTF/FC), the Treasury
    Executive Office of Asset Forfeiture (TEOAF), Office of Foreign Assets
    Control (OFAC), the Financial Crimes Enforcement Network (FinCEN) and
    the Office of Intelligence Support (OIS). The fiscal year 2005 FTE
    breakdown for those offices that will fall under the TFI umbrella is as
    follows:

    ------------------------------------------------------------------------
                             Office                                 FTE
    ------------------------------------------------------------------------
    Under Secretary \1\.....................................               8
    TFI (includes EOTF/FC and OIS) \1\......................              58
    TEOAF...................................................              17
    OFAC....................................................             120
                                                             ---------------
          Subtotal Departmental Offices.....................             203
    FinCEN \2\..............................................             292
                                                             ---------------
          TOTAL.............................................             495
    ------------------------------------------------------------------------
    \1\ Includes funding and FTE request from the Deputy Secretary that is
      currently under consideration by the Appropriations Committees.
    \2\ FinCEN's 292 FTE include 1 reimbursable.

        Question. Will the redirection of scarce resources from OFAC and
    FinCEN affect those organizations' ability to accomplish actual work
    fighting the war on terrorism?
        Answer. The small number of detailees from OFAC and FinCEN should
    have a minimal effect on those agencies' ability to accomplish their
    missions. Indeed, the detailing of these officers should yield closer
    coordination among OIA and OFAC and FinCEN, ensuring that the
    Department focuses on its highest priorities and allows it to move
    scarce resources across priority targets.
        Question. Deputy Secretary Bodman indicated in his testimony before
    the Senate Banking Committee that the Department will provide up to $2
    million from other areas to fund this office in fiscal year 2004.
    Please provide a detailed breakout of where these resources will be
    derived from.
        Answer. Since October 2003, many offices have experienced attrition
    and the dollars saved during the process of filling those positions
    will be used to start up this new office. Offices with the employee
    turnover that generated the funds are:

    ------------------------------------------------------------------------
                                                              Salary Savings
                             Office                           Generated from
                                                                 Turnover
    ------------------------------------------------------------------------
    Executive Direction Offices.............................        $324,000
    Tax Policy..............................................         270,000
    Domestic Finance........................................         112,000
    Economic Policy.........................................         182,000
    International Affairs...................................         518,000
    Treasury-Wide Management and Administration.............         575,000
                                                             ---------------
          Total.............................................       1,981,000
    ------------------------------------------------------------------------

        Question. In Treasury's press release of March 8, the Department
    announced the creation of the Office of Terrorism and Financial
    Intelligence. How will the Department fund this office? When?
        Answer. Start-up costs in fiscal year 2004 will be derived from
    salary savings in offices that have experienced employee turnover since
    the beginning of the fiscal year and a hiring freeze which has been in
    place since May. Once approved by the committee, funding will be
    programmed to the office on an as-needed basis, which will occur as the
    new office is staffed.
        Question. The fiscal year 2005 request does not provide funding for
    this new office. How much will it cost to staff and run this office in
    fiscal year 2005?
        Answer. The estimated additional cost for staffing and running this
    new office is approximately $4.6 million.
        Question. What is the vision for this office in 2 years? In 5
    years?
        Answer. The establishment of TFI will bring together Treasury's
    intelligence, regulatory, law enforcement, sanctions, and policy
    components, and enhance Treasury's efforts. As well, the new Office of
    Intelligence and Analysis (OIA) will address one of the longstanding
    issues identified in the Department of the Treasury, which is a lack of
    an integrated intelligence function that supports the Department and is
    linked directly into the Intelligence Community. Two primary functions
    are provided with the addition of OIA.
        The Department of the Treasury needs actionable intelligence that
    can be used to exercise its legal authorities under all or portions of
    such acts as the International Emergency Economic Powers Act (IEEPA),
    USA PATRIOT Act, the Bank Secrecy Act, the Drug Kingpin Act, and
    Trading with the Enemy Act. Analytical products from the intelligence
    community are largely intended to inform policymakers rather than
    taking action. They also tend to be highly classified, whereas Treasury
    often needs to use the lowest classification possible to use such
    material openly to press foreign governments or in evidentiary
    packages.
        OIA will also provide intelligence support to other senior Treasury
    officials on a wide range of other international economic and political
    issues of concern to the Department. Subsuming the functions of the
    current Office of Intelligence Support, OIA will continue to review
    incoming raw and finished intelligence from other agencies, and then
    select relevant items for senior officials. The intelligence advisors
    will also drive collection by drafting requirements for the
    intelligence agencies to ensure that Treasury's information needs are
    met. Moreover, they will continue to serve in a liaison capacity with
    the intelligence community and represent the Department in various
    intelligence-related activities.
        The Treasury Department is following a staged approach in the
    creation of TFI. This will ensure that the office will be able to work
    towards its short term goals while strengthening its capabilities and
    accomplishing its mission over the long term.
        Question. What specifically will this office do that is not already
    being done by the United States Government?
        Answer. The establishment of TFI will bring together Treasury's
    intelligence, regulatory, law enforcement, sanctions, and policy
    components, and enhance Treasury's efforts. As well, the new Office of
    Intelligence and Analysis (OIA) will address one of the longstanding
    issues identified in the Department of the Treasury, which is a lack of
    an integrated intelligence function that supports the Department and is
    linked directly into the Intelligence Community. Two primary functions
    are provided with the addition of OIA.
        The Department of the Treasury needs actionable intelligence that
    can be used to exercise its legal authorities under all or portions of
    such acts as the International Emergency Economic Powers Act (IEEPA),
    USA PATRIOT Act, Bank Secrecy Act, the Drug Kingpin Act, and Trading
    with the Enemy Act. Analytical products from the intelligence community
    are largely intended to inform policymakers rather than taking action.
    They also tend to be highly classified, whereas Treasury often needs to
    use the lowest classification possible to use such material openly to
    press foreign governments or in evidentiary packages.
        OIA will also provide intelligence support to other senior Treasury
    officials on a wide range of other international economic and political
    issues of concern to the Department. Subsuming the functions of the
    current Office of Intelligence Support, OIA will continue to review
    incoming raw and finished intelligence from other agencies, and then
    select relevant items for senior officials. The intelligence advisors
    will also drive collection by drafting requirements for the
    intelligence agencies to ensure that Treasury's information needs are
    met. Moreover, they will continue to serve in a liaison capacity with
    the intelligence community and represent the Department in various
    intelligence-related activities.
        The Treasury Department is following a staged approach in the
    creation of TFI. This will ensure that the office will be able to work
    towards its short term goals while strengthening its capabilities and
    accomplishing its mission over the long term.
        Question. What enhanced ability will this office give the
    Department?
        Answer. The creation of TFI will increase Treasury's efforts in
    several ways. The combined use of intelligence and financial data is
    the best way to detect how terrorists are exploiting the financial
    system and to design methods to stop them. By coordinating Treasury's
    intelligence functions and capabilities, TFI will benefit from enhanced
    analytical capabilities, as well as additional expertise and
    technology. Second, the USA PATRIOT Act gave the Department important
    new tools to detect and prevent the abuse of our financial system by
    terrorists and other criminals. TFI will coordinate Treasury's
    aggressive effort to enforce these regulations. Third, we have forged a
    strong international coalition to combat terrorist financing. The
    ongoing, cooperative efforts between the United States and our
    international partners are at unprecedented levels. The unified
    structure will promote a robust international engagement and allow us
    to intensify outreach to our counterparts in other countries. Finally,
    having a single office is the best way to ensure accountability and
    achieve results for this essential mission.
        Question. What functionality will this provide the U.S. Government
    that does not currently exist?
        Answer. The establishment of TFI will bring together Treasury's
    intelligence, regulatory, law enforcement, sanctions, and policy
    components, and enhance Treasury's efforts. As well, the new Office of
    Intelligence and Analysis (OIA) will address one of the longstanding
    issues identified in the Department of the Treasury, which is a lack of
    an integrated intelligence function that supports the Department and is
    linked directly into the Intelligence Community. Two primary functions
    are provided with the addition of OIA.
        The Department of the Treasury needs actionable intelligence that
    can be used to exercise its legal authorities under all or portions of
    such acts as the International Emergency Economic Powers Act (IEEPA),
    USA PATRIOT Act, the Bank Secrecy Act, the Drug Kingpin Act, and
    Trading with the Enemy Act. Analytical products from the intelligence
    community are largely intended to inform policymakers rather than
    taking action. They also tend to be highly classified, whereas Treasury
    often needs to use the lowest classification possible to use such
    material openly to press foreign governments or in evidentiary
    packages.
        OIA will also provide intelligence support to other senior Treasury
    officials on a wide range of other international economic and political
    issues of concern to the Department. Subsuming the functions of the
    current Office of Intelligence Support, OIA will continue to review
    incoming raw and finished intelligence from other agencies, and then
    select relevant items for senior officials. The intelligence advisors
    will also drive collection by drafting requirements for the
    intelligence agencies to ensure that Treasury's information needs are
    met. Moreover, they will continue to serve in a liaison capacity with
    the intelligence community and represent the Department in various
    intelligence-related activities.
        The Treasury Department is following a staged approach in the
    creation of TFI. This will ensure that the office will be able to work
    towards its short term goals while strengthening its capabilities and
    accomplishing its mission over the long term.
        The creation of TFI will increase Treasury's efforts in several
    ways. The combined use of intelligence and financial data is the best
    way to detect how terrorists are exploiting the financial system and to
    design methods to stop them. By coordinating Treasury's intelligence
    functions and capabilities, TFI will benefit from enhanced analytical
    capabilities, as well as additional expertise and technology. Second,
    the USA PATRIOT Act gave the Department important new tools to detect
    and prevent the abuse of our financial system by terrorists and other
    criminals. TFI will coordinate Treasury's aggressive effort to enforce
    these regulations. Third, we have forged a strong international
    coalition to combat terrorist financing. The ongoing, cooperative
    efforts between the United States and our international partners are at
    unprecedented levels. The unified structure will promote a robust
    international engagement and allow us to intensify outreach to our
    counterparts in other countries. Finally, having a single office is the
    best way to ensure accountability and achieve results for this
    essential mission.
        Question. Please provide an organizational chart for the proposed
    office.
        Answer. Please see the attached organizational chart.

        Question. Please provide the committee with the number of detailees
    from OFAC, FinCEN and other agencies that are expected to support the
    new office.
        Answer. To date, the Office of Intelligence Analysis has two
    employees detailed from OFAC, two detailed from FinCEN, and one
    detailed from CIA. Additional detailees have not yet been determined.
        Question. When will the detailees be returned to their parent
    agencies?
        Answer. They are currently on a 6-month detail. We will review the
    arrangement after the 6-month period is over. They can either renew
    their detail agreement or return to their home agencies.
        Question. Who will have day to day oversight of these employees?
        Answer. Those four officers are supervised by the Deputy Assistant
    Secretary for Intelligence and Analysis.
        Question. How many FTE and budget resources will be realigned from
    Departmental offices (excluding OFAC)?
        Answer. Approximately 27 FTEs will be realigned from DO in fiscal
    year 2005.
        Question. What other offices within the Department will be merged
    into this new structure?
        Answer. This structure will include the Executive Office for
    Terrorist Financing and Financial Crimes (EOTF/FC), the Treasury
    Executive Office of Asset Forfeiture (TEOAF), Office of Foreign Assets
    Control (OFAC), and the Office of Intelligence Support (OIS). There is
    always the possibility that other resources and synergies within
    Treasury can be found to amplify the efforts of TFI.
        Question. If this office is critical, will the Department send up a
    budget amendment to realign its internal resources to fund this new
    office?
        Answer. The administration does not intend to send up a budget
    amendment. In order to provide our perspective on the appropriate
    fiscal year 2005 funding levels, on June 25, 2004, the Treasury
    Department submitted a revised funding structure reflecting changes
    made to the DO account that can be viewed as an amendment to the Budget
    Justifications that we submitted to the committee in February 2004.
        Question. How many FTEs, funded or detailed, are proposed to work
    in this office by the end of fiscal year 2004? Please break out the
    numbers between the responsibilities of the two assistant secretaries.
        Answer. By the end of the fiscal year, the Department hopes to have
    191 employees in the new office. The estimated breakdown is as follows:

    ------------------------------------------------------------------------
                             Office                                 FTE
    ------------------------------------------------------------------------
    Under Secretary.........................................               6
    TFI (includes EOTFFC and OIS)...........................              48
    OFAC....................................................             120
    TEOAF...................................................              17
                                                             ---------------
          Subtotal Departmental Offices.....................             191
    FinCEN..................................................             292
                                                             ---------------
          Total.............................................             483
    ------------------------------------------------------------------------

        Question. Please provide a detailed explanation of the roles and
    responsibilities of each of the new assistant secretaries.
        Answer. The Office of the Assistant Secretary for Intelligence and
    Analysis (OIA) will be responsible for developing a robust analytical
    capability on terrorist financing. The office will draft actionable
    intelligence to support Treasury's efforts to exercise its legal
    authorities, including the USA PATRIOT Act, the International Emergency
    Economic Powers Act (IEEPA), the Drug Kingpin Act, the Bank Secrecy
    Act, and Trading with the Enemy Act. It will provide intelligence
    support to other senior Treasury officials on a wide range of
    international economic and political issues of concern to the
    Department. The Assistant Secretary for Intelligence and Analysis will
    serve as the Senior Official of the Intelligence Community (SOIC) and
    represent the Department in intelligence community fora, such as the
    National Foreign Intelligence Board committees and the Community
    Management Staff. Moreover, the Assistant Secretary will be responsible
    for managing the Department's security functions, including information
    security, personnel security, industrial security, physical security,
    and counterintelligence.
        The overall purpose of OIA is to ensure that the Treasury
    Department properly exploits the vast pools of financial data already
    collected by the Department and combines that data with the relevant
    intelligence collected by the intelligence community to create
    strategic and actionable financial intelligence and analysis to support
    Treasury's mission and authorities. For example, this analysis will be
    used to designate individuals under Presidential Executive Orders,
    target corrupt foreign financial institutions under Section 311 of the
    USA PATRIOT Act, guide regulatory policies and compliance, and direct
    strategic international engagement to set appropriate standards to
    safeguard the international financial system. OIA's priorities include
    identifying and attacking the financial infrastructure of terrorist
    groups; identifying and addressing vulnerabilities that may be
    exploited by terrorists and criminals in domestic and international
    financial systems; and promoting stronger relationships with our
    partners in the United States and around the world. A key long-term
    goal will be to ensure Treasury's full integration into the
    intelligence community, and ensure that the Secretary's economic and
    financial responsibilities are supported fully by the intelligence
    community.
        OIA is already responding to Treasury's urgent short-term needs. A
    small team of analysts has already begun to closely monitor and review
    current intelligence threat reporting. These analysts sit together in
    secure space in the Main Treasury building and ensure that Treasury can
    track, analyze possible financial angles, and then refer their analysis
    to relevant Treasury and U.S. government components for appropriate
    action. In the near term, the Treasury Department plans to develop its
    analytical capability through OIA in untapped areas, such as strategic
    targeting of terrorist financial networks as well as analyzing trends
    and patterns and non-traditional targets such as hawalas and couriers.
        The Office of the Assistant Secretary for Terrorist Financing (OTF)
    builds on the functions that have been underway at Treasury over the
    past year by developing, organizing, and implementing U.S. government
    strategies to combat terrorist financing and financial crime, both
    internationally and domestically. This office is the policy and
    outreach apparatus for the Treasury Department on the issues of
    terrorist financing, money laundering, financial crime, and sanctions.
    The Assistant Secretary is responsible for coordinating with other
    elements of the U.S. government, including law enforcement, and for
    working with the Federal regulatory agencies, both those within the
    Treasury Department such as the OCC and OTS and those outside such as
    the Federal Reserve, SEC and CFTC to ensure effective supervision for
    BSA and USA PATRIOT Act compliance.
        OTF will be the primary office responsible for formulating Treasury
    Department counter-terrorist financing and anti-money laundering
    policies and implementing Treasury's related regulatory, sanctions, and
    enforcement programs and authorities. These functions include the
    administration, implementation, and enforcement of Presidential
    Executive Orders, in particular, those related to the freezing of
    terrorist assets, as well as the administration and safeguarding of the
    Bank Secrecy Act, as expanded by the USA PATRIOT Act.
        In addition, OTF is responsible for integrating FinCEN, OFAC and
    TEOAF into these efforts. FinCEN provides a government-wide, multi-
    source intelligence and analytical network designed to support money
    laundering and other financial crime investigations, and it ensures the
    quality of the information it administers through outreach and
    regulatory action performed in the course of its administration of the
    BSA. OFAC has long administered and enforced economic and trade
    sanctions based on U.S. foreign policy and national security goals
    against targeted foreign countries, foreign terrorists, international
    narcotics traffickers, and those engaged in activities related to the
    proliferation of weapons of mass destruction. TEOAF provides oversight
    and management of Treasury's nationwide forfeiture program and the
    Treasury Forfeiture Fund. OTF also works in close partnership with IRS-
    CI to enforce terrorist financing, money laundering, and BSA laws.
        OTF leads and coordinates the U.S. representation at international
    bodies dedicated to fighting terrorist financing and financial crime
    such as the Financial Action Task Force (FATF) and increases our
    multilateral and bilateral efforts in this field. This office creates
    global solutions to evolving international problems, attack financial
    crime and safeguard the financial system by advancing international
    standards, conduct assessments, provide technical assistance, and apply
    protective countermeasures against high-risk foreign jurisdictions and
    financial institutions. Bilaterally, OTF works with foreign finance
    ministries--such as the Russian Finance Ministry--to craft strategies
    to jointly attack terrorist financing both globally and within specific
    regions, and with foreign financial intelligence units to establish
    special channels of information exchange.
        Question. Has the Department detailed FTE or expended funds from
    the Office of Foreign Assets Control? If there is a legal opinion
    related to this action, please provide such to the committee.
        Answer. As noted above, the Department has detailed two officers
    from OFAC. Treasury asked its attorneys to review the draft
    documentation for establishing the non-reimbursable details of two OFAC
    employees to the Office of Intelligence and Analysis in the
    Departmental Offices for a period of up to 6 months. That documentation
    explained that the two employees would provide OFAC with relevant
    financial intelligence, targets and leads that would be the basis for
    further analytical work to be performed by OFAC, and that this work
    directly furthers OFAC's mission by permitting the analysts to assist
    in the coordination of financial intelligence research and analysis on
    a Department-wide basis. On the basis of this information, the
    attorneys expressed no legal objection to the details. No formal legal
    opinion was issued.
        Question. Will all intelligence related to terrorist financing
    resident in the CIA, FBI, and Homeland Security become a part of this
    office? If not, why not?
        Answer. The Office of Intelligence and Analysis will draw
    intelligence reporting from the CIA, FBI, and DHS to produce its own
    analytical products in support of Treasury's mission. It is also in
    daily contact with its interagency counterparts regarding threat
    reporting and other counterterrorism issues.
        Question. How will the functions of this office differ from the
    Foreign Terror Asset Tracking Group (FTAT-G)?
        Answer. We are in the process of evaluating how OIA and the FTAT-G
    will interact to ensure no overlap arises.
        Question. How will it differ from the Terror Threat Integration
    Center (T-TIC)?
        Answer. TTIC has the primary responsibility in the United States
    for terrorism threat analysis and is responsible for the day-to-day
    terrorism analysis provided to the President and senior policymakers.
    OIA differs from TTIC in that it will focus primarily on the financial
    angle of counterterrorism issues. It will also specifically support
    Treasury's authorities and its relations with foreign counterparts.
        Question. Who will be the lead agency in overseas technical
    assistance that assists countries in learning about how to stop
    terrorists from using financial systems?
        Answer. The Treasury Department will continue to provide technical
    assistance to countries around the world to help build anti-money
    laundering and counter-terrorist financing capacity. The State
    Department leads the coordination of terrorist financing-related
    training efforts with the interagency Terrorist Financing Working Group
    (TFWG). The Treasury Department participates actively in TFWG.
        Question. Regarding intelligence gathering efforts, if the
    Department is currently obtaining intelligence on these issues, how it
    is being used to accomplish its mission?
        Answer. The Treasury Department uses intelligence for several
    purposes. Most significantly, we use the information to develop the
    legal basis to impose economic sanctions, ranging from a designation to
    designate a primary money laundering concern under Section 311 of the
    USA PATRIOT Act to action under E.O. 13224. Intelligence information is
    used to develop strategic direction, e.g., determining countries that
    are vulnerable to exploitation by terrorists and, therefore, priorities
    for technical assistance or diplomatic outreach.
        Within the Treasury Department, it can be used to designate a
    terrorist or narco-trafficker and it may be used to support an action
    for failure to comply with a designation, e.g., information may be
    provided to the FBI to support an investigation for providing support
    to a designated party--a criminal violation. It can be used to
    determine a primary money laundering concern or shared with a State or
    local law enforcement agency investigating a drug crime. It may be used
    by the Office of Critical Infrastructure Protection and Compliance
    Policy to evaluate a threat to the Treasury. Moreover, it may be used
    by the Office of the Under Secretary for Domestic Finance to identify
    vulnerabilities within the financial services industry's critical
    infrastructure that could be exploited. And, as previously discussed,
    it may be used by my senior staff and me as background for bilaterals
    with our foreign government colleagues.
        Question. Is this information coming from the intelligence
    community and law enforcement?
        Answer. Treasury receives information from the intelligence
    community and law enforcement, but also from our own analysis of
    information provided directly to Treasury under the Bank Secrecy Act,
    e.g., Suspicious Activity Reports (SARs) filed with the Financial
    Crimes Enforcement Network.
        Question. What intelligence is Treasury providing that the
    Intelligence Community does not already have access to?
        Answer. Information from the Bank Secrecy Act, such as Suspicious
    Activity Reports, and OFAC-related information from the banking
    community is managed by Treasury and is available to the intelligence
    community. The discussion of specific information available to the
    intelligence community is best left for a classified forum.

                              TERRORIST FINANCING

        Question. Is Treasury considered the finance ministry of the U.S.
    Government?
        Answer. Yes.
        Question. Who has primary jurisdiction over financial intelligence?
        Answer. No one agency has primary jurisdiction over financial
    intelligence. Different agencies use financial intelligence to support
    their specific missions. For example, the intelligence and law
    enforcement agencies use their collection and analysis on terrorist
    financing to support their operations. While consolidating financial
    intelligence into one agency could enhance accountability for outcomes
    under the statutes that Treasury enforces, other agencies will need the
    function to support their own missions.
        Question. Should Treasury be the home of the financial intelligence
    units in the U.S. Government?
        Answer. The term ``financial intelligence unit'' is a term-of-art
    that refers to the entity within a government that is responsible for
    receiving, analyzing, and disseminating information derived from
    suspicious activity reports and other money laundering-related reports
    from the financial sector. The Financial Crimes Enforcement Network
    (FinCEN) serves as the financial intelligence unit for the United
    States. FinCEN is an integral part of the Department of the Treasury
    and substantially benefits from Treasury's unique relationship with the
    financial community, the law enforcement community and the regulatory
    community.
        Question. Who is the Federal Government's lead agency in the war on
    terrorist financing?
        Answer. There is no one agency that is the lead agency in the war
    on terrorist financing. Each participating agency has a unique mission.
    The Treasury Department has the lead in safeguarding the integrity of
    the United States and international financial systems--including from
    abuse by terrorists and those who support them.
        Treasury has expertise throughout the Department that stretches
    across the entire anti-money laundering/counter-terrorist financing
    (AML/CTF) spectrum and allows it to deal with complicated issues
    associated with the movement of money and assets in the United States
    and international financial system. All of these components give
    Treasury the necessary broad perspective to create and implement
    strategies to safeguard the financial system against abuse.
        In its role safeguarding the financial systems both home and
    abroad, the Treasury Department utilizes numerous capabilities:
        Sanctions and Administrative Powers.--Treasury wields a broad range
    of powerful economic sanctions and administrative powers to attack
    various forms of financial crime, including E.O. 13224 and Section 311
    of the USA PATRIOT Act.
        Law Enforcement and Law Enforcement Support.--Treasury combats
    various forms of financial crime through the direct law enforcement
    actions of IRS-CI and the law enforcement support provided by FinCEN
    and Treasury's regulatory authorities.
        Financial Regulation and Supervision.--FinCEN administers the Bank
    Secrecy Act and issues and enforces AML/CTF regulations. Treasury
    further maintains close contact with the Federal financial
    supervisors--including the Treasury Department's Office of the
    Comptroller of the Currency and Office of Thrift Supervision--with the
    goal of ensuring that these regulations are being implemented
    consistently throughout the financial sectors. In addition, OFAC
    administers and enforces the various economic sanctions and
    restrictions imposed by statute and under the Secretary's delegated
    IEEPA authority.
        International Initiatives.--The Treasury Department is part of and
    has access to an extensive international network of Finance Ministries
    and Finance Ministry-related bodies such as the Financial Action Task
    Force (FATF) and various FATF-Style Regional Bodies, the International
    Monetary Fund (IMF), the World Bank, the G-7, and various multilateral
    development banks. In addition, Treasury is the critical facilitator
    for the international relationship between financial intelligence units
    organized through the Egmont Group.
        Private Sector Outreach.--As a result of our traditional role in
    safeguarding the financial system, Treasury has developed a unique
    partnership with the private sector. Through outreach programs such as
    the Bank Secrecy Act Advisory Group (BSAAG) and other regulatory and
    educational seminars and programs, Treasury maintains a close
    relationship with U.S. financial institutions to ensure a smooth
    exchange of information related to money laundering and terrorist
    financing. Treasury also maintains a close dialogue with the charitable
    sector to help it address its vulnerabilities to terrorist financing.
        The Office of Terrorism and Financial Intelligence (TFI) brings
    together Treasury's intelligence, regulatory, law enforcement,
    sanctions, and policy components, and enhances Treasury's efforts in
    combating terrorist financing and financial crime. TFI will work in
    coordination with its partners in the interagency community to ensure
    that its efforts complement and augment the important initiatives
    already underway.
        Question. What other agencies or departments are engaged in
    Treasury-related functions in terrorist financing?
        Answer. Treasury works with many agencies on terrorist-financing
    matters. In fact, E.O. 13224 requires Treasury to consult with the
    Department of Justice, Department of State, and Department of Homeland
    Security in making designation decisions. Treasury also ensures that
    our activities are part of a coordinated government approach. To that
    end, we also work with the Central Intelligence Agency, Department of
    Defense, and National Security Agency.
        Question. What is the cost and how much duplication is created when
    other agencies and departments engage in Treasury's responsibilities?
        Answer. Each agency brings its own expertise, jurisdictions, and
    capabilities to the tasks at large. This expertise is used to the
    advantage of our overall efforts in the war against terrorist
    financing. As long as there is effective coordination and
    collaboration, we maximize efficiency and minimize cost and
    duplication.
        Question. If there were a consolidation into one unit, would that
    allow the different agencies to focus on their core responsibilities
    and save resources to do more against terrorism?
        Answer. Treasury has no reason to believe that other agencies are
    not currently focusing on their core responsibilities.
        Question. Why was Treasury removed as the lead of the President's
    Coordinating Committee on terrorist financing?
        Answer. Reflecting the high importance that the White House places
    on this issue, the National Security Council (NSC) currently chairs the
    Policy Coordinating Committee (PCC) on Terrorist Financing. Treasury
    continues to play an important role on the PCC. The purpose of the PCC
    has always been to coordinate the policy direction and actions of the
    U.S. Government related to terrorist financing. As chair, we may have
    had administrative responsibilities and shared a useful tool in this
    campaign. As chair, we often found ourselves driving the process by our
    readiness to take one action--forcing discussion on other options that,
    on many occasions, were more appropriate for the government to pursue.
    As a participant, we continue to bring a useful tool to the campaign
    and, as before, find ourselves fostering discussions through our
    readiness to act, but being responsive to other methods for
    accomplishing the ultimate goal--severing the link between a source of
    money and some willing and able to commit an act of terrorism.
        Question. Should Treasury be the lead on all matters related to
    terror financing?
        Answer. The Treasury Department has the lead in safeguarding the
    integrity of the United States and international financial systems--
    including from abuse by terrorists and those who support them.
        Treasury has expertise throughout the Department that stretches
    across the entire anti-money laundering/counter-terrorist financing
    (AML/CTF) spectrum and allows it to deal with complicated issues
    associated with the movement of money and assets in the United States
    and international financial system. All of these components give
    Treasury the necessary broad perspective to create and implement
    strategies to safeguard the financial system against abuse.
        In its role safeguarding the financial systems both home and
    abroad, the Treasury Department utilizes numerous capabilities:
        Sanctions and Administrative Powers.--Treasury wields a broad range
    of powerful economic sanctions and administrative powers to attack
    various forms of financial crime, including E.O. 13224 and Section 311
    of the USA PATRIOT Act.
        Law Enforcement and Law Enforcement Support.--Treasury combats
    various forms of financial crime through the direct law enforcement
    actions of IRS-CI and the law enforcement support provided by FinCEN
    and Treasury's regulatory authorities.
        Financial Regulation and Supervision.--FinCEN administers the Bank
    Secrecy Act and issues and enforces AML/CTF regulations. Treasury
    further maintains close contact with the Federal financial
    supervisors--including the Treasury Department's Office of the
    Comptroller of the Currency and Office of Thrift Supervision--with the
    goal of ensuring that these regulations are being implemented
    consistently throughout the financial sectors. In addition, OFAC
    administers and enforces the various economic sanctions and
    restrictions imposed by statute and under the Secretary's delegated
    IEEPA authority.
        International Initiatives.--The Treasury Department is part of and
    has access to an extensive international network of Finance Ministries
    and Finance Ministry-related bodies such as the Financial Action Task
    Force (FATF) and various FATF-Style Regional Bodies, the International
    Monetary Fund (IMF), the World Bank, the G-7, and various multilateral
    development banks. In addition, Treasury is the critical facilitator
    for the international relationship between financial intelligence units
    organized through the Egmont Group.
        Private Sector Outreach.--As a result of our traditional role in
    safeguarding the financial system, Treasury has developed a unique
    partnership with the private sector. Through outreach programs such as
    the Bank Secrecy Act Advisory Group (BSAAG) and other regulatory and
    educational seminars and programs, Treasury maintains a close
    relationship with U.S. financial institutions to ensure a smooth
    exchange of information related to money laundering and terrorist
    financing. Treasury also maintains a close dialogue with the charitable
    sector to help it address its vulnerabilities to terrorist financing.
        The Office of Terrorism and Financial Intelligence (TFI) brings
    together Treasury's intelligence, regulatory, law enforcement,
    sanctions, and policy components, and enhances Treasury's efforts in
    combating terrorist financing and financial crime. TFI will work with
    its partners in the interagency community to ensure that its efforts
    complement and augment the important initiatives already underway.
        Treasury has a central role to play in the overall fight against
    terrorist financing due to our unique responsibilities and position
    within the government and with respect to the financial sector. Of
    course, many agencies have important roles to play and have the lead in
    their specific areas of expertise. The FBI, for example, has the lead
    in terrorist financing investigations. This does not diminish from
    Treasury's role or responsibilities.
        Question. Has Treasury's role on the PCC for Terrorist Financing
    changed since being replaced as the chair?
        Answer. Treasury continues to play an important role on the PCC.
    The purpose of the PCC has always been to coordinate the policy
    direction and actions of the U.S. government related to terrorist
    financing. As chair, we may have had administrative responsibilities
    and shared a useful tool in this campaign. As chair, we often found
    ourselves driving the process by our readiness to take one action--
    forcing discussion on other options that, on many occasions, were more
    appropriate for the government to pursue. As a participant, we continue
    to bring a useful tool to the campaign and, as before, find ourselves
    fostering discussions through our readiness to act, but being
    responsive to other methods for accomplishing the ultimate goal--
    severing the link between a source of money and some willing and able
    to commit an act of terrorism.
        Question. The Secretary indicated in his testimony before the
    subcommittee that there are clear lines of responsibility between
    Treasury and Homeland. Please provide a detailed description of the
    responsibilities of both Departments as they relate specifically to
    terrorist financing. Please include any Memorandum of Understanding or
    relevant documents for the record. Please also differentiate the role
    of Cornerstone from the Department's role.
        Answer. The most fundamental responsibility of the Treasury
    Department is the safeguarding of the soundness and integrity of the
    United States and international financial systems. Treasury meets this
    responsibility through a wide range of programs, ranging from domestic
    regulatory actions to far-reaching international initiatives through
    the International Monetary Fund, participation in multilateral groups
    such as the Financial Action Task Force and the World Bank. Each of
    these programs benefits from the historic, deep and ongoing
    relationship that Treasury maintains with the U.S. financial community
    and our support for law enforcement investigative initiatives through
    financial powers unique to the Department of the Treasury.
        Of course, a vital component of our overall efforts is the
    protection of the U.S. financial system from abuse by terrorist
    financiers, money launderers and other financial criminals. Central to
    these efforts are such Treasury components as the Executive Office for
    Terrorist Financing and Financial Crimes (EOTF/FC), Office of Foreign
    Assets Control (OFAC), Financial Crimes Enforcement Network (FinCEN),
    the Treasury Executive Office of Asset Forfeiture (TEOAF) and the
    Office of Critical Infrastructure Protection and Compliance Policy, and
    will soon include the newly-established Office of Terrorism and
    Financial Intelligence. Each of these offices works closely with the
    U.S. law enforcement community--including the FBI, DEA, IRS-CI, U.S.
    Secret Service, U.S. Postal Inspection Service, and the Bureau of
    Immigration and Customs Enforcement (ICE)--to ensure that criminals
    seeking to use and abuse the U.S. financial system are identified and
    brought to justice.
        FinCEN, as the administrator of the Bank Secrecy Act, ensures that
    information reported under that act is provided to law enforcement
    agencies such as the Bureau of Immigration and Customs Enforcement
    (ICE). In addition to making the fruits of this activity available to
    law enforcement, FinCEN also uses its analytical resources to mine the
    data to support existing law enforcement cases on request, as well as
    to proactively identify potential new cases for law enforcement. FinCEN
    provides guidance to industry to ensure that its regulatory efforts are
    directed at law enforcement concerns, and takes enforcement action as
    necessary to ensure that its regulations are being followed. In
    addition, FinCEN publishes a number of analytical products to help law
    enforcement understand the financial system and follow the money, and
    to help the financial industry improve its monitoring and reporting of
    suspicious activity. Finally, in the international context, FinCEN's
    relationship with its counterpart financial intelligence units provides
    tremendous information where funds are flowing into or out of the
    United States, and are available for appropriate use by ICE as well as
    all Federal law enforcement investigating financial crimes. A large
    portion of FinCEN's budget is devoted to developing and supporting its
    systems and analytical tools to assist and complement the financial
    investigatory effort of programs such as Cornerstone, which Treasury
    welcomes. We look forward to a continued close cooperation with ICE in
    our efforts to combat financial crimes.
        Question. The Bureau of Immigration and Customs Enforcement (BICE)
    administers the Systematic Homeland Approach to Reducing Exploitation
    program (SHARE) where BICE will be joined by U.S. Secret Service to
    jointly conduct semiannual meetings with members of the banking and
    trade communities impacted by money laundering, identity theft and
    other financial crime. There is no mention of Treasury in the DHS press
    announcement or on the web page.
        Does Treasury participate in these meetings? If so, please provide
    the materials presented in the last meeting to the private sector.
        Answer. We understand from DHS that there have been no meetings to
    date under the SHARE auspices.
        Question. Why is BICE taking the lead when it comes to dealing with
    financial institutions? Isn't this Treasury's role? What information is
    DHS providing that Treasury doesn't?
        Answer. The Treasury Department has the lead in protecting the
    integrity of the U.S. financial sector and in dealing with financial
    institutions. Treasury would welcome efforts by DHS to provide the
    financial community with information related to DHS enforcement issues.
    For example, the Secret Service plays an important role in the
    investigation of counterfeiting U.S. currency, credit card fraud and
    identity theft.
        Question. Does FinCEN deliver BSA data to BICE? Is it a gross data
    transfer? Does BICE have data mining software that is similar to what
    FinCEN was created to do? If so, what functionality for the financial
    industry is FinCEN providing?
        Answer. Under a legacy process in place when certain ICE agents
    were employees of the U.S. Customs Service and part of Treasury, FinCEN
    provided a direct download of BSA data into the Treasury Enforcement
    Communications System (TECS), which is now administered by the
    Department of Homeland Security. We are not familiar with ICE's current
    data mining tools.
        FinCEN, as administrator of the BSA and as mandated in Section 361
    of the USA PATRIOT Act, has the responsibility for communicating with
    the financial industry about BSA matters. In meeting this obligation,
    FinCEN:
      --Participates in numerous conferences and seminars being held
            throughout the year across the country;
      --Participates in compliance training workshops;
      --Chairs and conducts regular meetings with the BSA Advisory Group
            and its subcommittees;
      --Interacts on a daily basis with bank officials throughout the
            country regarding various aspects of BSA compliance;
      --Conducts customer surveys;
      --Produces publications such as the The Suspicious Activity Review, a
            semiannual publication providing feedback and guidance to
            financial institutions on BSA reporting and anti-money
            laundering requirements; and
      --Provides interaction with the financial institutions through its
            Regulatory Help Line, which handles more than 5,000 calls a
            year, and through website postings of regulations, guidance,
            comment letters and other regulatory-related materials.
        Question. This sounds virtually identical to the mission of FinCEN
    and the Treasury Department. How are the two roles different?
        Answer. The missions are quite distinct. FinCEN is responsible for
    administering the Bank Secrecy Act. In that role, FinCEN is ultimately
    responsible for the collection, maintenance, analysis and dissemination
    of information collected under that Act. FinCEN has a statutory mandate
    to provide feedback to the industry. FinCEN provides guidance to the
    financial industry to ensure that its regulatory efforts are directed
    at law enforcement concerns, and takes enforcement action as necessary
    to ensure that its regulations are being followed. In addition, FinCEN
    publishes a number of analytical products to help law enforcement
    understand the financial system and follow the money, and to help the
    financial industry improve its monitoring and reporting of suspicious
    activity. Finally, in the international context, FinCEN is the United
    States financial intelligence unit and is responsible for the Egmont
    secure web, providing the Egmont Group, an international collection of
    financial intelligence entities charged with the collection and
    analysis of financial information to help prevent money laundering and
    other illicit finance, with the ability to communicate with one another
    via secure e-mail, posting and assessing information regarding trends,
    analytical tools, and technological developments. Currently, 76 of the
    94 countries are connected to the Egmont Secure Web. In this area,
    FinCEN is unique in that it supports all of U.S. law enforcement and
    assists all international Egmont partners.
        Question. What provisions of the National Money Laundering Strategy
    does Treasury enforce?
        Answer. The National Money Laundering Strategy is not an
    enforcement document, but rather a document setting forth the
    President's overarching goals in a variety of areas to identify and
    combat money laundering, terrorist financing and other financial
    crimes.
        Question. Is this strategy essential to coordinating the government
    goals to fight money laundering?
        Answer. The Department believes that the requirement of drafting a
    national Strategy has been beneficial in that it has required the
    principal U.S. government anti-money laundering and anti-terrorist
    financing regulators and law enforcement investigators and prosecutors,
    as well as the intelligence community to discuss overarching goals and
    directions, as well as to identify trends and emerging threats. The
    resulting Strategies reflect those interagency discussions.
        Question. Has the administration transmitted a reauthorization
    proposal to Congress regarding the National Money Laundering Strategy?
        Answer. I am not aware of a formal submission.
        Question. The Secretary also indicated in his testimony that the
    Treasury Department is the lead agency for interdicting the flows of
    terrorist financing in the financial system and that Homeland Security
    is only responsible for the protecting the physical structures, but not
    the financial system itself.
        Is there any written understanding between the Department of
    Homeland Security and the Department of the Treasury that clearly
    delineates the roles of the two agencies?
        Answer. There are no written procedures delineating respective
    roles.
        Question. Is there an MOU or other document between Justice and
    Treasury that defines the roles and missions of each Department in
    terrorist financing? Please provide a copy of any written
    understandings.
        Answer. I am not aware of an MOU.
        Question. The Memorandum of Understanding between the Justice
    Department and Homeland Security Department that establishes the
    Federal Bureau of Investigation as the lead in all terrorist financing
    investigations. What is the role of Treasury in investigating terrorist
    financing investigations? Why is the Department excluded from an MOU
    where Treasury has a major stake in the decisions being made?
        Answer. The MOU referenced was necessary to provide clarity of
    jurisdiction so as to ensure proper coordination of law enforcement
    investigations of terrorist financing. The Treasury Department's law
    enforcement and support entities (IRS-CID, FinCEN, and OFAC) support
    the FBI-led Joint Terrorism Task Forces (JTTFs) on terrorist financing
    investigations. We see no need for Treasury to have been a signatory to
    an MOU allocating responsibility for domestic operational
    investigations of terrorist financing between the FBI and ICE.
        Question. Who is the agency primarily responsible for safeguarding
    the integrity of America's financial systems?
        Answer. The most fundamental responsibility of the Treasury
    Department is the safeguarding of the soundness and integrity of the
    United States and international financial systems. Treasury meets this
    responsibility through a wide range of programs, ranging from domestic
    regulatory actions to far-reaching international initiatives through
    the International Monetary Fund, participation in multilateral groups
    such as the Financial Action Task Force and the World Bank. Each of
    these programs benefits from the historic, deep and ongoing
    relationship that Treasury maintains with the U.S. financial community
    and our support for law enforcement investigative initiatives through
    financial powers unique to the Department of the Treasury. Although
    other agencies have primacy in the regulation of specific sectors of
    the U.S. financial system, no other agency has this overarching
    responsibility.
        Of course, a vital component of our overall efforts is the
    protection of the U.S. financial system from abuse by terrorist
    financiers, money launderers and other financial criminals. Central to
    these efforts are such Treasury components as the Executive Office for
    Terrorist Financing and Financial Crimes (EOTF/FC), Office of Foreign
    Assets Control (OFAC), Financial Crimes Enforcement Network (FinCEN),
    the Treasury Executive Office of Asset Forfeiture (TEOAF) and the
    Office of Critical Infrastructure Protection and Compliance Policy, and
    will soon include the newly-established Office of Terrorism and
    Financial Intelligence. Each of these offices works closely with the
    U.S. law enforcement community--including the FBI, DEA, IRS-CI, U.S.
    Secret Service, U.S. Postal Inspection Service, and ICE--to ensure that
    criminals seeking to use and abuse the U.S. financial system are
    identified and brought to justice.
        FinCEN, as the administrator of the Bank Secrecy Act, ensures that
    information reported under that act is provided to law enforcement
    agencies such as the Bureau of Immigration and Customs Enforcement. In
    addition to making the fruits of this activity available to law
    enforcement, FinCEN also uses its analytical resources to mine the data
    to support existing law enforcement cases on request, as well as to
    proactively identify potential new cases for law enforcement. FinCEN
    provides guidance to industry to ensure that its regulatory efforts are
    directed at law enforcement concerns, and takes enforcement action as
    necessary to ensure that its regulations are being followed. In
    addition, FinCEN publishes a number of analytical products to help law
    enforcement understand the financial system and follow the money, and
    to help the financial industry improve its monitoring and reporting of
    suspicious activity. Finally, in the international context, FinCEN's
    relationship with its counterpart financial intelligence units provides
    tremendous information where funds are flowing into or out of the
    United States, and are available for appropriate use by ICE as well as
    all Federal law enforcement investigating financial crimes. A large
    portion of FinCEN's budget is devoted to developing and supporting its
    systems and analytical tools to assist and complement the financial
    investigatory effort of programs such as Cornerstone, which Treasury
    welcomes. We look forward to a continued close cooperation with ICE in
    our efforts to combat financial crimes.
        Question. What agency is ultimately responsible for fighting the
    financial war on terrorism?
        Answer. Several agencies work together in fighting the financial
    war on terrorism. The Treasury Department has the lead in safeguarding
    the integrity of the United States and international financial
    systems--including from abuse by terrorists and those who support them.
        Treasury has expertise throughout the Department that stretches
    across the entire anti-money laundering/counter-terrorist financing
    (AML/CTF) spectrum and allows it to deal with complicated issues
    associated with the movement of money and assets in the United States
    and international financial system. All of these components give
    Treasury the necessary broad perspective to create and implement
    strategies to safeguard the financial system against abuse.
        In its role safeguarding the financial systems both home and
    abroad, the Treasury Department utilizes numerous capabilities:
        Sanctions and Administrative Powers.--Treasury wields a broad range
    of powerful economic sanctions and administrative powers to attack
    various forms of financial crime, including E.O. 13224 and Section 311
    of the USA PATRIOT Act.
        Law Enforcement and Law Enforcement Support.--Treasury combats
    various forms of financial crime through the direct law enforcement
    actions of IRS-CI and the law enforcement support provided by FinCEN
    and Treasury's regulatory authorities.
        Financial Regulation and Supervision.--FinCEN administers the Bank
    Secrecy Act and issues and enforces AML/CTF regulations. Treasury
    further maintains close contact with the Federal financial
    supervisors--including the Treasury Department's Office of the
    Comptroller of the Currency and Office of Thrift Supervision--with the
    goal of ensuring that these regulations are being implemented
    consistently throughout the financial sectors. In addition, OFAC
    administers and enforces the various economic sanctions and
    restrictions imposed by statute and under the Secretary's delegated
    IEEPA authority.
        International Initiatives.--The Treasury Department is part of and
    has access to an extensive international network of Finance Ministries
    and Finance Ministry-related bodies such as the Financial Action Task
    Force (FATF) and various FATF-Style Regional Bodies, the International
    Monetary Fund (IMF), the World Bank, the G-7, and various multilateral
    development banks. In addition, Treasury is the critical facilitator
    for the international relationship between financial intelligence units
    organized through the Egmont Group.
        Private Sector Outreach.--As a result of our traditional role in
    safeguarding the financial system, Treasury has developed a unique
    partnership with the private sector. Through outreach programs such as
    the Bank Secrecy Act Advisory Group (BSAAG) and other regulatory and
    educational seminars and programs, Treasury maintains a close
    relationship with U.S. financial institutions to ensure a smooth
    exchange of information related to money laundering and terrorist
    financing. Treasury also maintains a close dialogue with the charitable
    sector to help it address its vulnerabilities to terrorist financing.
        The Office of Terrorism and Financial Intelligence (TFI) brings
    together Treasury's intelligence, regulatory, law enforcement,
    sanctions, and policy components, and enhances Treasury's efforts in
    combating terrorist financing and financial crime. TFI will work in
    coordination with its partners in the interagency community to ensure
    that its efforts complement and augment the important initiatives
    already underway.
        Treasury has a central role to play in the overall fight against
    terrorist financing due to our unique responsibilities and position
    within the government and with respect to the financial sector. Of
    course, many agencies have important roles to play and have the lead in
    their specific areas of expertise. The FBI, for example, has the lead
    in terrorist financing investigations. This does not diminish from
    Treasury's role or responsibilities.
        Question. Is all information shared with Treasury from the Foreign
    Terror Asset Tracking Group (FTAT-G)?
        Answer. With respect to FTAT-G, the purpose of that entity is to
    provide a forum where the various agencies with what can be described
    as proprietary information can work together, each bringing their
    separate ``databases'' of information to bear on tracking assets. This
    information is used to develop reports that are used by decision-
    makers. Treasury has participated in the FTAT-G and, as a result, has
    had an opportunity to review and comment on working drafts and receives
    copies of all the final reports they prepare.
        Question. Does the Terror Threat Integration Center (T-TIC) clear
    all of its terrorist financing information with the Department?
        Answer. With respect to the TTIC, Treasury will become a party to
    the MOU authorizing the sharing of appropriate threat information.
    Treasury components will identify what, if any, information it may have
    covered by the MOU and will share.
        Question. With Treasury being the lead agency on terrorist
    financing, does all terror financing intelligence and investigations
    come through the Department? How? Does the Treasury Department
    coordinate these actions? How?
        Answer. All terrorist financing investigations do not come through
    the Department of the Treasury, nor should they. Just like OFAC
    designations, criminal investigation and prosecution are tools
    available to the United States in its war against the financing of
    terror. The Department, through its participation on the PCC, shares
    and receives information needed to make informed decisions concerning
    which anti-terrorist financing tools to apply in given circumstances.
        Question. Does the Department direct the actions or the resources
    that other agencies spend to fight terror financing?
        Answer. Treasury does not have the authority to direct the
    resources of other agencies.
        Question. Does the Department have any input on the resources that
    Homeland spends on Cornerstone, as an example?
        Answer. No.
        Question. According to the testimony of numerous witnesses, there
    seems to be a considerable amount of duplication in the Federal
    Government on the issue of terror financing. What agency is making the
    resource decisions in spending by Department on the amounts spent on
    terror financing? Does Treasury have any input in this process?
        Answer. The Office of Management and Budget (OMB) coordinates
    spending decisions. Treasury, like all agencies, works with OMB on
    those decisions.
        Question. Should there be an evaluation of the coordination and
    actions of these financial intelligence units? Is any agency doing
    this?
        Answer. There are existing fora for coordinating the actions of our
    financial intelligence functions. The National Security Council (NSC)
    oversees this coordination. We continuously work with the NSC and OMB
    to maximize our efforts developing financial intelligence and will
    continue to do so in the future. Treasury is always studying how we can
    best improve our efforts to meet our responsibilities, both within this
    agency and in cooperation with our sister agencies.
        The term ``financial intelligence unit'' is a term-of-art that
    refers to the entity within a government that is responsible for
    receiving, analyzing, and disseminating information derived from
    suspicious activity reports and other money laundering-related reports
    from the financial sector. The Financial Crimes Enforcement Network
    (FinCEN) serves as the financial intelligence unit for the United
    States. FinCEN is an integral part of the Department of the Treasury
    and substantially benefits from Treasury's unique relationship with the
    financial community, the law enforcement community and the regulatory
    community.
        Question. If the resources were provided, could Treasury enforce
    its responsibilities under the Patriot Act, allowing the other agencies
    to focus on their core missions?
        Answer. The Treasury Department believes that it is meeting its
    current USA PATRIOT Act responsibilities, but there is always more we
    can do. We have no reason to believe that other agencies are not
    focusing on their ``core missions.''
        Question. What resources would be necessary?
        Answer. The Treasury Department believes that it is meeting its
    current USA PATRIOT Act responsibilities, but there is always more we
    can do. We have no reason to believe that other agencies are not
    focusing on their ``core missions.''
        Question. How will Treasury enforce the provisions of the USA
    PATRIOT Act it is responsible for?
        Answer. Different components of the Department have differing
    ``enforcement'' responsibilities under both the BSA and the USA PATRIOT
    Act. For example, by virtue of a delegation order from the Secretary of
    the Treasury and an organic statute passed as part of the USA PATRIOT
    Act, FinCEN is charged with the responsibility of administering the
    regulatory regime of the BSA. In this capacity, among other things,
    FinCEN issues regulations and accompanying interpretive guidance;
    collects, analyzes and maintains the reports and information filed by
    financial institutions pursuant to BSA regulations; makes those reports
    and information available to law enforcement and regulators; and
    ensures financial institution compliance with the regulations through
    enforcement actions. The USA PATRIOT Act both refined and extended
    FinCEN's focus in carrying out these responsibilities.
        Amendments to the BSA by the USA PATRIOT Act sharpened FinCEN's
    responsibilities relating to the management of BSA information. For
    example, FinCEN designed and implemented the Patriot Act Communications
    System to provide a platform for electronically capturing at least 90
    percent of all BSA reports, and built information sharing and
    dissemination systems required under Section 314. FinCEN is also
    undertaking the ``BSA Direct'' initiative to significantly upgrade
    mandated requirements to ensure that it secures this sensitive
    information and that it audits its use; that it ``networks'' disparate
    agencies accessing the information to ensure more robust investigation
    and to ensure that investigations do not overlap; and to collect and
    provide feedback and other information to the entities reporting the
    information--the financial industry--so that reporting can be better
    and more relevant for law enforcement.
        The USA PATRIOT Act also extended FinCEN's regulatory
    responsibilities by accelerating expansion of BSA coverage to a broad
    range of new industries. Generally FinCEN's role involves such things
    as providing prompt BSA interpretive guidance to examiners, policy
    makers and the financial service industries, and ensuring the
    consistent application of the BSA regulations across industry lines,
    most notably through the rule making process and subsequent guidance.
    While FinCEN is responsible for ensuring compliance with the BSA
    regulatory regime, FinCEN does not itself examine financial
    institutions for compliance. Instead, FinCEN taps the resources and
    expertise of other Federal agencies and self-regulatory organizations
    by delegating to these agencies the responsibility for conducting
    compliance exams.
        FinCEN does have an important role in supporting the examination
    regime created through these delegations. To enhance this role, FinCEN
    will create a new program office devoted solely to the BSA examination
    function. The new structure will consolidate all examination support
    functions and better enable FinCEN to provide the necessary support to
    regulatory agencies conducting BSA compliance exams. As an initial
    priority, FinCEN plans to focus on assisting the IRS in its examination
    function, particularly in light of the new regulations that FinCEN has
    and will issue to bring thousands of additional businesses under the
    BSA anti-money laundering program provision.
        Since coordination among the functional regulators is essential for
    improving the overall compliance process, FinCEN will be working
    through the Bank Secrecy Act Advisory Group to identify, in
    coordination with the regulatory agencies, ways in which we can
    identify common compliance deficiencies, provide feedback and guidance
    to examiners, collaborate on a continuing basis on examination
    procedures, and engage in joint examiner training.
        As part of our investigation of the current BSA regulatory system's
    ability to enforce industry compliance with provisions of the BSA,
    FinCEN is pursuing a number of initiatives to improve such compliance
    through enforcement and other actions, including: creating a new
    Examination Program Office; dedicating analytical resources to
    compliance support and examination targeting; allocating resources to
    provide interpretive guidance to examiners; reviewing enforcement
    referral guidelines and reporting requirements to FinCEN; and focusing
    on compliance by money service businesses.
        FinCEN is also exploring ideas for enhanced coordination among the
    Federal regulators. These ideas include: identifying common compliance
    deficiencies; enhancing collaboration on examination procedures; and
    encouraging more joint examiner training. Treasury will work closely
    with FinCEN and the Federal regulators to develop these ideas and
    others as our investigation into the effectiveness of the current BSA
    compliance and enforcement system progresses.
        Finally, FinCEN retains the authority to pursue civil enforcement
    actions against financial institutions for egregious non-compliance
    with the BSA and the implementing regulations. Under the BSA, FinCEN is
    empowered to assess civil monetary penalties against, or require
    corrective action by, a financial institution committing negligent or
    willful violations.
        The IRS also has large BSA and USA PATRIOT Act enforcement
    responsibilities, both civilly and criminally. In addition to its
    primary jurisdiction, which is set forth in Title 26 of the United
    States Code (Internal Revenue Code), IRS-CI also has investigative
    jurisdiction involving other financial-related statutes. Beginning in
    1970, Congress enacted a number of laws that led to greater
    participation by CI in the financial investigative environment. The
    Currency and Foreign Transactions Reporting Act of 1970 (Bank Secrecy
    Act); The Comprehensive Crime Control Act of 1984; The Anti-Drug Abuse
    Acts of 1986 and 1988; Crime Control Act of 1990; The Annunzio-Wylie
    Anti-Money Laundering Act of 1992; The Money Laundering Suppression Act
    of 1994; The Antiterrorism and Effective Death Penalty Act of 1996; The
    Health Insurance Portability and Accountability Act of 1996; and the
    USA PATRIOT Act of 2001 all developed and refined the existing anti-
    money laundering and anti-terrorism laws under Titles 31 and 18 of the
    United States Code.
        Additionally, IRC, Section 6050 I, requires anyone involved in a
    trade or business, except financial institutions, to report currency
    received for goods or services in excess of $10,000 on a Form 8300.
        The combination of tax, money laundering and Bank Secrecy Act
    statutes enables IRS to identify and investigate tax evasion cases
    involving legal and illegal income sources. Ultimately, this
    versatility leverages IRS's ability to be a major contributor to many
    important national law enforcement priorities.
        Responsibility for ensuring compliance with the BSA and USA PATRIOT
    Act of all non-banking and financial institutions not otherwise subject
    to examination by another Federal functional regulator i.e., Money
    Service Businesses (MSBs), casinos and credit unions was delegated to
    the IRS by the Department of Treasury in December 1992. Under the
    delegation, IRS is responsible for three elements of compliance--the
    identification of MSBs, educational outreach to all three types of
    organizations, and the examination of these entities suspected of
    noncompliance. The IRS performs these compliance functions along with
    its criminal enforcement role.
        The processing and warehousing of BSA documents into the Currency
    Banking and Retrieval System (CBRS), including FBARs \1\, CTRs \2\,
    8300s \3\ and SARs \4\, are also the responsibility of the IRS. All
    documents entered into the CBRS (approximately 14 million annually) are
    made available to other law enforcement and regulatory agencies in
    addition to IRS. However, the IRS is the largest user of the CBRS.
    ---------------------------------------------------------------------------
        \1\ Foreign Bank & Financial Account Report (FBAR).
        \2\ Currency Transaction Report--(CTR) FinCEN Form 104 and FinCEN
    Form 103 (filed by casinos).
        \3\ Report of Cash Payments Over $10,000 Received in a Trade or
    Business (IRS and FinCEN form 8300).
        \4\ Suspicious Activity Reports (SARs)--filed by financial
    institutions when there is suspicious activity, as determined by the
    financial institution.
    ---------------------------------------------------------------------------
        To meet its obligations under 31 CFR 103.57(b) and Treasury
    Delegation Order 15-41 IRS ensures that certain financial institutions
    (FIs) are in compliance with their recordkeeping and reporting
    requirements under the Bank Secrecy Act.
        This is accomplished by a balanced civil and criminal program that
    includes:
      --identifying financial institutions (FIs) under IRS jurisdiction,
      --identifying those FIs that are actively involved in or facilitate
            money laundering and seek ways to end this activity,
      --conducting BSA compliance examinations to identify or uncover
            potential areas of noncompliance, money laundering trends,
            patterns, schemes, and forwarding the information for use in
            enhancing the National Anti-Money Laundering Strategy,
      --an aggressive effort to assist FIs for which IRS has jurisdiction
            in understanding their role in combating money laundering and
            to voluntarily meet their obligations under the BSA,
      --actively participating in coordinated multi-agency anti-money
            laundering initiatives such as GTOs, HIDTAs, HIFCAs, and SAR
            Review Teams designed to disrupt and dismantle money laundering
            organizations,
      --securing information on currency transactions which should have
            been reported or recorded and make available to law enforcement
            and other interested parties,
      --utilizing and evaluating various currency transaction reports as
            authorized for tax compliance activities.
        IRS's civil and criminal outreach efforts include State, and
    national associations affiliated with financial services industries.
    IRS provides keynote speakers, conducts seminars and provides
    educational programs relating to check cashers, bankers, tax
    practitioners, fraud examiners, corporate security personnel and bank
    security officers. This outreach and our efforts to contact money
    service businesses is a significant part of our program to identify and
    educate MSBs regarding their requirements to register their business
    with both the State and Federal Government.
        IRS has approximately 350 civil examiners assigned to the anti-
    money laundering program. These examiners are currently conducting
    5,576 examinations. In addition to the examination of non-banking
    financial institutions (NBFI), civil examiners also conduct reviews for
    compliance with the currency reporting requirements of Section 6050I of
    the Internal Revenue Code. As of March 31, 2004, the IRS NBFI database
    reflected over 88,000 potential NBFIs. From September 30, 2000 through
    May 2004, IRS has closed 13,288 examinations and conducted 5,940
    registration examinations.
        On June 3, 2004, the Comptroller of the Currency testified before
    the Senate Committee on Banking, Housing and Urban Affairs, and
    detailed the actions OCC is taking under both the BSA and USA PATRIOT
    Act to ensure anti-money laundering compliance. That testimony is
    available on the Department of the Treasury's web site.
        Question. Would the consolidation of financial intelligence into
    one Federal agency make the government more accountable for outcomes
    under the statutes that Treasury enforces?
        Answer. Different agencies use financial intelligence to support
    their specific missions. For example, the intelligence and law
    enforcement agencies use their collection and analysis on terrorist
    financing to support their operations. While consolidating financial
    intelligence into one agency could enhance accountability for outcomes
    under the statutes that Treasury enforces, other agencies will need the
    function to support their own missions.
        Question. On the Bureau of Immigration and Customs Enforcement
    (BICE) webpage is the following description of their role in terrorist
    financing:

        ``Cornerstone is ICE's premier financial crime program that seeks
    to identify vulnerabilities in financial systems through which
    criminals launder their illicit proceeds, bring the criminals to
    justice, eliminate the vulnerabilities, and develop a working
    partnership with industry representatives to share information and
    close industry-wide security gaps that could be exploited by money
    launderers and other criminal organizations. `Safeguarding the
    integrity of America's financial systems is a key part of homeland
    security,' said Secretary Ridge. Criminal organizations are seeking new
    ways to finance their operations, and the Department of Homeland
    Security is moving aggressively to identify vulnerabilities within U.S.
    financial systems that could be exploited to those ends.''

        Describe in detail Treasury's role in the BICE program described
    above.
        Answer. ICE is a law enforcement bureau within the Department of
    Homeland Security. We regard Operation Cornerstone as primarily a law
    enforcement investigative initiative of that bureau, and therefore have
    little involvement. That said, Operation Cornerstone does have a
    private sector outreach component, and Treasury is taking steps to
    ensure that this aspect of Cornerstone is coordinated with overall
    financial community outreach, a responsibility with which Treasury
    clearly is charged. Treasury's primary mechanism for such outreach is
    the Bank Secrecy Act Advisory Group (BSAAG), which is chaired by
    FinCEN.
        Question. Was Cornerstone a coordinated effort with Treasury? What
    is Treasury's role?
        Answer. As noted above, we regard Operation Cornerstone as
    primarily a law enforcement investigative initiative of that bureau,
    and therefore have had little involvement. That said, Operation
    Cornerstone does have a private sector outreach component, and Treasury
    is taking steps to ensure that this aspect of Cornerstone is
    coordinated with overall financial community outreach, a responsibility
    with which Treasury clearly is charged. Treasury's primary mechanism
    for such outreach is the Bank Secrecy Act Advisory Group (BSAAG), which
    is chaired by FinCEN.
        Question. Does Cornerstone share all of their money laundering and
    terrorist financing information with the Treasury Department?
        Answer. Operational law enforcement matters properly are handled by
    law enforcement agency or agencies, or joint task forces that are
    investigating the specific activities involved. It would not be
    appropriate for all information relating to such investigative
    operations to be shared with the Treasury Department.
        That said, DHS, DOJ and Treasury do routinely share new and
    developing money laundering trends and methodologies information to
    ensure that their enforcement and prosecutorial efforts stay abreast of
    the activities of the criminals. As to terrorist financing information,
    ICE has merged all of its terrorist financing activities into the FBI's
    Terrorist Financing Operations Section (TFOS). Additionally, Treasury,
    through IRS-CI, is an active participant in DOJ's JTTF, along with ICE
    and other law enforcement agencies.
        Question. How is this different from FinCEN's mission and also the
    mission of the Office of Critical Infrastructure? Please be specific.
        Answer. FinCEN is responsible for administering the Bank Secrecy
    Act. In that role, FinCEN is ultimately responsible for the collection,
    maintenance, analysis and dissemination of information collected under
    that Act. FinCEN has a statutory mandate to provide feedback to the
    industry. FinCEN provides guidance to industry to ensure that its
    regulatory efforts are directed at law enforcement concerns, and takes
    enforcement action as necessary to ensure that its regulations are
    being followed. FinCEN's primary mechanism for private sector outreach
    is the Bank Secrecy Act Advisory Group. In addition, FinCEN publishes a
    number of analytical products to help law enforcement understand the
    financial system and follow the money, and to help the financial
    industry improve its monitoring and reporting of suspicious activity.
    Finally, in the international context, FinCEN is the U.S. financial
    intelligence unit and is responsible for the Egmont secure web,
    providing the Egmont Group, an international collection of financial
    intelligence entities charged with the collection and analysis of
    financial information to help prevent money laundering and other
    illicit finance, with the ability to communicate with one another via
    secure e-mail, posting and assessing information regarding trends,
    analytical tools, and technological developments. Currently, 76 of the
    94 countries are connected to the Egmont Secure Web.
        The Office of Critical Infrastructure Protection and Compliance
    Policy works with the financial services sector and regulators on
    behalf of the Department in the area of critical infrastructure
    protection for the financial services sector. The Department is the
    agency of the U.S. government responsible for coordinating the
    development of policies to reduce vulnerabilities and increase
    resilience for the Nation's financial services sector critical
    infrastructure. This office develops policy formulations intended to
    increase the resilience of private sector financial services firms. The
    office also supports the Assistant Secretary for Financial
    Institutions, who chairs the Financial and Banking Information
    Infrastructure Committee, a grouping of Federal and State financial
    regulators that focuses on the resilience and integrity of financial
    sector infrastructure. Moreover, this office supports Treasury
    policymakers concerning the development of policies regarding
    information sharing, the protection of personal financial information,
    and remittances.
        Question. This seems to be not only complimentary of the Treasury
    mission; it seems to be the Treasury mission. Why is the Federal
    Government funding two different agencies in two Executive Branch
    Departments to do the same job?
        Answer. We view the Cornerstone initiative as complimentary and not
    as duplicative. The most fundamental responsibility of the Treasury
    Department is the safeguarding of the soundness and integrity of the
    U.S. and international financial systems. Treasury meets this
    responsibility through a wide range of programs, ranging from domestic
    regulatory actions to far-reaching international initiatives through
    the International Monetary Fund, participation in multilateral groups
    such as the Financial Action Task Force and the World Bank. Each of
    these programs benefits from the historic, deep and ongoing
    relationship that Treasury maintains with the U.S. financial community
    and our support for law enforcement investigative initiatives through
    financial powers unique to the Department of the Treasury.\5\
    ---------------------------------------------------------------------------
        \5\ For example, the most important tool in the United States
    arsenal to attack systemic money laundering is the Geographic Targeting
    Order (31 U.S.C.  5326) by and through which financial industry
    reporting can be reduced and more finely honed. In the international
    realm, use of PATRIOT Act Section 311 (31 U.S.C.  5318A) to target
    ``primary money laundering jurisdictions, accounts, financial
    institutions and others is a very potent weapon''.
    ---------------------------------------------------------------------------
        Of course, a vital component of our overall efforts is the
    protection of the U.S. financial system from abuse by terrorist
    financiers, money launderers and other financial criminals. Central to
    these efforts are such Treasury components as the Executive Office for
    Terrorist Financing and Financial Crimes (EOTF/FC), Office of Foreign
    Assets Control (OFAC), Financial Crimes Enforcement Network (FinCEN),
    the Treasury Executive Office of Asset Forfeiture (TEOAF) and the
    Office of Critical Infrastructure Protection and Compliance Policy, and
    will soon include the newly-established Office of Terrorism and
    Financial Intelligence. Each of these offices works closely with the
    U.S. law enforcement community--including the FBI, DEA, IRS-CID, U.S.
    Secret Service, U.S. Postal Inspection Service, and ICE--to ensure that
    criminals seeking to use and abuse the U.S. financial system are
    identified and brought to justice.
        FinCEN, as the administrator of the Bank Secrecy Act, ensures that
    information reported under that act is provided to law enforcement
    agencies such as the Bureau of Immigration and Customs Enforcement
    (ICE). In addition to making the fruits of this activity available to
    law enforcement, FinCEN also uses its analytical resources to mine the
    data to support existing law enforcement cases on request, as well as
    to proactively identify potential new cases for law enforcement. FinCEN
    provides guidance to industry to ensure that its regulatory efforts are
    directed at law enforcement concerns, and takes enforcement action as
    necessary to ensure that its regulations are being followed. In
    addition, FinCEN publishes a number of analytical products to help law
    enforcement understand the financial system and follow the money, and
    to help the financial industry improve its monitoring and reporting of
    suspicious activity. Finally, in the international context, FinCEN's
    relationship with its counterpart financial intelligence units provides
    tremendous information where funds are flowing in to or out of the
    United States, and are available for appropriate use by ICE as well as
    all Federal law enforcement investigating financial crimes. A large
    portion of FinCEN's budget is devoted to developing and supporting its
    systems and analytical tools to assist and complement the financial
    investigatory effort of programs such as Cornerstone, which Treasury
    welcomes. We look forward to a continued close cooperation with ICE in
    our efforts to combat financial crimes.
        Question. Considering that ICE and FBI have financial intelligence
    units with hundreds of staff devoted to financial intelligence, why
    should Treasury still be considered as the lead agency?
        Answer. The Treasury Department has the lead in safeguarding the
    integrity of the U.S. and international financial systems--including
    from abuse by terrorists and those who support them.
        Treasury has expertise throughout the Department that stretches
    across the entire anti-money laundering/counter-terrorist financing
    (AML/CTF) spectrum and allows it to deal with complicated issues
    associated with the movement of money and assets in the United States
    and international financial system. All of these components give
    Treasury the necessary broad perspective to create and implement
    strategies to safeguard the financial system against abuse.
        In its role safeguarding the financial systems both home and
    abroad, the Treasury Department utilizes numerous capabilities:
        Sanctions and Administrative Powers.--Treasury wields a broad range
    of powerful economic sanctions and administrative powers to attack
    various forms of financial crime, including E.O. 13224 and Section 311
    of the USA PATRIOT Act.
        Law Enforcement and Law Enforcement Support.--Treasury combats
    various forms of financial crime through the direct law enforcement
    actions of IRS-CI and the law enforcement support provided by FinCEN
    and Treasury's regulatory authorities.
        Financial Regulation and Supervision.--FinCEN administers the Bank
    Secrecy Act and issues and enforces AML/CTF regulations. Treasury
    further maintains close contact with the Federal financial
    supervisors--including the Treasury Department's Office of the
    Comptroller of the Currency and Office of Thrift Supervision--with the
    goal of ensuring that these regulations are being implemented
    consistently throughout the financial sectors. In addition, OFAC
    administers and enforces the various economic sanctions and
    restrictions imposed by statute and under the Secretary's delegated
    IEEPA authority.
        International Initiatives.--The Treasury Department is part of and
    has access to an extensive international network of Finance Ministries
    and Finance Ministry-related bodies such as the Financial Action Task
    Force (FATF) and various FATF-Style Regional Bodies, the International
    Monetary Fund (IMF), the World Bank, the G-7, and various multilateral
    banks. In addition, Treasury is the critical facilitator for the
    international relationship between financial intelligence units
    organized through the Egmont Group.
        Private Sector Outreach.--As a result of our traditional role in
    safeguarding the financial system, Treasury has developed a unique
    partnership with the private sector. Through outreach programs such as
    the Bank Secrecy Act Advisory Group (BSAAG) and other regulatory and
    educational seminars and programs, Treasury maintains a close
    relationship with U.S. financial institutions to ensure a smooth
    exchange of information related to money laundering and terrorist
    financing. Treasury also maintains a close dialogue with the charitable
    sector to help it address its vulnerabilities to terrorist financing.
        The Office of Terrorism and Financial Intelligence (TFI) brings
    together Treasury's intelligence, regulatory, law enforcement,
    sanctions, and policy components, and enhances Treasury's efforts in
    combating terrorist financing and financial crime. TFI will work in
    coordination with its partners in the interagency community to ensure
    that its efforts complement and augment the important initiatives
    already underway.
        Treasury has a central role to play in the overall fight against
    terrorist financing due to our unique responsibilities and position
    within the government and with respect to the financial sector. Of
    course, many agencies have important roles to play and have the lead in
    their specific areas of expertise. The FBI, for example, has the lead
    in terrorist financing investigations. This does not diminish from
    Treasury's role or responsibilities.

                                     FINCEN

        Question. Please provide a detailed description of what BSA Direct
    will provide in functionality to FinCEN.
        Answer. The BSA Direct initiative encompasses systems and processes
    that will significantly alter the way Bank Secrecy Act information is
    provided to law enforcement and the regulators that access the
    information. It will provide those entities, including FinCEN, with
    state of the art data search tools in a robust user-friendly
    environment. Users will be able to search Bank Secrecy Act information
    faster and better, and will be able to do more with the data than they
    currently can. Eventually, sophisticated data mining, geographic and
    other analytic tools will be added to the environment, which will add
    to the value of the Bank Secrecy Act information. Finally, the
    initiative will help free FinCEN analytic resources to focus on more
    complex and strategic analysis of the financing of terror, money
    laundering and other illicit finance. To better understand the specific
    functionality this initiative will provide to FinCEN, it is important
    to understand the way Bank Secrecy Act information is currently
    managed, analyzed and disseminated.
        FinCEN is the delegated administrator of the Bank Secrecy Act, a
    regulatory statute designed to deter, prevent and address money
    laundering and illicit finance, including the financing of terrorism.
    The keystone of the Bank Secrecy Act is a reporting regime under which
    financial institutions report to the Federal Government certain
    information--large cash transactions or suspicious activity. Over 13
    million Bank Secrecy Act reports are filed each year by more than
    200,000 U.S. financial institutions, providing invaluable information
    to detect and prevent financial crimes. FinCEN is responsible for
    ensuring that information is collected, securely housed, analyzed and
    shared with law enforcement. Amendments to the Bank Secrecy Act by the
    USA PATRIOT Act sharpened FinCEN's responsibilities relating to this
    information. Among other things, FinCEN is responsible for securing
    this sensitive information and auditing its use; networking with
    disparate agencies accessing the information to ensure more robust
    investigation and ensuring that investigations do not overlap; and
    collecting and providing feedback and other information to the entities
    reporting the information--the financial industry--so that reporting
    can be better and more relevant for law enforcement.
        Currently, under a legacy process that predates FinCEN, Bank
    Secrecy Act reports are collected by the Internal Revenue Service's
    Detroit Computing Center and are housed in an IBM IDMS mainframe
    environment incorporating 12 hierarchical databases. Most persons
    access the data through a ``gateway'' connection. While the IRS is
    currently converting the data to a ``DB2'' relational format, the data
    on the mainframe system in Detroit is not currently kept in a
    relational database, so search capabilities are limited for persons and
    entities that access Bank Secrecy Act information through that system.
    Because of the limitations of this system, FinCEN devotes a significant
    portion of its analytic resources to data retrieval for many of its law
    enforcement customers. As a result of this system, FinCEN downloads a
    duplicate copy of the Bank Secrecy Act database every night to other
    systems and into programs that provide relational data mining and
    analytical capabilities.
        FinCEN is not the only entity that downloads all or part of the
    Bank Secrecy Act data from the Detroit Computing Center. Under legacy
    arrangements that pre-date FinCEN's current leadership, Suspicious
    Activity Reports (SARs) filed by depository institutions are downloaded
    directly from the IRS's Detroit Computing Center to the Federal Bureau
    of Investigation and United States Secret Service. Bank Secrecy Act
    information is also downloaded to the Treasury Enforcement
    Communications System (TECS), which was maintained by the former U.S.
    Customs Service and is now maintained by the Department of Homeland
    Security (DHS). Agencies with access to TECS (e.g., DHS's Immigration
    and Customs Enforcement, DHS's Customs and Border Protection, DOJ's
    Bureau of Alcohol, Tobacco, Firearms and Explosives, etc.) generally
    access Bank Secrecy Act information through that system. FinCEN has a
    limited ability to network the use of the data by those who download it
    since it is entirely dependent on manual feedback on the use of the
    data, which is difficult to obtain. Moreover, auditing the use of the
    data is far more difficult since it depends on manual reviews combined
    with the tracking system in place at the independent system. Simply
    put, currently FinCEN cannot fully meet any of its statutory
    responsibilities relating to the data utilizing the current system and
    processes in place.
        The systems and processes contemplated in the BSA Direct initiative
    will allow FinCEN to not only meet these responsibilities, but will
    provide law enforcement, regulators and FinCEN a modern, user-friendly
    environment to mine and analyze BSA data. The heart of the BSA Direct
    initiative is a secure data warehouse to consolidate the Bank Secrecy
    Act information into a single, integrated data set. Users will have a
    flexible and robust query system accessible through an intuitive web-
    based interface. This system will provide access, including secure web
    access, to Bank Secrecy Act information with capabilities that allow
    end users to perform ad hoc as well as pre-defined queries and
    reporting. Users will gain easier, faster data access and enhanced
    ability to query and analyze Bank Secrecy Act information, and FinCEN
    will have tools to control and audit the use of this sensitive
    information, network with agencies that are using the data, and provide
    better feedback to the financial industry about the use of the data,
    which will lead to more relevant reporting.
        The full scope and detail of the functionality will be more fully
    determined as a result of the user requirements analyses in the first
    months of the project. However, the following examples identify the
    types of capabilities that BSA Direct will afford FinCEN and its
    customers that they presently do not have:
      --The automated capability for FinCEN to control and audit the use of
            all persons accessing Bank Secrecy Act information.
      --The capability, through an alert system, for FinCEN to ``network''
            all users of Bank Secrecy Act information that ``hit'' the same
            data, or appear to be analyzing the same information.
      --The capability to analyze law enforcement's use of the data to
            provide meaningful feedback to the financial industry, which
            will result in better reporting.
      --The capability to develop sophisticated filer profiles for
            financial industry members to help FinCEN and the regulators
            target entities for compliance examinations as well as the
            ability to be notified automatically by the system when there
            is a significant filing anomaly.
      --An intuitive interface to enable users to query data with little or
            no training, and with strong, context-sensitive on-line help.
      --Users will be able to keep and view a list of their prior queries.
      --Managers in organizations will be better able to audit and manage
            the use of the data by their subordinate users.
      --Users will be able to schedule a particular query to re-run on a
            schedule set by the user.
      --Users will be able to customize query output, i.e., define what
            columns of information are displayed, rearrange the order of
            the columns, and then save that order as a personal default
            view.
      --Users will have the ability to sort, filter, and aggregate columns
            of data.
      --Users will be able to run ``batch queries,'' e.g., social security
            numbers from all bankruptcy filings 6 months ago against all
            Bank Secrecy Act filings in the last year.
      --Users will be able to create customized queries and reports.
      --A geographic mapping tool will provide information to show the
            geographic significance of Bank Secrecy Act data.
      --Users will have the capability to pre-schedule queries and receive
            reports on a timetable scheduled by users.
      --Users will be able to download results into popular formats, e.g.,
            Word, Excel, Analysts Notebook, etc.
        Question. Please provide the cost and schedule, as well as an
    assessment of the technical risk of development, for BSA Direct for
    fiscal year 2005 and for future fiscal years.
        Answer. The Request for Proposals (RFP) for BSA Direct (full and
    open competition) was released in February 2004. FinCEN is currently in
    the final stages of evaluating the proposals received in response to
    the RFP. Because the BSA Direct RFP clearly specifies that the offerors
    must utilize standards based methodology (SEI-CMM level 2 or higher)
    and use open standards, COTS products, and because the underlying data
    warehousing technology is relatively mature, technical risk is
    minimized. Risk management is a key component of the project
    management.
        FinCEN has submitted a Cost and Schedule Milestones chart for BSA
    Direct (as submitted to the Office of Management and Budget in December
    2003) below. The costs in this chart were based upon estimates provided
    by the Mitre Corporation, which FinCEN engaged to help evaluate the
    project. It is important to note that these are only estimates based on
    Mitre's study. FinCEN will be pleased to provide the committee with a
    much more accurate cost picture for this project once a contract for
    the system is awarded.

              COST AND SCHEDULE GOALS: ORIGINAL BASELINE FOR A PHASE/SEGMENT/MODULE OF PROJECT (INVESTMENT)
    ----------------------------------------------------------------------------------------------------------------
                                                                        Planned
                                  ----------------------------------------------------------------------------------
             Description                       Schedule                 Duration
                                  --------------------------------------------------  Planned Cost    Funding Agency
                                      Start Date        End Date      Days    Hrs.       (BCWS)
    ----------------------------------------------------------------------------------------------------------------
    1. Program Administration      09/01/2003.....  03/13/2004.....     194  ......        $225,000  FinCEN
     Costs, excludes FTE.
    2. Project Management,         04/05/2004.....  09/30/2005.....     543  ......      $1,006,000  Department of
     excludes FTE.                                                                                    Treasury
    3. BSA Direct Proof of         10/02/2003.....  03/12/2004.....     162  ......        $393,000  Treasury
     Concept (POC) Development.
    4. BSA Direct System           04/05/2004.....  06/10/2005.....     431  ......      $4,278,000  Treasury
     Development and Construction.
        4.1 Requirements           04/05/2004.....  08/20/2004.....     137  ......        $531,000  Treasury
         Definition and Analysis.
        4.2 System Design........  06/14/2004.....  10/29/2004.....     137  ......        $398,000  Treasury
        4.3 System Design Review.  10/18/2004.....  11/05/2004.....      18  ......         $40,000  Treasury
        4.4 System Development     07/05/2004.....  08/13/2004.....      39  ......         $80,000  Treasury
         Environment Setup.
        4.5. System Development &  09/06/2004.....  03/18/2005.....     193  ......        $929,000  Treasury
         Construction.
        4.6 Data Conversion,       06/14/2004.....  09/30/2004.....     108  ......        $744,000  Treasury
         Transformation, &
         Migration.
        4.7. System/Integration/   09/27/2004.....  11/05/2004.....      30  ......         $80,000  Treasury
         Test Environment.
        4.8. Usability/Component   01/24/2005.....  04/15/2005.....      81  ......        $239,000  Treasury
         Functional Testing.
        4.9. System/Integration/   03/21/2005.....  06/10/2005.....      81  ......        $372,000  Treasury
         Testing.
        4.10. Integration with     03/21/2005.....  06/10/2005.....      81  ......        $465,000  Treasury
         other systems.
        4.11. Lease costs          04/05/2004.....  06/10/2005.....     431  ......        $400,000  Treasury
         hardware and software.
    5. BSA Direct Deployment and   06/28/2004.....  09/16/2005.....     445  ......      $1,675,000  Treasury
     Rollout.
        5.1. Deployment and        06/28/2004.....  09/17/2004.....      81  ......        $239,000  Treasury
         Rollout Strategy
         Planning.
        5.2. Acceptance/           05/02/2005.....  07/08/2005.....      67  ......        $398,000  Treasury
         Production Ready Testing.
        5.3. Production System     05/02/2005.....  09/16/2005.....     137  ......        $531,000  Treasury
         Deployment & Rollout.
        5.4. User Training and     06/06/2005.....  08/26/2005.....      81  ......        $372,000  Treasury
         Transition.
        5.5. Lease costs hardware  06/02/2005.....  09/30/2005.....     120  ......        $135,000  Treasury
         and software.
    6. BSA Direct Operations and   10/01/2005.....  09/30/2006.....     364  ......       $2,500,00  FinCEN
     Maintenance.
                                  ----------------------------------------------------------------------------------
          PROJECT TOTAL..........  09/01/2003.....  09/30/2006.....   1,125  ......     $10,077,000  ...............
    ----------------------------------------------------------------------------------------------------------------

        Question. If full funding were provided, when will the system be
    complete?
        Answer. With full funding, the FinCEN basic system contemplated by
    BSA Direct system will be operational and available to users by October
    2005. It is anticipated that FinCEN will continue to enhance the basic
    functionality of the system in future years. The goal at this point is
    to get the basic foundation of the system up and running as quickly as
    possible.
        Question. If BSA Direct were fully funded, what functionality would
    that provide FinCEN that it currently does not have?
        Answer. The full scope and detail of the functionality will be more
    fully determined as a result of the user requirements analyses in the
    first months of the project. However, the following examples identify
    the types of capabilities that BSA Direct will afford FinCEN and its
    customers that they presently do not have:
      --The automated capability for FinCEN to control and audit the use of
            all persons accessing Bank Secrecy Act information.
      --The capability, through an alert system, for FinCEN to ``network''
            all users of Bank Secrecy Act information that ``hit'' the same
            data, or appear to be analyzing the same information.
      --The capability to analyze law enforcement's use of the data to
            provide meaningful feedback to the financial industry, which
            will result in better reporting.
      --The capability to develop sophisticated filer profiles for
            financial industry members to help FinCEN and the regulators
            target entities for compliance examinations as well as the
            ability to be notified automatically by the system when there
            is a significant filing anomaly.
      --An intuitive interface to enable users to query data with little or
            no training, and with strong, context-sensitive on-line help.
      --Users will be able to keep and view a list of their prior queries.
      --Managers in organizations will be better able to audit and manage
            the use of the data by their subordinate users.
      --Users will be able to schedule a particular query to re-run on a
            schedule set by the user.
      --Users will be able to customize query output, i.e., define what
            columns of information are displayed, rearrange the order of
            the columns, and then save that order as a personal default
            view.
      --Users will have the ability to sort, filter, and aggregate columns
            of data.
      --Users will be able to run ``batch queries,'' e.g., social security
            numbers from all bankruptcy filings 6 months ago against all
            Bank Secrecy Act filings in the last year.
      --Users will be able to create customized queries and reports.
      --A geographic mapping tool will provide information to show the
            geographic significance of Bank Secrecy Act data.
      --Users will have the capability to pre-schedule queries and receive
            reports on a timetable scheduled by users.
      --Users will be able to download results into popular formats, e.g.,
            Word, Excel, Analysts Notebook, etc.
        Question. Is BSA Direct on schedule?
        Answer. Each of the offerors has committed to deliver BSA Direct by
    October 14, 2005, or sooner. This is a 2-week delay from our initial
    schedule.
        Question. What will it cost to complete the system?
        Answer. FinCEN has submitted a Cost and Schedule Milestones chart
    for BSA Direct (as submitted to the Office of Management and Budget in
    December 2003) below. The costs in this chart were based upon estimates
    provided by the Mitre Corporation, which FinCEN engaged to help
    evaluate the project. It is important to note that these are only
    estimates based on Mitre's study. FinCEN will be pleased to provide the
    committee with a much more accurate cost picture for this project once
    a contract for the system is awarded.

              COST AND SCHEDULE GOALS: ORIGINAL BASELINE FOR A PHASE/SEGMENT/MODULE OF PROJECT (INVESTMENT)
    ----------------------------------------------------------------------------------------------------------------
                                                                        Planned
                                  ----------------------------------------------------------------------------------
             Description                       Schedule                 Duration
                                  --------------------------------------------------  Planned Cost    Funding Agency
                                      Start Date        End Date      Days    Hrs.       (BCWS)
    ----------------------------------------------------------------------------------------------------------------
    1. Program Administration      09/01/2003.....  03/13/2004.....     194  ......        $225,000  FinCEN
     Costs, excludes FTE.
    2. Project Management,         04/05/2004.....  09/30/2005.....     543  ......      $1,006,000  Department of
     excludes FTE.                                                                                    Treasury
    3. BSA Direct Proof of         10/02/2003.....  03/12/2004.....     162  ......        $393,000  Treasury
     Concept (POC) Development.
    4. BSA Direct System           04/05/2004.....  06/10/2005.....     431  ......      $4,278,000  Treasury
     Development and Construction.
        4.1 Requirements           04/05/2004.....  08/20/2004.....     137  ......        $531,000  Treasury
         Definition and Analysis.
        4.2 System Design........  06/14/2004.....  10/29/2004.....     137  ......        $398,000  Treasury
        4.3 System Design Review.  10/18/2004.....  11/05/2004.....      18  ......         $40,000  Treasury
        4.4 System Development     07/05/2004.....  08/13/2004.....      39  ......         $80,000  Treasury
         Environment Setup.
        4.5. System Development &  09/06/2004.....  03/18/2005.....     193  ......        $929,000  Treasury
         Construction.
        4.6 Data Conversion,       06/14/2004.....  09/30/2004.....     108  ......        $744,000  Treasury
         Transformation, &
         Migration.
        4.7. System/Integration/   09/27/2004.....  11/05/2004.....      30  ......         $80,000  Treasury
         Test Environment.
        4.8. Usability/Component   01/24/2005.....  04/15/2005.....      81  ......        $239,000  Treasury
         Functional Testing.
        4.9. System/Integration/   03/21/2005.....  06/10/2005.....      81  ......        $372,000  Treasury
         Testing.
        4.10. Integration with     03/21/2005.....  06/10/2005.....      81  ......        $465,000  Treasury
         other systems.
        4.11. Lease costs          04/05/2004.....  06/10/2005.....     431  ......        $400,000  Treasury
         hardware and software.
    5. BSA Direct Deployment and   06/28/2004.....  09/16/2005.....     445  ......      $1,675,000  Treasury
     Rollout.
        5.1. Deployment and        06/28/2004.....  09/17/2004.....      81  ......        $239,000  Treasury
         Rollout Strategy
         Planning.
        5.2. Acceptance/           05/02/2005.....  07/08/2005.....      67  ......        $398,000  Treasury
         Production Ready Testing.
        5.3. Production System     05/02/2005.....  09/16/2005.....     137  ......        $531,000  Treasury
         Deployment & Rollout.
        5.4. User Training and     06/06/2005.....  08/26/2005.....      81  ......        $372,000  Treasury
         Transition.
        5.5. Lease costs hardware  06/02/2005.....  09/30/2005.....     120  ......        $135,000  Treasury
         and software.
    6. BSA Direct Operations and   10/01/2005.....  09/30/2006.....     364  ......       $2,500,00  FinCEN
     Maintenance.
                                  ----------------------------------------------------------------------------------
          PROJECT TOTAL..........  09/01/2003.....  09/30/2006.....   1,125  ......     $10,077,000  ...............
    ----------------------------------------------------------------------------------------------------------------

        Question. How is FinCEN providing information to the law
    enforcement entities that it serves?
        Answer. FinCEN provides analytic products--both tactical and
    strategic--to appropriate law enforcement customers. FinCEN also
    administers a process under Section 314 of the USA PATRIOT Act that
    permits law enforcement to submit requests to financial institutions
    for transactional and account information in certain cases. A
    particular institution indicates whether it has such information and
    that information is provided to law enforcement. FinCEN also maintains
    some general information for law enforcement on its public web-site and
    will provide more and better information to law enforcement through BSA
    Direct.
        FinCEN also provides access to Bank Secrecy Act data. Legacy
    processes and inadequate data retrieval capabilities currently result
    in this data being provided to Federal, State and local law enforcement
    in several ways:
      --Through direct case support from a FinCEN analyst.
      --Through ``Platform'' support, whereby law enforcement agencies may
            send personnel to FinCEN to use its technical and analytical
            resources to work their agency's respective cases on an as
            needed basis.
      --Through ``Gateway,'' which provides direct, dial-in access to Bank
            Secrecy Data housed at the IRS's Detroit Computing Center.
      --To certain entities, through wholesale direct downloads of all or
            part of the Bank Secrecy Act data from the Detroit Computing
            Center. Direct downloads are currently provided to:
        --The Federal Bureau of Investigation and United States Secret
                Service receive wholesale downloads of suspicious activity
                reports filed by depository institutions.
        --A wholesale download of all Bank Secrecy Act information is made
                into the Treasury Enforcement Communications System (TECS).
                TECS, which was previously administered by the former U.S.
                Customs Service, is now administered by the Department of
                Homeland Security. Various law enforcement entities have
                access to TECS.
        Question. Is FinCEN sending law enforcement wholesale data or does
    it screen requests through its system?
        Answer. FinCEN provides wholesale data to the following Federal law
    enforcement agencies: the Federal Bureau of Investigation and the
    United States Secret Service receive downloads of Suspicious Activity
    Reports (SARs) filed by depository institutions. In addition, a
    wholesale download of all Bank Secrecy Act information is made into the
    Treasury Enforcement Communication System (TECS) which is now
    administered by the Department of Homeland Security. All other requests
    are thoroughly screened.
        Question. Is FinCEN doing gross data information transfers to the
    Bureau of Immigration and Customs Enforcement and the Federal Bureau of
    Investigation without any directed analysis or query from them?
        Answer. Yes. The BSA Direct initiative encompasses systems and
    processes that will significantly alter the way Bank Secrecy Act
    information is provided to law enforcement and the regulators that
    access the information. It will provide those entities, including
    FinCEN, with state of the art data search tools in a robust user-
    friendly environment. Users will be able to search Bank Secrecy Act
    information faster and better, and will be able to do more with the
    data than they currently can. Eventually, sophisticated data mining,
    geographic and other analytic tools will be added to the environment,
    which will add to the value of the Bank Secrecy Act information.
    Finally, the initiative will help free FinCEN analytic resources to
    focus on more complex and strategic analysis of the financing of
    terror, money laundering and other illicit finance. To better
    understand the specific functionality this initiative will provide to
    FinCEN, it is important to understand the way Bank Secrecy Act
    information is currently managed, analyzed and disseminated.
        FinCEN is the delegated administrator of the Bank Secrecy Act, a
    regulatory statute designed to deter, prevent and address money
    laundering and illicit finance, including the financing of terrorism.
    The keystone of the Bank Secrecy Act is a reporting regime under which
    financial institutions report to the Federal Government certain
    information--large cash transactions or suspicious activity. Over 13
    million Bank Secrecy Act reports are filed each year by more than
    200,000 U.S. financial institutions, providing invaluable information
    to detect and prevent financial crimes. FinCEN is responsible for
    ensuring that information is collected, securely housed, analyzed and
    shared with law enforcement. Amendments to the Bank Secrecy Act by the
    USA PATRIOT Act sharpened FinCEN's responsibilities relating to this
    information. Among other things, FinCEN is responsible for securing
    this sensitive information and auditing its use; networking with
    disparate agencies accessing the information to ensure more robust
    investigation and ensuring that investigations do not overlap; and
    collecting and providing feedback and other information to the entities
    reporting the information--the financial industry--so that reporting
    can be better and more relevant for law enforcement.
        Currently, under a legacy process that predates FinCEN, Bank
    Secrecy Act reports are collected by the Internal Revenue Service's
    Detroit Computing Center and are housed in an IBM IDMS mainframe
    environment incorporating 12 hierarchical databases. Most persons
    access the data through a ``gateway'' connection. While the IRS is
    currently converting the data to a ``DB2'' relational format, the data
    on the mainframe system in Detroit is not currently kept in a
    relational database, so search capabilities are limited for persons and
    entities that access Bank Secrecy Act information through that system.
    Because of the limitations of this system, FinCEN devotes a significant
    portion of its analytic resources to data retrieval for many of its law
    enforcement customers. As a result of this system, FinCEN downloads a
    duplicate copy of the Bank Secrecy Act database every night to other
    systems and into programs that provide relational data mining and
    analytical capabilities.
        FinCEN is not the only entity that downloads all or part of the
    Bank Secrecy Act data from the Detroit Computing Center. Under legacy
    arrangements that pre-date FinCEN's current leadership, Suspicious
    Activity Reports (SARs) filed by depository institutions are downloaded
    directly from the IRS's Detroit Computing Center to the Federal Bureau
    of Investigation and United States Secret Service. Bank Secrecy Act
    information is also downloaded to the Treasury Enforcement
    Communications System (TECS), which was maintained by the former U.S.
    Customs Service and is now maintained by the Department of Homeland
    Security (DHS). Agencies with access to TECS (e.g., DHS's Immigration
    and Customs Enforcement, DHS's Customs and Border Protection, DOJ's
    Bureau of Alcohol, Tobacco, Firearms and Explosives, etc.) generally
    access Bank Secrecy Act information through that system. FinCEN has a
    limited ability to network the use of the data by those who download it
    since it is entirely dependent on manual feedback on the use of the
    data, which is difficult to obtain. Moreover, auditing the use of the
    data is far more difficult since it depends on manual reviews combined
    with the tracking system in place at the independent system. Simply
    put, currently FinCEN cannot fully meet any of its statutory
    responsibilities relating to the data utilizing the current system and
    processes in place.
        The systems and processes contemplated in the BSA Direct initiative
    will allow FinCEN to not only meet these responsibilities, but will
    provide law enforcement, regulators and FinCEN a modern, user-friendly
    environment to mine and analyze BSA data. The heart of the BSA Direct
    initiative is a secure data warehouse to consolidate the Bank Secrecy
    Act information into a single, integrated data set. Users will have a
    flexible and robust query system accessible through an intuitive web-
    based interface. This system will provide access, including secure web
    access, to Bank Secrecy Act information with capabilities that allow
    end users to perform ad hoc as well as pre-defined queries and
    reporting. Users will gain easier, faster data access and enhanced
    ability to query and analyze Bank Secrecy Act information, and FinCEN
    will have tools to control and audit the use of this sensitive
    information, network with agencies that are using the data, and provide
    better feedback to the financial industry about the use of the data,
    which will lead to more relevant reporting. FinCEN provides analytic
    products--both tactical and strategic--to appropriate law enforcement
    customers. FinCEN also administers a process under Section 314 of the
    USA PATRIOT Act that permits law enforcement to submit requests to
    financial institutions for transactional and account information in
    certain cases. A particular institution indicates whether it has such
    information and that information is provided to law enforcement. FinCEN
    also maintains some general information for law enforcement on its
    public web-site and will provide more and better information to law
    enforcement through BSA Direct.
        FinCEN also provides access to Bank Secrecy Act data. Legacy
    processes and inadequate data retrieval capabilities currently result
    in this data being provided to Federal, State and local law enforcement
    in several ways:
      --Through direct case support from a FinCEN analyst.
      --Through ``Platform'' support, whereby law enforcement agencies may
            send personnel to FinCEN to use its technical and analytical
            resources to work their agency's respective cases on an as
            needed basis.
      --Through ``Gateway,'' which provides direct, dial-in access to Bank
            Secrecy Data housed at the IRS's Detroit Computing Center.
      --To certain entities, through wholesale direct downloads of all or
            part of the Bank Secrecy Act data from the Detroit Computing
            Center. Direct downloads are currently provided to:
        --The Federal Bureau of Investigation and United States Secret
                Service receive wholesale downloads of suspicious activity
                reports filed by depository institutions.
        --A wholesale download of all Bank Secrecy Act information is made
                into the Treasury Enforcement Communications System (TECS).
                TECS, which was previously administered by the former U.S.
                Customs Service, is now administered by the Department of
                Homeland Security. Various law enforcement entities have
                access to TECS.
        Question. Is this how the law requires the system to work?
        Answer. The Bank Secrecy Act, as amended by the USA PATRIOT Act,
    does not specify any particular method or limitation on the delivery of
    Bank Secrecy Act information. The Bank Secrecy Act requires that the
    purpose of any request for information must be for an authorized
    purpose--criminal, tax, regulatory or intelligence activities relating
    to terrorism. Section 361 of the USA PATRIOT Act requires FinCEN to
    maintain a government-wide data access network with access in
    accordance with applicable legal requirements, and further requires
    FinCEN to develop appropriate standards and guidelines governing who is
    to be given access, what limits are to be imposed on the use of the
    information, and how the exercise of constitutional rights is to be
    protected.
        In accordance with these statutory mandates, FinCEN grants access
    only for purposes authorized by the Bank Secrecy Act (criminal, tax,
    regulatory, intelligence activity directed at counter-terrorism) and
    strictly controls dissemination of the information contained in the
    reports. FinCEN has met this statutory mandate in the creation of the
    ``Gateway'' system by entering into agreements for access and
    establishing the capability to monitor and audit each query. Currently,
    FinCEN does not have the capability to audit entities that receive
    wholesale downloads of data, which is one reason why FinCEN is placing
    such a high priority on the development of BSA Direct. The BSA Direct
    initiative encompasses systems and processes that will significantly
    alter the way Bank Secrecy Act information is provided to law
    enforcement and the regulators that access the information. It will
    provide those entities, including FinCEN, with state of the art data
    search tools in a robust user-friendly environment. Users will be able
    to search Bank Secrecy Act information faster and better, and will be
    able to do more with the data than they currently can. Eventually,
    sophisticated data mining, geographic and other analytic tools will be
    added to the environment, which will add to the value of the Bank
    Secrecy Act information. Finally, the initiative will help free FinCEN
    analytic resources to focus on more complex and strategic analysis of
    the financing of terror, money laundering and other illicit finance. To
    better understand the specific functionality this initiative will
    provide to FinCEN, it is important to understand the way Bank Secrecy
    Act information is currently managed, analyzed and disseminated.
        FinCEN is the delegated administrator of the Bank Secrecy Act, a
    regulatory statute designed to deter, prevent and address money
    laundering and illicit finance, including the financing of terrorism.
    The keystone of the Bank Secrecy Act is a reporting regime under which
    financial institutions report to the Federal Government certain
    information--large cash transactions or suspicious activity. Over 13
    million Bank Secrecy Act reports are filed each year by more than
    200,000 U.S. financial institutions, providing invaluable information
    to detect and prevent financial crimes. FinCEN is responsible for
    ensuring that information is collected, securely housed, analyzed and
    shared with law enforcement. Amendments to the Bank Secrecy Act by the
    USA PATRIOT Act sharpened FinCEN's responsibilities relating to this
    information. Among other things, FinCEN is responsible for securing
    this sensitive information and auditing its use; networking with
    disparate agencies accessing the information to ensure more robust
    investigation and ensuring that investigations do not overlap; and
    collecting and providing feedback and other information to the entities
    reporting the information--the financial industry--so that reporting
    can be better and more relevant for law enforcement.
        Currently, under a legacy process that predates FinCEN, Bank
    Secrecy Act reports are collected by the Internal Revenue Service's
    Detroit Computing Center and are housed in an IBM IDMS mainframe
    environment incorporating 12 hierarchical databases. Most persons
    access the data through a ``gateway'' connection. While the IRS is
    currently converting the data to a ``DB2'' relational format, the data
    on the mainframe system in Detroit is not currently kept in a
    relational database, so search capabilities are limited for persons and
    entities that access Bank Secrecy Act information through that system.
    Because of the limitations of this system, FinCEN devotes a significant
    portion of its analytic resources to data retrieval for many of its law
    enforcement customers. As a result of this system, FinCEN downloads a
    duplicate copy of the Bank Secrecy Act database every night to other
    systems and into programs that provide relational data mining and
    analytical capabilities.
        FinCEN is not the only entity that downloads all or part of the
    Bank Secrecy Act data from the Detroit Computing Center. Under legacy
    arrangements that pre-date FinCEN's current leadership, Suspicious
    Activity Reports (SARs) filed by depository institutions are downloaded
    directly from the IRS' Detroit Computing Center to the Federal Bureau
    of Investigation and United States Secret Service. Bank Secrecy Act
    information is also downloaded to the Treasury Enforcement
    Communications System (TECS), which was maintained by the former U.S.
    Customs Service and is now maintained by the Department of Homeland
    Security (DHS). Agencies with access to TECS (e.g., DHS's Immigration
    and Customs Enforcement, DHS's Customs and Border Protection, DOJ's
    Bureau of Alcohol, Tobacco, Firearms and Explosives, etc.) generally
    access Bank Secrecy Act information through that system. FinCEN has a
    limited ability to network the use of the data by those who download it
    since it is entirely dependent on manual feedback on the use of the
    data, which is difficult to obtain. Moreover, auditing the use of the
    data is far more difficult since it depends on manual reviews combined
    with the tracking system in place at the independent system. Simply
    put, currently FinCEN cannot fully meet any of its statutory
    responsibilities relating to the data utilizing the current system and
    processes in place.
        The systems and processes contemplated in the BSA Direct initiative
    will allow FinCEN to not only meet these responsibilities, but will
    provide law enforcement, regulators and FinCEN a modern, user-friendly
    environment to mine and analyze BSA data. The heart of the BSA Direct
    initiative is a secure data warehouse to consolidate the Bank Secrecy
    Act information into a single, integrated data set. Users will have a
    flexible and robust query system accessible through an intuitive web-
    based interface. This system will provide access, including secure web
    access, to Bank Secrecy Act information with capabilities that allow
    end users to perform ad hoc as well as pre-defined queries and
    reporting. Users will gain easier, faster data access and enhanced
    ability to query and analyze Bank Secrecy Act information, and FinCEN
    will have tools to control and audit the use of this sensitive
    information, network with agencies that are using the data, and provide
    better feedback to the financial industry about the use of the data,
    which will lead to more relevant reporting.
        The full scope and detail of the functionality will be more fully
    determined as a result of the user requirements analyses in the first
    months of the project. However, the following examples identify the
    types of capabilities that BSA Direct will afford FinCEN and its
    customers that they presently do not have:
      --The automated capability for FinCEN to control and audit the use of
            all persons accessing Bank Secrecy Act information.
      --The capability, through an alert system, for FinCEN to ``network''
            all users of Bank Secrecy Act information that ``hit'' the same
            data, or appear to be analyzing the same information.
      --The capability to analyze law enforcement's use of the data to
            provide meaningful feedback to the financial industry, which
            will result in better reporting.
      --The capability to develop sophisticated filer profiles for
            financial industry members to help FinCEN and the regulators
            target entities for compliance examinations as well as the
            ability to be notified automatically by the system when there
            is a significant filing anomaly.
      --An intuitive interface to enable users to query data with little or
            no training, and with strong, context-sensitive on-line help.
      --Users will be able to keep and view a list of their prior queries.
      --Managers in organizations will be better able to audit and manage
            the use of the data by their subordinate users.
      --Users will be able to schedule a particular query to re-run on a
            schedule set by the user.
      --Users will be able to customize query output, i.e., define what
            columns of information are displayed, rearrange the order of
            the columns, and then save that order as a personal default
            view.
      --Users will have the ability to sort, filter, and aggregate columns
            of data.
      --Users will be able to run ``batch queries,'' e.g., social security
            numbers from all bankruptcy filings 6 months ago against all
            Bank Secrecy Act filings in the last year.
      --Users will be able to create customized queries and reports.
      --A geographic mapping tool will provide information to show the
            geographic significance of Bank Secrecy Act data.
      --Users will have the capability to pre-schedule queries and receive
            reports on a timetable scheduled by users.
      --Users will be able to download results into popular formats, e.g.,
            Word, Excel, Analysts Notebook, etc.
        Question. How does FinCEN audit information requested if there is
    no formal request and delivery system?
        Answer. The Bank Secrecy Act, as amended by the USA PATRIOT Act,
    does not specify any particular method or limitation on the delivery of
    Bank Secrecy Act information. The Bank Secrecy Act requires that the
    purpose of any request for information must be for an authorized
    purpose--criminal, tax, regulatory or intelligence activities relating
    to terrorism. Section 361 of the USA PATRIOT Act requires FinCEN to
    maintain a government-wide data access network with access in
    accordance with applicable legal requirements, and further requires
    FinCEN to develop appropriate standards and guidelines governing who is
    to be given access, what limits are to be imposed on the use of the
    information, and how the exercise of constitutional rights is to be
    protected.
        In accordance with these statutory mandates, FinCEN grants access
    only for purposes authorized by the Bank Secrecy Act (criminal, tax,
    regulatory, intelligence activity directed at counter-terrorism) and
    strictly controls dissemination of the information contained in the
    reports. FinCEN has met this statutory mandate in the creation of the
    ``Gateway'' system by entering into agreements for access and
    establishing the capability to monitor and audit each query. Currently,
    FinCEN does not have the capability to audit entities that receive
    wholesale downloads of data, which is one reason why FinCEN is placing
    such a high priority on the development of BSA Direct. The BSA Direct
    initiative encompasses systems and processes that will significantly
    alter the way Bank Secrecy Act information is provided to law
    enforcement and the regulators that access the information. It will
    provide those entities, including FinCEN, with state of the art data
    search tools in a robust user-friendly environment. Users will be able
    to search Bank Secrecy Act information faster and better, and will be
    able to do more with the data than they currently can. Eventually,
    sophisticated data mining, geographic and other analytic tools will be
    added to the environment, which will add to the value of the Bank
    Secrecy Act information. Finally, the initiative will help free FinCEN
    analytic resources to focus on more complex and strategic analysis of
    the financing of terror, money laundering and other illicit finance. To
    better understand the specific functionality this initiative will
    provide to FinCEN, it is important to understand the way Bank Secrecy
    Act information is currently managed, analyzed and disseminated.
        FinCEN is the delegated administrator of the Bank Secrecy Act, a
    regulatory statute designed to deter, prevent and address money
    laundering and illicit finance, including the financing of terrorism.
    The keystone of the Bank Secrecy Act is a reporting regime under which
    financial institutions report to the Federal Government certain
    information--large cash transactions or suspicious activity. Over 13
    million Bank Secrecy Act reports are filed each year by more than
    200,000 U.S. financial institutions, providing invaluable information
    to detect and prevent financial crimes. FinCEN is responsible for
    ensuring that information is collected, securely housed, analyzed and
    shared with law enforcement. Amendments to the Bank Secrecy Act by the
    USA PATRIOT Act sharpened FinCEN's responsibilities relating to this
    information. Among other things, FinCEN is responsible for securing
    this sensitive information and auditing its use; networking with
    disparate agencies accessing the information to ensure more robust
    investigation and ensuring that investigations do not overlap; and
    collecting and providing feedback and other information to the entities
    reporting the information--the financial industry--so that reporting
    can be better and more relevant for law enforcement.
        Currently, under a legacy process that predates FinCEN, Bank
    Secrecy Act reports are collected by the Internal Revenue Service's
    Detroit Computing Center and are housed in an IBM IDMS mainframe
    environment incorporating 12 hierarchical databases. Most persons
    access the data through a ``gateway'' connection. While the IRS is
    currently converting the data to a ``DB2'' relational format, the data
    on the mainframe system in Detroit is not currently kept in a
    relational database, so search capabilities are limited for persons and
    entities that access Bank Secrecy Act information through that system.
    Because of the limitations of this system, FinCEN devotes a significant
    portion of its analytic resources to data retrieval for many of its law
    enforcement customers. As a result of this system, FinCEN downloads a
    duplicate copy of the Bank Secrecy Act database every night to other
    systems and into programs that provide relational data mining and
    analytical capabilities.
        FinCEN is not the only entity that downloads all or part of the
    Bank Secrecy Act data from the Detroit Computing Center. Under legacy
    arrangements that pre-date FinCEN's current leadership, Suspicious
    Activity Reports (SARs) filed by depository institutions are downloaded
    directly from the IRS's Detroit Computing Center to the Federal Bureau
    of Investigation and United States Secret Service. Bank Secrecy Act
    information is also downloaded to the Treasury Enforcement
    Communications System (TECS), which was maintained by the former U.S.
    Customs Service and is now maintained by the Department of Homeland
    Security (DHS). Agencies with access to TECS (e.g., DHS's Immigration
    and Customs Enforcement, DHS's Customs and Border Protection, DOJ's
    Bureau of Alcohol, Tobacco, Firearms and Explosives, etc.) generally
    access Bank Secrecy Act information through that system. FinCEN has a
    limited ability to network the use of the data by those who download it
    since it is entirely dependent on manual feedback on the use of the
    data, which is difficult to obtain. Moreover, auditing the use of the
    data is far more difficult since it depends on manual reviews combined
    with the tracking system in place at the independent system. Simply
    put, currently FinCEN cannot fully meet any of its statutory
    responsibilities relating to the data utilizing the current system and
    processes in place.
        The systems and processes contemplated in the BSA Direct initiative
    will allow FinCEN to not only meet these responsibilities, but will
    provide law enforcement, regulators and FinCEN a modern, user-friendly
    environment to mine and analyze BSA data. The heart of the BSA Direct
    initiative is a secure data warehouse to consolidate the Bank Secrecy
    Act information into a single, integrated data set. Users will have a
    flexible and robust query system accessible through an intuitive web-
    based interface. This system will provide access, including secure web
    access, to Bank Secrecy Act information with capabilities that allow
    end users to perform ad hoc as well as pre-defined queries and
    reporting. Users will gain easier, faster data access and enhanced
    ability to query and analyze Bank Secrecy Act information, and FinCEN
    will have tools to control and audit the use of this sensitive
    information, network with agencies that are using the data, and provide
    better feedback to the financial industry about the use of the data,
    which will lead to more relevant reporting.
        The full scope and detail of the functionality will be more fully
    determined as a result of the user requirements analyses in the first
    months of the project. However, the following examples identify the
    types of capabilities that BSA Direct will afford FinCEN and its
    customers that they presently do not have:
      --The automated capability for FinCEN to control and audit the use of
            all persons accessing Bank Secrecy Act information.
      --The capability, through an alert system, for FinCEN to ``network''
            all users of Bank Secrecy Act information that ``hit'' the same
            data, or appear to be analyzing the same information.
      --The capability to analyze law enforcement's use of the data to
            provide meaningful feedback to the financial industry, which
            will result in better reporting.
      --The capability to develop sophisticated filer profiles for
            financial industry members to help FinCEN and the regulators
            target entities for compliance examinations as well as the
            ability to be notified automatically by the system when there
            is a significant filing anomaly.
      --An intuitive interface to enable users to query data with little or
            no training, and with strong, context-sensitive on-line help.
      --Users will be able to keep and view a list of their prior queries.
      --Managers in organizations will be better able to audit and manage
            the use of the data by their subordinate users.
      --Users will be able to schedule a particular query to re-run on a
            schedule set by the user.
      --Users will be able to customize query output, i.e., define what
            columns of information are displayed, rearrange the order of
            the columns, and then save that order as a personal default
            view.
      --Users will have the ability to sort, filter, and aggregate columns
            of data.
      --Users will be able to run ``batch queries,'' e.g., social security
            numbers from all bankruptcy filings 6 months ago against all
            Bank Secrecy Act filings in the last year.
      --Users will be able to create customized queries and reports.
      --A geographic mapping tool will provide information to show the
            geographic significance of Bank Secrecy Act data.
      --Users will have the capability to pre-schedule queries and receive
            reports on a timetable scheduled by users.
      --Users will be able to download results into popular formats, e.g.,
            Word, Excel, Analysts Notebook, etc.
        Question. Does this raise privacy concerns?
        Answer. While FinCEN is not providing these few law enforcement
    entities with information to which they are not entitled or couldn't
    otherwise receive, the fact remains that FinCEN is very limited in its
    ability to audit the use or guarantee the security of this information.
    Important privacy interests associated with Bank Secrecy Act
    information will be better protected once BSA Direct is built and
    implemented.
        Question. There are currently at least five other financial
    intelligence units in the Federal government outside of Treasury that
    download Bank Secrecy Act data wholesale from FinCEN. If FinCEN is just
    the delivery system for BSA data, what is its role other than to be a
    library? What analytics are occurring at FinCEN that are not occurring
    at the Bureau of Immigration and Customs Enforcement, the Federal
    Bureau of Investigation, the Central Intelligence Agency, or the United
    States Secret Service? If everyone has these databases with all the
    Bank Secrecy Act data, what is the value added by FinCEN?
        Answer. While the provision of Bank Secrecy Act information to law
    enforcement is a key aspect to FinCEN's mission, FinCEN is much more
    than a library. It has been and continues to be a source of unequaled
    analytic expertise on financial information, particularly information
    reported under the Bank Secrecy Act. It is recognized throughout the
    world for its expertise in studying and exploiting financial
    information.
        Other law enforcement agencies have come to recognize the
    importance of exploiting financial information--a fact that is at
    least, in part, attributable to FinCEN's work. From our point of view,
    the proliferation of financial analytical units in law enforcement
    agencies is a good thing. It means that exploitation of financial
    information, which is a key element to defining and dismantling
    criminal and terrorist organizations, will continue to grow. It also
    means that FinCEN will be freer to focus its analytic resources on
    niche areas as well as tactical and strategic analytical projects that
    are more sophisticated. As for the niche areas, FinCEN has unique
    responsibilities that differentiate it from any other entity working
    with financial data:
      --Helping Financial Institutions to understand, assess and address
            the risk of money laundering, the financing of terror and other
            illicit finance.--FinCEN is the administrator of the Bank
            Secrecy Act. It is uniquely positioned, and required by
            statute, to provide feedback to the financial industry about
            the use of this data. FinCEN will focus on providing
            information to the financial industry that will enable it to
            better target those issues and organizations for reporting.
            This will result in better and more relevant reporting for law
            enforcement, and will fulfill an important mandate of the USA
            PATRIOT Act to establish a communication channel between the
            government and private industry.
      --Leveraging FinCEN's counterpart financial intelligence units around
            the world.--FinCEN is in the forefront of international efforts
            to develop new Financial Intelligence Units (FIUs) and enhance
            the capabilities of existing FIUs. FinCEN is also a founding
            member of the Egmont Group, an informal organization of 84
            financial intelligence units around the world that share
            tactical and strategic financial information for the benefit of
            law enforcement and other competent authorities. Furthermore,
            the Egmont Group's Secure Website offers member FIUs the
            ability to rapidly share and broadly disseminate such
            information. FinCEN will focus analytic effort on supporting
            those relationships and making the financial intelligence units
            more productive and relevant in addressing what is a global
            problem.
      --Focusing FinCEN analytic effort on the Strategic.--FinCEN will also
            focus much of its analytic resources on strategic projects.
            Strategic studies of new financial industry products and
            trends, methods of illicit finance, and ways to address
            systemic weaknesses that lead to financial crime. FinCEN will
            also engage more in predictive analysis--trying to predict
            where the next problems will arise in the financial system.
        Addressing these three issues does not mean that FinCEN will not
    participate in traditional tactical analysis in support of law
    enforcement, but as law enforcement agencies add analytical units to
    support their missions, FinCEN will be able to better focus on these
    important niche areas.
        Question. FinCEN issues regulations under Title 31 related to the
    Bank Secrecy Act and the Patriot Act. Please provide a detailed
    description of the joint training that occurs between FinCEN and the
    Internal Revenue Service related to the intricacies of those
    regulations, especially when dealing with the financial community.
        Answer. FinCEN has worked extensively with the IRS SB/SE Taxpayer
    Education and Communication (TEC) organization to conduct joint
    training of IRS examiners. FinCEN has conducted joint training of IRS
    examiners on various Title 31 and Patriot Act requirements at the last
    two IRS Examiner training classes, held in Seattle and in Indianapolis.
    FinCEN will be conducting training at an upcoming meeting of IRS
    supervisory level personnel who have Bank Secrecy Act examination
    responsibility. In addition, FinCEN is working with IRS to revise the
    IRS IRM Manual that guides the conduct of Bank Secrecy Act
    examinations, and is used as a training template for its Bank Secrecy
    Act examiners as well.
        The cooperation between FinCEN and IRS on Bank Secrecy Act training
    extends to seminars conducted for the financial community as well.
    FinCEN works with the IRS SB/SE TEC to coordinate the content of
    presentations given by the IRS to provide education and outreach to the
    financial industries it is delegated to regulate. For example, FinCEN
    and IRS gave presentations to the Money Transmitter Regulators
    Association (MTRA) conference, an annual forum attended by money
    transmitters, their service providers, and State regulators in
    September 2003 on MSB registration and Suspicious Activity Report
    (SARs) requirements and issues.
        Going forward, FinCEN will continue to use tools such as the Anti
    Money Laundering monthly contact report provided by IRS TEC, which
    provides information on upcoming outreach opportunities, to coordinate
    and supervise the delivery of education on Title 31 and Patriot Act
    requirements to the financial community.
        Question. The costs of implementing Bank Secrecy Act are
    significant to the financial industry. Who is responsible for
    communicating with the financial industry to explain what their data is
    being used for?
        Answer. FinCEN, as administrator of the Bank Secrecy Act and as
    mandated in Section 361 of the USA PATRIOT Act, is responsible for
    communicating with the financial industry. While this is an important
    aspect of FinCEN's mission, it also leverages the assets of the Federal
    functional bank regulators, the Securities Exchange Commission, the
    Commodity Futures Trading Commission, and the Internal Revenue Service
    to help with this effort.
        Question. Does Treasury meet with the financial community to
    explain trends or the means of exploitation of the financial system?
        Answer. Treasury's FinCEN interacts extensively with the financial
    community through many different venues such as:
      --Participation in numerous conferences and seminars being held
            throughout the year across the country;
      --Participation in compliance training workshops;
      --Regular meetings with the Bank Secrecy Act Advisory Group and its
            subcommittees;
      --Daily interaction with bank officials throughout the country
            regarding various aspects of Bank Secrecy Act compliance;
      --Customer Surveys;
      --Publications such as The Suspicious Activity Review intended to
            provide feedback and guidance to financial institutions on Bank
            Secrecy Act reporting and anti money laundering requirements;
            and,
      --Website interaction through posting of regulations, guidance,
            comment letters and other regulatory-related materials.
        Question. Does Treasury investigate recent money laundering arrests
    to determine how criminals are evolving to exploit the U.S. financial
    system? Does Treasury or FinCEN send people to every major money
    laundering sting to determine how the organization was set up and how
    it exploited the financial system? This information could then be given
    to the financial community to alert it to recent trends. Does this
    activity occur? If not, should it?
        Answer. FinCEN directly communicates with law enforcement on a
    daily basis to obtain current information on money laundering cases.
    Information received from this dialogue helps FinCEN better understand
    money laundering and terrorist financing. While FinCEN does not have a
    specific program directed at debriefing money laundering sting
    operations, as a practical matter, it captures much of this information
    through its on-going dialogue with law enforcement.
        Question. How many cases were analyzed in calendar year 2003 and
    how much of that information was passed to the financial community? Has
    the financial community been surveyed to see if the information was
    helpful?
        Answer. In fiscal year 2003 (FinCEN statistics are kept by fiscal
    year), FinCEN provided support for approximately 5,000 requests
    received from law enforcement. In the majority of these cases, FinCEN
    helped retrieve Bank Secrecy Act information. FinCEN's new leadership
    has recognized the need to keep better statistics to better capture the
    work that FinCEN is accomplishing.
        FinCEN, independent of providing analytical support to law
    enforcement, conducts analysis of the Bank Secrecy Act information to
    identify trends and patterns. Some of this information is published
    semiannually in the Suspicious Activity Review--Trends, Tips & Issues.
    As mentioned above, this Review is produced based on continuing
    dialogue and close collaboration among our Nation's financial
    institutions, law enforcement officials and regulatory agencies in
    order to provide meaningful information regarding the preparation, use
    and value of suspicious activity reports filed by financial
    institutions. Each issue of this publication contains a Feedback Form
    for the financial industry to complete and return to FinCEN and the
    feedback FinCEN has received has been constructive and generally quite
    positive. To date, FinCEN has not surveyed the financial industry to
    determine satisfaction with FinCEN feedback, although that is something
    FinCEN's new leadership is considering establishing as a benchmark.
        Question. FinCEN's budget declares a 12.7 percent increase for
    fighting terrorism. How is this number obtained? Looking at the
    administration's budget submission in detail, the real increase is 2.7
    percent, or $1.53 million, to fight the war on terror.
      --Mandatory cost increases equal $1.76 million.
      --Program cost annualization for fiscal year 2004 new initiatives
            equals $1.52 million.
      --Transfer from the IRS for BSA work that is already done equals $2.5
            million.
        Answer. The 12.7 percent increase was calculated by adding the cost
    of program increases ($1.533 million), program annualizations ($1.522
    million), cost increases ($1.716 million), and the transfer from the
    Internal Revenue Service for the BSA Direct System ($2.5 million)--
    totaling an overall increase of $7.271 million over fiscal year 2004.
        Question. What types of outreach programs does FinCEN have with the
    financial community?
        Answer. FinCEN is in daily contact with the financial industries it
    helps regulate. First, and perhaps most importantly, through the
    process created pursuant to Section 314(a) of the USA PATRIOT Act,
    FinCEN now routinely contacts thousands of financial institutions to
    relay important information from law enforcement about individuals and
    entities that may be relevant to terrorism or significant money
    laundering investigations. FinCEN plans to expand this process and
    begin sharing information with the financial community that will enable
    industry reports to be more relevant. Also, FinCEN has encouraged the
    voluntary sharing of information between certain financial institutions
    related to possible terrorism or money laundering by implementing
    regulations under Section 314(b) of the USA PATRIOT Act.
        Since September 2001, FinCEN has maintained a hotline for financial
    institutions to voluntarily report suspected terrorist financing
    activity. FinCEN then expedites this information to appropriate law
    enforcement agencies. Since inception of this hotline, FinCEN has
    referred more than 850 tips to law enforcement.
        Treasury's FinCEN interacts extensively with the financial
    community through many different venues such as:
      --Participation in numerous conferences and seminars being held
            throughout the year across the country;
      --Participation in compliance training workshops;
      --Regular meetings with the Bank Secrecy Act Advisory Group and its
            subcommittees;
      --Daily interaction with bank officials throughout the country
            regarding various aspects of Bank Secrecy Act compliance;
      --Customer Surveys;
      --Publications such as The Suspicious Activity Review intended to
            provide feedback and guidance to financial institutions on Bank
            Secrecy Act reporting and anti money laundering requirements;
            and,
      --Website interaction through posting of regulations, guidance,
            comment letters and other regulatory-related materials.
        Question. Has FinCEN done any surveys or interviews with the
    financial community to better understand what their needs and concerns
    are?
        Answer. Yes. For example, when FinCEN adopted its rule requiring
    money services businesses to register, FinCEN conducted an extensive
    industry outreach program, including conducting focus groups, sending
    surveys and holding meetings with individual companies, trade
    associations, State regulators, and law enforcement to discuss
    implementation of the rule and solicit input on guidance. FinCEN also
    developed reference and guidance products, including posters, ``take-
    one'' cards, Quick Reference Guides on Bank Secrecy Act and suspicious
    activity reporting, an Anti-Money Laundering Prevention Guide, a
    suspicious activity reporting training video, and an interactive CD-ROM
    for MSBs. All of these materials are free and available to the public
    through FinCEN's website at www.msb.gov.
        In another example, FinCEN conducted a survey of financial
    institutions filing Currency Transaction Reports (CTRs) in order to
    produce a report to Congress in 2002 as required by the USA PATRIOT
    Act. That report sought to analyze financial institutions' use of
    exemptions from the CTR filing requirement.

                            MINT/BEP MERGER PROPOSAL

        Question. Please provide a detailed accounting of how the study to
    merge the Mint and BEP was funded.
        Answer. The cost, which was funded using Interagency Agreements,
    was evenly split between the Mint and the Bureau of Engraving and
    Printing.
        Question. How many phases are there to this contract to study a
    merger?
        Answer. Three phases were identified in the Request for Proposal:
      --1. Develop a business case;
      --2. Facilitate in developing a short and long-term approach; and
      --3. Advise on preparation of report roll-out.
        The first phase was to identify efficiencies and develop the
    business case to support those efficiencies identified in the study.
    Under the second phase, the government has exercised its option to have
    LMI's continued assistance in the analysis of the options. The
    government also has an option to have LMI assist in preparing the
    report to OMB.
        Question. What accounts were used at the BEP and the Mint to pay
    for the study?
        Answer. The study was funded through the BEP revolving fund and the
    Mint Public Enterprise Fund. The actual costs were charged to the line
    items--consulting services provided by a non-government entity. Both
    the Mint and the BEP allocate resources to assess changing market
    conditions and management improvements.
        Question. Does Treasury believe that this is a proper use of the
    funds in these accounts?
        Answer. The Treasury Department continues to look for taxpayer
    savings and efficiencies in all its bureaus. Due to changing market
    conditions, review of the Treasury Department's structure is necessary
    to best serve the public. By studying the structure of the U.S. Mint
    and Bureau of Engraving and Printing, the Treasury Department ensures
    effective use of taxpayer resources.
        Question. Please provide the parameters provided to the contractor
    to conduct the study.
        Answer. The Request for Proposal (RFP) outlined the parameters and
    was provided to IBM, Booz Allen Hamilton, and LMI. The RFP provided to
    these three bidders is attached.

        Question. What underlying data was used in the study to determine
    whether a merger was cost effective?
        Answer. Documents reviewed as part of the study included:
      --The Treasury 5-year Strategic Plan
      --Budget in Brief
      --BEP and Mint 2005 Budget Documents and Annual Reports
      --BEP Facilities Study--July 1998
      --Coin and Currency (Security) GAO Study, July 2003
      --1987 Consolidation Study
        These documents were supplemented with additional data such as BEP/
    Mint historical costs, industry standards, OMB Circular A-94, OPM
    guidelines and the DOD Cost Factor Handbook.
        The study drew guidance from management theory, in both the public
    and private sectors, and from an empirical perspective using best
    practices in the manufacturing industry.
        Question. Has OMB or Treasury sought comments from the potentially
    impacted agencies?
        Answer. The BEP and the Mint have both been involved in the effort
    from the beginning. They helped draft the scope of work, select the
    winning contractor, assist in the data gathering, and commented freely
    on each report reiteration.
        OMB has monitored progress on the effort, but will not seek
    comments until it receives the report on July 1, 2004.
        Question. Has the Federal Reserve been asked to comment on the
    effects of a proposed merger? If not, should Treasury initiate a
    discussion?
        Answer. Treasury views the Federal Reserve as a key stakeholder.
    Senior officials at the Federal Reserve have been interviewed and their
    suggestions have been incorporated into the process. The Federal
    Reserve is also being updated on progress.
        Question. Prior to the merger of any systems or services, would the
    Department intend to seek Congressional approval? Does it require
    legislation?
        Answer. We will not pursue any of those options without a full
    consultation with Congress and, in fact, Treasury will not call for any
    merger of any system or function prior to the end of the 108th
    Congress.
        It is still too early in the process to predict if or when
    legislation might be necessary.
        Question. When will the first phase of the study be completed?
        Answer. The first phase concluded with LMI's May 2004 assessment of
    the financial implications of the options open to Treasury.
        Question. Will there be any merger of any system or functions prior
    to the end of the year?
        Answer. Treasury will not call for any merger of any system or
    function prior to the end of the 108th Congress.
        Question. The purpose of most mergers is to create efficiencies and
    save taxpayer dollars. Previous studies conducted by the GAO and the
    Treasury IG found that only 4-5 percent of the workforces of the two
    agencies ``overlapped''. Moreover, the study surmised that since the
    agencies' production plants are located in 5 different locations, there
    was little likelihood that production lines could be streamlined. What
    has changed recently to nullify the findings of the GAO and the IG
    reports?
        Answer. The Treasury Department continues to look for taxpayer
    savings and efficiencies in all its bureaus. Due to changing market
    conditions, a review of the Treasury Department's structure is
    necessary to best serve the public. By studying the structure of the
    U.S. Mint and Bureau of Engraving and Printing, the Treasury Department
    ensures effective use of taxpayer resources.
        Question. The committee understands that a rough draft of the
    merger report was supposed to be submitted on April 16 with the final
    report to be delivered on May 4. What is the status of this report?
    Will any actions be taken prior to Congress having adequate time to
    review the report and determine whether the correct measurements were
    used to justify any possible consolidation?
        Answer. The document produced by LMI was designed to assess the
    potential for taxpayer savings and efficiencies. The April 16 and May 4
    dates were the dates initially proposed by Treasury in the Request for
    Proposal (RFP). These dates were negotiable. LMI's report was delivered
    on time and is currently being assessed. The initial schedule to
    deliver this report to OMB on July 1 is still on track. We will not
    pursue any plan without a full consultation with Congress and, in fact,
    Treasury will not call for any merger of any system or function during
    the 108th Congress.
        Question. The cost of the initial stage of this study was estimated
    to exceed $400,000. Under what authority was this money spent? Was
    Congress consulted prior to spending money on a study that has already
    undergone two extensive reviews?
        Answer. The United States Mint Public Enterprise Fund (PEF) statute
    (31 U.S.C.  5136) provides the authority to spend the Mint's portion
    of the expenses.
        Public Law 81-656, which created the Bureau of Engraving and
    Printing Fund, provides for funding without fiscal year limitation for
    all expenses of operating and maintaining the Bureau. This would
    include studies such as the Mint-BEP study, which is focused on
    ensuring cost effective and efficient operations.
        The study was announced in the President's Budget, which was sent
    to the Congress in early February. However, Congress was not
    specifically consulted prior to expending the funds for the study. This
    study is simply an effort to ensure the American people that Treasury
    is keeping up with changing technologies and market conditions. We will
    not pursue any of those options without a full consultation with
    Congress and, in fact, Treasury will not call for any merger of any
    system or function during the 108th Congress.
        Question. Will the study consider putting the Mint and BEP under
    the Federal Reserve?
        Answer. The study has assessed that option.
        Question. What is the future of the penny? What will happen to the
    Mint's production once the cost of the penny is more than 1 cent to
    produce? With the decline in coin usage and the accelerating cost of
    the penny, what plans does the Mint have to cut its manufacturing
    costs?
        Answer. 31 U.S.C.  5112 requires the minting and issuance of a
    three-quarter-inch diameter 1 cent coin composed of copper and zinc.
    The United States Mint will continue to mint and issue 1 cent coins
    pursuant to this statutory mandate. The United States Mint is committed
    to keeping production costs as low as possible.
        The United States Mint will produce pennies to fulfill all Federal
    Reserve Bank orders. Current forecasts suggest there will be demand of
    about 7.3 billion pennies in fiscal year 2004 from the Federal Reserve
    Banks.
        The United States Mint has taken several cost reduction steps.
    First, the total number of employees at the United States Mint has
    fallen from approximately 2,900 in fiscal year 2000 to 2,132 today,
    saving significant personnel costs. The United States Mint currently
    has a rigorous review ongoing, consisting of more than 10 task forces
    that are examining opportunities to streamline and reduce costs in an
    effort to enhance overall taxpayer value. Also, the United States Mint
    is examining ways to lower its direct production cost by incorporating
    additional automation and lean manufacturing concepts on the production
    lines. Finally, the agency is engaged in ongoing research to determine
    the feasibility of less expensive materials that could be used for
    coins without having an effect on their quality and utility.
    Congressional action would be required before changes could be made to
    the composition of most denominations.
        Question. How many dollar coins remain in the Mint's vaults? What
    is the estimated cost of this storage?
        Answer. The United States Mint is currently storing 262.6 million
    Golden Dollars. The United States Mint's coin inventory is stored in
    United States Mint facilities in Denver and Philadelphia, as well as
    Federal Reserve Banks in Phoenix, AZ and Helena, MT. The Golden Dollar
    is stored as part of the overall coin inventory at these locations at
    no additional incremental cost to the government.
        Question. How many sites does the Mint occupy in the Washington
    Metropolitan area? Please identify the use, location, amount of square
    footage, and cost for each of these locations.
        Answer. The United States Mint currently occupies two buildings in
    Washington, DC, both of which are used for administrative purposes. The
    total United States Mint occupied square footage in the Washington
    Metropolitan area is 237,273 square feet at an annual net cost to the
    bureau of $8,682,427.
        The first building, 801 9th Street, has a total of 232,000 square
    feet, of which the United States Mint occupies 163,079 square feet and
    subleases the remaining 68,921 square feet to the Internal Revenue
    Service, the Treasury Executive Institute, and the United States
    Marshals Service. The total annual rent expense of this building is
    $7,790,560. The United States Mint receives $2,314,367 in rent payments
    from our sublet tenants, for a net total annual rent expense of
    $5,476,193.
        At the second building, 799 9th Street, the United States Mint
    rents a total of 149,647 square feet, occupies 74,194 square feet, and
    subleases the remaining 75,453 square feet to the Customs Service and
    the Bureau of Public Debt. The United States Mint does not lease the
    entire building; the General Services Administration, however, leases
    out other parts of this building to other Federal agencies. The United
    States Mint's total annual rent expense for its part of this building
    is $6,486,176. The United States Mint receives $3,279,942 in rent
    payments from our sublet tenants, for a net total annual rent expense
    of $3,206,234.
        Note.--The United States Mint also rents a small (about 100 square
    feet) sales kiosk within Washington DC's Union Station at an annual
    cost of $78,000, operated by one or two sales clerks during business
    hours.
        Question. In 1997, the GAO testified before the Congress on the
    issue of a BEP-Mint merger. At that time the GAO was unable to conclude
    that a merger would save as much money as the cost of consolidation.
    Does Treasury have any new information that would discredit or
    invalidate the GAO findings?
        Answer. Treasury's study is still ongoing. The study will
    incorporate the 1997 GAO findings and account for changed market
    conditions.
        Question. Prior estimates of implementation costs for merging the
    basic functions of the Mint-BEP were calculated to exceed $50,000,000
    and could plausibly reach $100,000,000. When will the merger study be
    complete? Will it provide detailed cost estimates on a basic merger?
    Would it provide the costs of any proposed merger of production lines?
    Because of the concerns involved in the costs and the futures for these
    two organizations will the Treasury Department fully consult with the
    Congress prior to consolidation of any functions?
        Answer. The study will provide detailed cost estimates of the
    options under consideration.
        We will not pursue any of those options without a full consultation
    with Congress and, in fact, Treasury will not call for any merger of
    any system or function during the 108th Congress.

                    ALCOHOL AND TOBACCO TAX AND TRADE BUREAU

        Question. The Bureau of Alcohol, Tobacco, Firearms, and Explosives
    (ATF) was transferred to the Department of Justice, including IT
    services that support for the newly formed Alcohol and Tobacco Tax and
    Trade Bureau (TTB) at Treasury. Are the IT services for TTB provided by
    ATF? If so, why are these services still being provided by an agency of
    the Department of Justice?
        Answer. When ATF was split, all IT infrastructures (servers,
    storage systems, desktop computers, laptop computers, network
    equipment, etc.) remained with ATF. It was intended that pending
    funding costs for moving TTB to Treasury hardware and support, ATF
    would continue to provide IT support. TTB has taken some steps toward
    transition off of ATF support. TTB is currently moving all accounting,
    procurement, travel, property, and personnel applications to the
    Treasury Bureau of Public Debt (BPD).
        ATF currently provides the IT equipment and services for TTB that
    directly require an IT infrastructure. TTB has assumed the IT functions
    that can be performed without IT equipment (i.e. IT Security Policy,
    Capital Planning, and Enterprise Architecture). ATF provides all
    servers, network equipment and desktop/laptop equipment as well as all
    office productivity software. ATF provides services that include
    hosting and supporting all of TTB's custom business applications and
    office automation applications, TTB's computer security operations,
    TTB's network connectivity and client (desktop/laptop/peripheral)
    equipment support.
        On April 29, 2004, ATF provided formal notification that they will
    no longer support TTB after fiscal year 2005.
        Question. There is a Memorandum of Understanding (MOU) between TTB
    and ATF. Will the MOU between TTB and ATF be in effect for fiscal year
    2005?
        Answer. Yes, although not as many services will be included. For a
    number of non-IT areas, ATF has advised TTB that they intend to
    discontinue servicing TTB in fiscal year 2005 (see answer below). In
    the IT area, TTB has moved some services to BPD, as noted above.
        Question. What are the services provided under the MOU and what is
    the cost attached to the MOU?
        Answer. The current negotiated MOU with ATF for fiscal year 2004 is
    for $13.7 million and is comprised of two principal components, the IT
    services at $9.5 million and non-IT administrative support services at
    $4.2 million.
        The IT services covered under the MOU include the following:
      --Custom Business Application and Office Application hosting and
            support
      --Network and Phones equipment and support
      --Customer Equipment and Support (desktops/laptops/peripherals)
      --Software Maintenance of Custom Business Applications
      --Configuration Management
        The current non-IT administrative support services covered under
    the (MOU) are as follows:
      --Legal services (assisting with one old EEO case and two Merit
            Systems Protection Board cases from fiscal year 2003)
      --Peer support
      --Emergency management services*
      --Document services*
      --Space management*
      --Protective programs (finishing existing project)*
      --Science and technology (This will continue for years because of
            shared laboratory facilities.)
        ATF has informed us they will not provide IT services or within
    most of the non-IT areas noted above with an asterisk (*).
        TTB has elected to move the following administrative support
    services to Bureau of Public Debt's Administrative Resource Center, a
    Treasury operation, to provide optimal efficiency and effectiveness in
    the delivery of those services to our program operations:
      --Acquisition and material management (BPD for supplemental services)
      --Financial management (BPD for 2005)
      --Personnel services and personnel security (BPD beginning June 2004)
      --Training and professional development (supplemented by BPD).
        Question. How long do you anticipate ATF charging TTB for services
    rendered and is it necessary for TTB to rely on ATF for these services?
        Answer. As indicated above, ATF will continue services in some
    areas as we continue to seek means to secure or provide these services
    independent of ATF; however, we organized our Bureau to provide
    services to our customers and as such the FTE distribution is very
    streamlined in the area of internal services. We will rely on the
    reimbursable agreement with BPD for several areas of service. In the
    meantime, we continue to research the most economical and efficient
    ways to secure these services. Our major issue at this time is the IT
    services that ATF currently provides; they have advised us in writing
    that they will no longer service us after fiscal year 2005 in that
    area.
        It is necessary for these services to continue until TTB can
    transition the functions serviced at ATF to an alternate provider,
    including time to implement the transition after funding is provided.
        Question. TTB has the Tax Audit Division that is responsible for
    auditing taxpayers for compliance with the Internal Revenue Code and
    other laws and regulations. What strides has TTB made with the Tax
    Audit Division?
        Answer. TTB Tax Audit was first established in late fiscal year
    2003 as part of TTB's strategic plan to collect the revenue that is
    rightfully due from the alcohol, tobacco, and firearms and ammunitions
    industries. The division was established to provide a systematic
    approach to safeguard over $14 billion in annual revenue collected by
    TTB.
        The mission of the Tax Audit Division (TAD) is to promote voluntary
    compliance in the payment of excise taxes that TTB administers and to
    verify that such payment was made. The TAD also ensures compliance with
    the laws and regulations relating to revenue collection. TTB Tax Audit
    uses a risk-based approach to target non-compliant industry members.
    TTB's goal in 2004 is to establish a baseline for measuring tax revenue
    audited in a 5 to 6 year period and the industry compliance rate
    (percentage of taxpayers audited with no material findings, thereby
    validating the amount of tax paid was accurate and rightfully due).
    Based upon these findings, TTB will determine its follow up audit
    strategy.
        TTB's accomplishments in fiscal year 2004 as they relate to Tax
    Audit include:
      --Established 10 field offices covering the U.S. territory.
      --Recruited and hired 70 auditors. The average auditor has 10 years
            of previous audit experience and holds one audit certification
            such as CPA license.
      --Established a formal industry-training program. Seventy-five
            percent of the workforce has been trained in three or more
            industries (tobacco, distilled spirits plants, beer, wine,
            manufacture of non-beverage products, and firearms).
      --Implemented an automated audit documentation tool to facilitate a
            standard audit approach and create efficiencies.
      --Developed an audit workplan scheduling 110 taxpayers for review in
            2004.
      --As of May 24, 10 audits have been completed and 55 are underway.
        Initial audit findings have resulted in $872,000 in additional
    revenue due to TTB.
        Question. What is the status regarding flavored malt beverages and
    beers?
        Answer. TTB has reviewed and analyzed the approximately 16,000
    comments to Notice No. 4 concerning flavored malt beverages. At this
    time we are in the closing stages of evaluating the comments and we are
    discussing the comments with the Department of the Treasury.
        Question. Has the hiring process been streamlined or improved in
    the past year?
        Answer. Under the MOU, all human resource recruitment services were
    provided by ATF during fiscal year 2004; however, TTB just negotiated
    an agreement with the Bureau of Public Debt Administrative Resource
    Center (BPD ARC), to provide all TTB's human resource services for the
    bureau, including staff recruitment. This enhancement begins June 13,
    2004. We believe this change in service provider will improve the
    recruitment process and streamline the paperwork, while allowing the
    bureau to attract highly skilled and qualified applicants for our
    vacancies.
        Question. Will TTB reach its FTE ceiling of 559 this year?
        Answer. TTB will not reach its FTE utilization ceiling of 559 this
    year. The bureau FTE ceiling of 559 includes 15 positions for Puerto
    Rico, which is a Reimbursable program, and 544 direct FTE funded
    positions. As of the most recent pay period, TTB has 509 staff on
    board, including 13 in Puerto Rico, and TTB will make every effort to
    reach the 559 targeted staffing levels by the end of this fiscal year.
    TTB's recruitment strategy as outlined with BPD ARC is very aggressive,
    and TTB is hopeful that the targeted staffing level can be reached.
    Their goal is to have a full staffing complement to begin the fiscal
    year 2005 fiscal year, but FTE utilization may only reach 504.

                Question Submitted by Senator Robert F. Bennett

        Question. In 2002 Treasury officials advised the Open World
    Leadership Center on the legislation needed to clarify and obtain
    authority to invest the Center's Trust Funds (and similarly the Stennis
    Center and Madison Fellowships) in special par value obligations. Such
    investment is a necessary and desirable protection of appropriated
    funds provided to OWLC by the Congress as ``no year'' funding in annual
    appropriations. The OWLC has requested that they be allowed to invest a
    portion of their trust in a special Treasury par value obligation. This
    request is being reviewed by the Office of the Asst General Counsel for
    Banking & Finance in Treasury Headquarters. I understand that Treasury
    is concerned whether, under the rules of statutory construction, the
    new conditions for issuing special obligations to the Stennis Center
    also apply to the OWLC. Please provide an update on the status of this
    request.
        Answer. The Treasury Department has recently advised the Library of
    Congress (which manages the Open World trust fund) that amounts in the
    Open World trust fund may now be invested in par value Treasury
    specials.
                                     ______

                  Questions Submitted by Senator Patty Murray

      NEWLY-CREATED JOBS WILL NOT GO TO THOSE WHO ARE BEING LAID-OFF/JOB
                                    TRAINING

        Question. As I mentioned in my opening statement, it is fine to
    point out that some of the same companies that are shipping American
    jobs overseas might also create jobs here in the United States in the
    future. But we also need to recognize that the people who are having
    their jobs sent overseas are not the ones that are likely to get the
    new jobs those companies are creating here at home.
        For many Americans who are trained in one partfield and have
    supported their families on that same job for decades, the decision to
    move that job overseas represents the beginning of a long period of
    heartbreak and financial ruin.
        Mr. Secretary, do you agree that the job descriptions and skill
    requirements of the new positions that are likely to be created in the
    United States in the future are not the same as those for the jobs that
    companies are currently shipping overseas?
        Answer. It's true that many new jobs in our economy require new
    skills and education. Those new skills and education are one of the
    sources of our rising standard of living. That is why the President has
    made improving our Federal job training programs a priority. New jobs
    demanding new skills are always appearing. A quarter of all Americans
    are working in jobs that weren't even in the Census Bureau's occupation
    list in 1967.
        The U.S. labor market is always changing, and is one of the most
    resilient and flexible labor markets in the world. One aspect of that
    flexibility is the high rate of job changes as employers and employees
    continually adjust to changing business needs and personnel
    requirements. Data from the Bureau of Labor Statistics (BLS) Job
    Opening and Labor Turnover Survey (JOLTS) suggests that there are more
    than 1 million new hires each week. In March 2004, there were 4.5
    million new hires and about 4.1 million separations, and JOLTS reports
    that on the last day of March, there were about 3.1 million job
    openings available. The President is committed to ensuring workers have
    the skills necessary to obtain those jobs.
        Question. I mentioned earlier that the President's new job training
    proposal does not add $1 to his budget request for job training. In
    fact under his proposal, the amount of money going to community
    colleges for all job training purposes will actually decline. For the
    last 3 years, the Bush Administration has requested half a billion
    dollars in cuts in job training.
        Mr. Secretary, what does the Bush Administration have to offer the
    manufacturing worker or the software engineer or the call center worker
    whose job is being sent overseas?
        Answer. The President's goal is to increase job growth in this
    country while making sure workers have the skills necessary to access
    those jobs. Over the past 9 months, 1.4 million new jobs have been
    created. The tax cuts, which were proposed by the President and passed
    by the Congress in 2001 and 2003, played a vital role in creating a
    strong growth environment. During the last 3 years, the
    administration's tax reductions have been successful--first, in keeping
    the recent economic slowdown from worsening substantially in the face
    of terrorist attacks, corporate malfeasance, and wars in Afghanistan
    and Iraq, and secondly, in promoting a solid economic recovery and
    enhancing job prospects.
        Our econometric work suggests that without the tax cuts, more than
    2 million fewer Americans would have been working by the end of last
    year and the unemployment rate would have been more than 1 percentage
    point higher.
        To ensure workers have the skills necessary to obtain these new
    jobs, the President's Fiscal Year 2005 Budget provides $23 billion for
    job training and employment assistance, including Pell Grants used by
    students at technical and 2-year post-secondary schools. This funding
    level is $500 million (2.3 percent) more than in 2004 and $2.5 billion
    (12.5 percent more than in 2001).
        Moreover, the President has proposed reforming the major Workforce
    Investment Act grant programs to double the number of workers who
    receive job training. These reforms will maximize the available Federal
    dollars going to train workers by eliminating unnecessary overhead
    costs, reducing expenditures on overhead by $300 million. His Jobs for
    the 21st Century initiative includes a $250 million proposal to help
    America's community colleges train 100,000 additional workers for
    industries that are creating the most new jobs.
        Finally, the President has proposed a $50 million Personal
    Reemployment Accounts pilot program to help unemployed workers who have
    the hardest time finding jobs get back to work. These flexible
    accounts, which would be in addition to unemployment compensation,
    would allow certain unemployed workers to purchase the training, child
    care, transportation, or other reemployment services they need to
    return to work. They would be allowed to keep unused amounts as a
    ``reemployment bonus'' if they become employed quickly. The
    administration is pleased that the House passed H.R. 444, the Worker
    Reemployment Accounts Act, on June 3 to authorize this pilot program
    under the Workforce Investment Act and urges the Senate to act on this
    important legislation for America's workers.
        Question. What do you expect these people to do to try and maintain
    their level of income, their health insurance, and their ability to
    feed their families?
        Answer. Whatever the cause, loss of jobs is taken very seriously by
    this administration. First and foremost, the administration believes
    that the best way to help workers who are competing in the global
    marketplace is to keep economic growth strong at home, to help make
    American companies more competitive, and to make America the best place
    in the world to do business. Recent employment gains show that our
    program is working. Employment has increased more than 1.4 million in
    the past 9 months and initial claims for State unemployment insurance
    benefits have fallen 20 percent from a year earlier.
        As with any transition, an evolving economy can produce
    dislocations for individuals and communities in the short term. The
    administration is committed to helping these workers find good jobs at
    good wages as quickly as possible.
        Our primary responsibility is to keep the economy growing.
    Maintaining and increasing economic growth is the key to increasing the
    number of good jobs in the economy, making it easier for people who
    have lost their jobs to find new and better ones.
        The President has proposed several new measures to help prepare
    Americans for the rapidly changing and increasingly global workplace.
    His Jobs for the 21st Century initiative includes more than $500
    million to help prepare U.S. workers to take advantage of the better
    skilled, higher-paying jobs of the future, including $250 million in
    proposed funding targeted to community colleges to train workers for
    industries that are creating the most new jobs.

                              COMPETITIVE SOURCING

        Question. What is the status of all the competitive sourcing
    studies that have been undertaken at IRS? Please include year, area,
    and result.
        Answer. The following list summarizes the status of IRS Competitive
    Sourcing studies:
    Architects and Engineers (10 FTE)
        Streamline competition resulted in in-house award. No savings were
    achieved. The in-house team was the most efficient.
    Area Distribution Centers (500 FTE in Bloomington, IL; Rancho Cordova,
            CA; Richmond, VA)
        The three Area Distribution Centers distribute tax forms,
    instructions and publications to taxpayers and internal use documents
    to IRS employees. A standard competition with award decision is
    scheduled for June 28, 2004.
        Expected Saving and Benefits.--Consolidation of activities and
    geographic locations resulting in the release of commercial space,
    revised operational processes and procedures to gain efficiencies, new
    information system, reduced staff and increased managerial span of
    control.
        Anticipated Return on Investment (fiscal year 2005-fiscal year
    2009).--$22 million.
    Building Delegations or Operation and Maintenance (O&M) of Delegated
            Buildings (100 FTE in Covington, Fresno, Austin, Ogden,
            Philadelphia, and Headquarters)
        O&M are those functions identified in the Building Delegation
    Agreements between the General Services Administration (GSA) and the
    IRS. These services include responsibilities to operate and maintain
    building systems (electrical, HVAC, control systems, etc).
        A standard competition with solicitation release is scheduled for
    June 2004.
        Expected Saving and Benefits.--Revised operational processes and
    procedures to gain efficiencies; reduced staff; and increased
    managerial span of control.
        Anticipated Return on Investment (fiscal year 2006-fiscal year
    2010).--$3.9 million.
    Mail Rooms (70 FTE)
        Mailroom services functions include all aspects of the delivery of
    mail from full service delivery to mail stop or desktop to self-service
    mailrooms where customers pick up their own mail. The IRS made a
    decision to divide the study among headquarters, nationwide ``stand
    alone sites'' and campuses. The IRS plans to use public-private
    competition to improve operations.
        A direct conversion is in progress.
        Fully Implemented.--Denver, CO; Detroit, MI; Plantation, FL;
    Detroit Computing Center, MI; Houston (Leland), TX; Laguna Niguel, CA;
    Oklahoma City, OK; and San Francisco, CA.
        Partially Implemented.--Washington, DC; New Carrollton, MD.
        Scheduled for Implementation.--Cincinnati, OH; Jacksonville, FL (5/
    17); and Nashville, TN.
        Implementation Not Scheduled.--Atlanta, GA; Baltimore, MD; Boston,
    MA; Buffalo, NY; Dallas, TX; Greensboro, NC; Hartford, CT; Houston
    (Alliance), TX; Indianapolis, IN; Los Angeles, CA; Milwaukee, WI; New
    Orleans, LA; Oakland, CA; Philadelphia, PA; Phoenix, AZ; Richmond, VA;
    Chicago, IL; Springfield, NJ; St. Louis, MO; St. Paul, MN.
        Anticipated Return on Investment (fiscal year 2005-fiscal year
    2009).--$399,000.
    Campus Operations (Information Technology) (350 FTE in Ogden, UT;
            Atlanta, GA; Brookhaven, NY; Andover, MA; Cincinnati, OH;
            Fresno, CA; Austin, TX; Memphis TN; Kansas City, MO;
            Philadelphia, PA)
        This functional area provides the Information Systems (IS) computer
    operations at the ten IRS Campus facilities. The positions include
    computer operators, production controllers, tape librarians, computer
    specialists, and clerks. A standard competition with award decision is
    scheduled for July 2004.
        Expected Saving and Benefits.--Revised operational processes and
    procedures to gain efficiencies; reduced staff; and increased
    managerial span of control.
        Anticipated Return on Investment (fiscal year 2005-fiscal year
    2009).--$12.7 million.
    Logistics Support (formerly Warehouse and Transportation) (160 FTE in
            Andover, MA; Philadelphia, PA; Brookhaven, NY; Atlanta, GA;
            Covington, KY; Austin, TX; Kansas City, MO; Ogden, UT; Fresno,
            CA; Memphis, TN)
        This functional area provides warehousing and transportation,
    mainly at the 10 campus sites. This activity includes positions such as
    material handlers, warehouseman, motor vehicle operators, laborers, and
    clerks. A standard competition with Performance Work Statement
    development is underway.
        Expected Saving and Benefits.--Revised operational processes and
    procedures to gain efficiencies, release of leased space, reduced staff
    and increase of managerial span of control.
        Anticipated Return on Investment (fiscal year 2006-fiscal year
    2010).--$4.8 million.
    Campus Files Activity (1,458 FTE in Austin, TX; Andover, MA;
            Philadelphia, PA; Brookhaven, NY; Cincinnati, OH; Memphis, TN;
            Atlanta, GA; Kansas City, MO; Ogden, UT; Fresno, CA)
        This functional area receives, controls, shelves and maintains all
    returns/documents for retention and retirement. They retrieve documents
    as requested by customer organizations. Liaison work is critical with
    the Federal Records Centers for final retention of documents. The work
    is routine and does not involve making complex determinations or
    present unique fact patterns. A standard competition with solicitation
    release is scheduled for the fourth quarter of 2004.
        Expected Saving and Benefits.--Revised operational processes and
    procedures to gain efficiencies; reduced staff; and increased
    managerial span of control.
        Anticipated Return on Investment (fiscal year 2006-fiscal year
    2010).--$22 million.
    Learning and Education (617 FTE Service-wide)
        This functional area is responsible for determining service-wide
    and division-level professional training requirements, developing
    training plans and curriculum, evaluating the effectiveness of
    training, and performing a broad spectrum of program administration.
        A standard competition with Performance Work Statement development
    is underway.
        Expected Saving and Benefits.--Consolidation of activities,
    revision of operational processes and procedures to gain efficiencies,
    implementation of learning content management and learning management
    systems, reduction of staff and increased managerial span of control.
        Anticipated Return on Investment (fiscal year 2006-fiscal year
    2010).--$25 million.
        Note.--Return on investment includes cost of conducting competition
    and transition/separation costs. The IRS calculated savings through
    fiscal year 2009.
        The following highlights IRS Business Case Analysis/Feasibility
    Studies:
                Tax Law Telephone
        This is a preliminary feasibility assessment of having a vendor
    provide tax law telephone assistance. After the completion of the
    preliminary feasibility assessment, the IRS will make a decision as to
    whether to go forward with the competition.
                Fuel Compliance Activity (140 FTE Service-wide)
        This function area monitors 1,400 terminals, all fuel wholesalers,
    thousands of retail motor fuel outlets, and U.S. border crossings.
    Additionally, these personnel are charged with conducting periodic
    inspections of on-road vehicles on highways throughout the country.
                IT Support (Service-wide)
        This is identification and development of sourcing strategy to
    identify candidate public-private competition activities.
        Question. How much money has been spent on these competitions?
    Since the competitions are not budgeted for, where has the money come
    from?
        Answer. Competitive Sourcing Competition Costs (Travel, training,
    staffing, expert contractor support (PWS, Most Efficient Organization,
    Independent Review)--does not reflect transition/separation costs):
      --Fiscal year 2003--$5.0 million;
      --Fiscal year 2004--$6.3 million.
        It has been difficult to finance the Competitive Sourcing Program
    since the IRS does not know the outcomes in advance, the exact level of
    savings are yet to be determined, and it takes time to realize these
    savings. The IRS had to internally realign. However, the investments
    made today in public-private competitions show a return on investment
    usually within 2-3 years (includes payment of transition costs--
    voluntary early retirement, voluntary separation incentive, etc.). At
    that time, the IRS plans to reinvest the savings to fund future
    competitions and cover transition costs. The IRS proposes to fund $9.1
    million in the fiscal year 2005 budget for the Competitive Sourcing
    program by reinvesting resources freed up through productivity savings.

     PROGRESS ON STEMMING THE USE OF CHARITIES TO FUNNEL CASH TO TERRORIST
                                 ORGANIZATIONS

        Question. Our government has linked some 23 charitable
    organizations with the Al Qaeda network. It has been a longstanding
    practice for terrorist organizations around the globe to use charitable
    giving as an avenue for illicit resources. There appear to be some
    continuing disagreements between our government and the governments of
    the European Union as to which charities should be designated as being
    associated with terrorist organizations. A number of international
    charities that are listed by the United States have not been listed by
    European nations.
        Why can't the United States and Europe agree over which charities
    are financing terrorism?
        Answer. One of the primary differences between the United States
    and the European Union (E.U.) on the issue of terrorism and terrorist
    financing is the fact that the European Union has not traditionally
    treated non-al Qaeda terrorist groups, such as Hamas and Hizballah, in
    the same way that the United States treats them. The European Union has
    an efficient process for designating al Qaeda-related entities that
    have been designated by the U.N. 1267 Sanctions Committee. Under their
    system, action on an organization or individual by the U.N. 1267
    Sanctions Committee is a sufficient legal basis for the European Union
    to designate that same organization or individual. The European Union's
    designation system for non-al Qaeda groups (i.e., for groups designated
    pursuant to U.N. Security Council Resolution (UNSCR) 1373), however,
    suffers from a lack of efficiency and effectiveness. This has resulted
    in delays and gaps in the European Union's designation on several non-
    al Qaeda-related entities.
        One significant example of this problem is the European Union's
    failure to act swiftly and effectively with respect to Hamas. It is
    beyond question that funding to Hamas and other terrorist groups must
    be stopped, and the United States does not accept any artificial
    distinctions that some Europeans have in the past drawn between the so-
    called ``military'' and the so-called ``socio-political'' wings of
    Hamas or other terrorist groups. Hamas leaders themselves have publicly
    acknowledged this distinction is one without a difference. The
    conclusion is supported by the fungibility of funds. Money allocated to
    the humanitarian works of Hamas charities makes available for terrorist
    activity the Hamas funds that otherwise would have gone to those
    humanitarian purposes. Moreover, the United States believes that the
    funds raised by Hamas-related charities are used to finance the
    organization and ultimately fuel terrorist activities. For example, it
    is clear that Hamas uses its humanitarian operations to recruit
    militants and secure support for their activities among local
    communities and populace.
        To that end, the United States has designated charities that have
    provided support to Hamas. We have made clear our position on Hamas,
    and other such terrorist groups, to our partners around the world. We
    are beginning to see a ``sea change'' of the European attitude on this
    matter, based in large part on the U.S. efforts to change attitudes and
    policies. The European Union's decision in September 2003 to designate
    Hamas in its entirety as a terrorist group represents an important
    first. Due to inefficiencies within the E.U. designation process,
    however, this overarching designation has not always resulted in the
    designation of individual European charities that are funding Hamas. We
    therefore must continue to encourage the European Union to implement
    their decision by designating Hamas charities operating in Europe.
    Recently there have been encouraging signs from certain E.U. members.
    Last year, the Dutch government froze the assets of the Al Aqsa
    Foundation, a European charity supporting Hamas. The German government
    shut down the offices of the Al Aqsa Foundation in their country, and
    the Danish government took actions against certain individuals
    operating Al Aqsa in Denmark.
        The United States will continue to work with our E.U. counterparts,
    both by urging action and by keeping channels of communication open to
    share evidence supporting a complete designation of these terrorist
    groups.
        Question. Have you seen a demonstrable increase in the level of the
    effort on the part of European nations in going after terrorist
    financing since the Madrid bombings?
        Answer. Yes. The European Union's attention to the threat of
    terrorist financing has increased since the Madrid bombings. This
    renewed dedication is articulated in the European Union's Declaration
    on Combating Terrorism, which was issued on March 24, 2004, just 2
    weeks after the Madrid bombings and by the accompanying appointment of
    Gijs de Vries to the newly created position of E.U. Counter-Terrorism
    Coordinator.
        Question. What concrete changes have you seen since the Madrid
    bombings?
        Answer. As noted above, immediately following the Madrid bombings,
    the European Union issued a Declaration on Combating Terrorism and
    appointed Mr. de Vries as the counter-terrorism coordinator. Mr. de
    Vries has articulated an aggressive agenda and has visited the United
    States to consult with key U.S. counter-terrorism officials. We are
    hopeful that the establishment of this position will enhance E.U.
    effectiveness in combating terrorist financing.
        Question. In your view, which European nations have done the most
    in combating terrorist financing and which have the longest way to go?
        Answer. The State Department's recently issued annual report on
    ``Patterns of Global Terrorism 2003'' includes a country-by-country
    discussion of actions by European countries in fighting terrorist
    financing. Treasury concurs with that assessment and refers the
    committee to that document for more information about country-specific
    activity.
        Question. After some considerable pressure from Congress and the
    General Accounting Office, the IRS has finally published guidance to
    the States on how they can help regulate and monitor charitable
    organizations in this country that may be funneling money to
    terrorists.
        Do you believe that the States have done all they can monitor
    charitable organizations that may be funneling money to terrorists?
        Answer. States have an obligation to ensure the integrity of
    charities. They are the ground-level watchdog of charities and we rely
    on them to fulfill that function. They do not always, however, have the
    ability to effectively monitor global organizations. That is where the
    resources of not only the U.S. government, but the capabilities of
    umbrella organizations within the philanthropic community become
    critical.
        Question. Do you believe States have the kind of resources that are
    necessary to do this job adequately?
        Answer. I am not in a position to comment on the type or level of
    resources applied by each State to address the abuse of charities by
    terrorist financiers. I note, however, that we are engaged in a
    campaign to enhance their resources through cooperation. The first step
    was an outreach event recently held by the Treasury Department, with
    the focus being a discussion of the voluntary best practices against
    abuse of charities by terrorist financiers, previously published by
    Treasury. One of the significant results of this meeting was a decision
    to create an ``advisory group'' on charities. This group will serve as
    a resource and provide a forum that not only includes the States and
    the U.S. government, but also includes representatives from charities
    (large and small) and watchdog organizations.
     has progress in saudi arabia triggered progress in other arab nations?
        Question. Mr. Secretary, you traveled to Saudi Arabia back in
    September. Your agency has heaped praise on the Saudi government for
    enacting a significant number of new laws and regulations to prohibit
    the free flow of money to terrorist organizations in that country. But,
    as I noted in my opening statement, there is a difference between
    putting the laws on the books and actually enforcing them.
        Do you believe the Saudis have actually cut off the flow of money
    in a significant way between their suspect charitable organizations and
    terrorist groups?
        Answer. The Saudi Arabian government has taken decisive steps to
    curb the flow of terrorist money and we are hopeful that there will be
    further developments. Recognizing the significant role of charitable
    giving (zakat) in the Kingdom, this is a monumental task that not only
    requires legal and regulatory changes, but also a change in mindset
    among the population. The Saudis, who have now become victims of
    terrorism, appear to be committed to taking decisive action to address
    this problem. Even so, we continue to work with the Saudi government
    and other countries around the world to do more, faster and more
    aggressively.
        The most fundamental challenge facing the Kingdom is defusing the
    radical extremism that facilitates support and recruitment for radical
    Islamist terrorist organizations like al Qaeda. The Saudi efforts to
    deal with this issue are important to ensure that militant religious
    extremism does not provide a platform for terrorists from which they
    can justify and launch their terrible actions.
        The Saudi government must fully implement and enforce the
    comprehensive measures it has enacted to ensure charities, hawalas, and
    their formal financial systems are not abused for terrorist purposes.
    Recently, Saudi Arabia took concrete steps to do just that. On June 2,
    2004, the United States and Saudi Arabia jointly designated five
    branches of the Saudi-based charity, the Al Haramain Foundation (AHF),
    and at the same time Saudi Arabia announced its intention to dissolve
    AHF in its entirety and merge its remaining operations and assets into
    the newly-established Saudi National Commission for Charitable Work
    Abroad. Saudi Arabia announced that this new entity will be subject to
    strict financial transparency, will be subject to legal oversight and
    will operate according to clear policies, so as to ensure that
    charitable funds intended to help the needy are not misused.
        Question. Has the improved level of effort on the part of Saudi
    Arabia elicited similar responses by other Islamic nations?
        Answer. We have been working closely with many Islamic nations
    since the events of September 11 and have seen continued progress in
    their anti-terrorist financing efforts. There has been ongoing work and
    cooperation on fighting terrorist financing since September 11, given
    the real threat that al Qaeda poses to many countries, particularly
    those in the Middle East. Gulf Countries such as Kuwait and the United
    Arab Emirates (UAE) have been cooperative in responding to decisions by
    the U.N. 1267 Sanctions Committee and have taken important steps to
    address issues like regulation of charities and hawalas. Other
    countries have been victims of terrorism and have taken important steps
    to address that issue. For example, we have worked closely with
    Algeria, which has a secular government, to support their anti-
    terrorist financing efforts.
        Significant steps that are still needed include further action on
    cross-border currency transactions, wire transfers, and effective
    oversight of alternative payment systems such as hawalas. We are
    encouraging regional discussions on these issues and continue to
    advance progress on these issues in the Middle East and around the
    world.
        Question. What about the United Arab Emirates (UAE)?
        Answer. The UAE Government has made many positive reforms to their
    anti-money laundering program. Further, it has cracked down on
    potential vulnerabilities in the financial markets and is cooperating
    in the international effort to prevent money laundering, particularly
    by terrorists and their supporters. In 2002, the UAE, in partnership
    with the United States, blocked the assets of more than 150 named
    terrorist entities, including significant assets in the UAE belonging
    to Al-Barakat. The Central Bank (CB) of the UAE has frozen a total of
    $3.13 million in 18 bank accounts in the UAE between September 11, 2001
    and March 2004.
        Additionally, the UAE has recognized the importance and threat of
    hawala, and other alternative remittance systems, and they have made
    efforts to address the particular vulnerabilities from a lack of
    oversight and regulation of this sector. New regulations to improve
    oversight of the hawala system were implemented in 2002, and the CB now
    supervises 61 hawala brokers, which--like other financial institutions
    in the UAE--are now required to submit the names and addresses of
    transferors and beneficiaries involved in transfers to the CB and to
    complete suspicious transaction reports. The new attention on hawala is
    encouraging more people to use regulated exchange houses in the UAE.
    Traders in Dubai's Central Souk (Market) have stated that hawala
    exchange rates are now only 3 percent cheaper than formal exchange
    houses, persuading many to use the formal banking network. In May 2002,
    the UAE hosted an International Conference on Hawala attended by over
    300 delegates from 58 countries. The conference concluded with the
    issuance of ``The Abu Dhabi Declaration on Hawala,'' which calls for
    the establishment of a sound mechanism to regulate hawala, including,
    but not limited to the recommendation that countries adopt the 40
    Recommendations on money laundering and 8 Special Recommendations on
    terrorist financing of the Financial Action Task Force (FATF). In April
    2004, they held a second international conference on hawala reaffirming
    their commitment to the regulation of alternative remittance systems.
        UAE has also just established the Anti-Money Laundering and
    Suspicious Case Unit (AMLSCU), located within the Central Bank, which
    functions as that nation's Financial Intelligence Unit (FIU). In June
    2004, they co-hosted the South Asia Conference on Money Laundering with
    FinCEN, the U.S. FIU, further showing their commitment to combating
    money laundering and terrorist financing--especially on a regional
    basis.
        Question. Have you seen any improved level of cooperation from the
    UAE?
        Answer. Yes. The UAE Government has made many positive reforms to
    their anti-money laundering program. Further, it has cracked down on
    potential vulnerabilities in the financial markets and is cooperating
    in the international effort to prevent money laundering, particularly
    by terrorists and their supporters. In 2002, the UAE worked in
    partnership with the United States to block terrorist financing, and
    froze the assets of more than 150 named terrorist entities, including
    significant assets in the UAE belonging to Al-Barakat. The Central Bank
    (CB) of the UAE has frozen a total of $3.13 million in 18 bank accounts
    in the UAE between September 11, 2001 and March 2004.
        Additionally, the UAE has recognized the importance and threat of
    hawala, and other alternative remittance systems, and they have made
    efforts to address the particular vulnerabilities from a lack of
    oversight and regulation of this sector. New regulations to improve
    oversight of the hawala system were implemented in 2002, and the CB now
    supervises 61 hawala brokers, which--like other financial institutions
    in the UAE--are now required to submit the names and addresses of
    transferors and beneficiaries involved in transfers to the CB and to
    complete suspicious transaction reports. The new attention on hawala is
    encouraging more people to use regulated exchange houses in the UAE.
    Traders in Dubai's Central Souk (Market) have stated that hawala
    exchange rates are now only 3 percent cheaper than formal exchange
    houses, persuading many to use the formal banking network. In May 2002,
    the UAE hosted an International Conference on Hawala attended by over
    300 delegates from 58 countries. The conference concluded with the
    issuance of ``The Abu Dhabi Declaration on Hawala,'' which calls for
    the establishment of a sound mechanism to regulate hawala, including,
    but not limited to the recommendation that countries adopt the 40
    Recommendations on money laundering and 8 Special Recommendations on
    terrorist financing of the Financial Action Task Force (FATF). In April
    2004, they held a second international conference on hawala reaffirming
    their commitment to the regulation of alternative remittance systems.
        UAE has also just established the Anti-Money Laundering and
    Suspicious Case Unit (AMLSCU), located within the Central Bank, which
    functions as that nation's Financial Intelligence Unit (FIU). In June
    2004, they co-hosted the South Asia Conference on Money Laundering with
    FinCEN, the U.S. FIU, further showing their commitment to combating
    money laundering and terrorist financing--especially on a regional
    basis.
       will treasury ban non-cooperating nations from the banking sector?
        Question. Mr. Secretary, the Patriot Act gave you a new power to
    designate certain individual foreign jurisdictions or financial
    institutions as being ``primary money laundering concerns'' of the
    United States. To date, you have done this in the case of Burma,
    briefly in the case of the Ukraine, and in the case of the small
    country of Nauru. You can use this power under the Patriot Act to go so
    far as to cut those countries off from the U.S. financial sector.
        Mr. Secretary are you considering expanding the use of this tool in
    terms of pushing foreign nations to improve their efforts in the area
    of combating terrorist financing?
        Answer. The Treasury Department is committed to employing the tools
    given to us in Section 311 of the Patriot Act effectively and
    aggressively. As you note in your question, Treasury has already used
    this authority to designate the jurisdictions of Ukraine, Nauru and
    Burma, and two individual Burmese banks, all based on money laundering
    concerns. Additionally, the Treasury Department has designated the
    Commercial Bank of Syria and its Lebanese subsidiary under Section 311
    based on a variety of issues, including terrorist financing concerns.
    In the cases of Ukraine, Nauru, and Burma, the designations have proved
    effect in pushing the foreign governments to improve their anti-money
    laundering efforts. It is our hope and expectation that the Syrian-
    related designation will prove effective as well.
        Moving forward, Treasury will continue to safeguard the U.S.
    financial system by identifying and designating appropriate targets
    under Section 311, including those that pose risks related to terrorist
    financing.
        Question. Which nations would you identify as having the most work
    to do to bring their level of effort up to a level that you would
    consider acceptable?
        Answer. All countries should be constantly striving to improve
    their efforts in the fight against terrorist financing. Some countries
    have steps that they should take to improve the underlying structure of
    the counter-terrorist financing legal and regulatory systems. Others
    have these systems in place and need to focus on effective
    implementation. The State Department's recently issued annual report on
    ``Patterns of Global Terrorism 2003'' includes a country-by-country
    discussion of actions in fighting terrorist financing. Treasury concurs
    with that assessment and refers the committee to that document for more
    information about country-specific activity.

      IS TREASURY REQUESTING ENOUGH FOOT SOLDIERS IN THE WAR ON TERRORIST
                                   FINANCING?

        Question. Many critics have observed that your agency's efforts to
    combat terrorist financing are spread over too many offices with little
    or no coordination between the Office of Foreign Asset Control, the
    IRS, the Financial Crimes Enforcement Network and other parts of the
    Treasury Department. As such, I commend your decision to create the new
    Office of Terrorism and Financial Intelligence within the Department to
    coordinate all of these efforts. The leaders of the Senate Finance
    Committee--both Chairman Grassley and Senator Baucus--have commented in
    a letter to the President that your new initiative seems to be ``heavy
    on generals and light on soldiers.'' Also, it was recently revealed
    that, in developing President Bush's budget request for 2005, a request
    by the IRS to increase the number of criminal financial investigators
    working on terrorist financing by 50 percent was rejected.
        Are you sure that the amount of money that you have requested will
    supply enough resources to boost the number of foot soldiers that can
    follow up on leads and disseminate information to have the maximum
    impact in combating terrorism?
        Answer. Over the last year, we have made substantial progress in
    coordinating the activities of the Office of Foreign Assets Control
    (OFAC), the IRS-Criminal Investigation Division (IRS-CI) and the
    Financial Crimes Enforcement Network (FinCEN) through the leadership of
    Deputy Assistant Secretary Juan Zarate and the Executive Office for
    Terrorist Financing and Financial Crimes (EOTF/FC). With the creation
    of the Office of Terrorism and Financial Intelligence (TFI), we are
    taking the final step of fully integrating the intelligence functions
    and resources of the Treasury Department into this effort. Initially,
    we are focusing on ensuring we are using what resources we have as
    effectively as possible. As part of this, we are exploring all options,
    e.g., exploiting the expertise and resources of existing Treasury
    bureaus and offices, not just for intelligence or law enforcement
    purposes, but also looking at regulatory actions. But before we turn to
    the solution of adding more people, we are ensuring we clearly know
    what is necessary--whether expertise, personnel, technology, or legal
    authorities.
        Question. How do you respond to the criticism that your new
    initiative is too top heavy and doesn't provide enough people to follow
    up on every potential lead?
        Answer. The key to this new structure is the combination of our
    resources as well as the elevation of the status of these efforts
    within the Treasury Department and the U.S. Government. Both elements
    are essential to making the Office of Terrorism and Financial
    Intelligence (TFI) function well. Thus, we will be creating necessary
    efficiencies both within Treasury and in the U.S. Government to ensure
    we are maximizing our efforts. This is a team effort, not just within
    Treasury, but within the government. As we create this new office, we
    need expertise and leadership that will not only maximize the resources
    we have within Treasury, but also the resources within the government
    that contribute to this effort.

        WILL THE BUDGET BOOST ACTUALLY IMPROVE FINANCIAL CRIMES NETWORK
                     ENFORCEMENT'S (FINCEN'S) PERFORMANCE?

        Question. Your Financial Crimes Enforcement Network, or FinCEN, is
    charged with collecting and disseminating information on all
    questionable financial transactions that are reported by the banking
    sector. This agency has been subjected to a lot of criticism because of
    outdated technology and the long delays between the time questionable
    transactions are reported and the time they can be accessed by law
    enforcement agencies. Your budget seeks a 13 percent boost in funding
    for FinCEN this year.
        If we approve this request, will we see demonstrable improvement in
    the amount of time it takes from when your agency takes receipt of this
    information to when it is available to the Federal and State agencies
    that are actually investigating and prosecuting these crimes?
        Answer. Yes. Electronic filing from institutions is the best way to
    ensure faster provision of Bank Secrecy Act (BSA) information after it
    is received. An amount of $3.238 million of this budget request is for
    program costs associated with the various mandates of the USA PATRIOT
    Act, and one of these mandates is to build a system that would permit
    the electronic filing of Bank Secrecy Act reports. The system built by
    FinCEN--the Patriot Act Communications System--has been operational
    since June 2002. Some of this request will be used to enhance this
    system's reliability and to develop tools that FinCEN believes will
    result in greater usage by industry.
        FinCEN has also requested $1.354 million and two FTEs for program
    increases to expand law enforcement's access to Bank Secrecy Act
    information through the on-line access system known as Gateway. This
    will broaden electronic access to this information among law
    enforcement.
        Finally, FinCEN's BSA Direct initiative--a program critical to
    FinCEN's ability to provide law enforcement access to timely
    information--will improve law enforcement's access to the critical Bank
    Secrecy Act data by integrating the data into a consolidated, modern
    data warehouse. BSA Direct will include sophisticated query and
    reporting tools. Law enforcement and regulatory agencies will gain
    easier data access and enhanced ability to query and analyze the Bank
    Secrecy Act reports. These improvements are expected to lead to
    increased use of the Bank Secrecy Act data and will permit FinCEN to
    achieve its statutory obligations to control access and audit access to
    this sensitive information, provide FinCEN with the ability to network
    agencies with overlapping investigations, and will help FinCEN provide
    feedback and better communicate with the financial industry.
        Question. The so-called ``hawala'' network is considered one of the
    prime ways in which terrorist organizations have been able to move
    money across borders without a paper trail. These networks are used for
    legitimate money transfers from immigrant families to their families
    back home. A blue ribbon task force on terrorist financing recommended
    that your Financial Crimes Enforcement Network register these
    operations in this country and require them, like banks, to report
    suspicious financial transactions.
        Has any progress been made toward that goal by your Financial
    Crimes Enforcement Network?
        Answer. To date, approximately 18,000 money service businesses have
    registered with FinCEN. It is unclear, however, how many of these
    entities are informal value transfer systems such as hawalas, hundi,
    fei ch'ien and others. Although there is a clear requirement for
    informal value transfer systems to register with FinCEN as a money
    services business, the registration does not distinguish these systems
    from other money service businesses. Failure to register can result in
    a Federal felony conviction.
        FinCEN is working closely with the Internal Revenue Service (IRS),
    the agency with delegated responsibility to examine these businesses
    for Bank Secrecy Act compliance, to look for ways to identify these
    informal value transfer systems and bring them into compliance. FinCEN
    and the IRS are also focusing outreach and education efforts in
    communities where these informal systems are popular. Finally, FinCEN
    is working closely with law enforcement to identify those persons and
    entities that may be operating outside the bounds of the law.
        Question. Should we expect any progress this year?
        Answer. Yes. A central focus of FinCEN's new leadership is to
    improve registration and compliance by money service businesses. FinCEN
    is developing a comprehensive plan aimed at increasing registration and
    otherwise improving money service business compliance with Bank Secrecy
    Act regulations. Steps that FinCEN is already taking include:
      --Obtaining better information on the size and nature of components
            of the money service business industry--including informal
            value transfer systems--to better ascertain the scope of
            education and outreach necessary and focus compliance resources
            on those sectors of the industry that critically need to be
            addressed;
      --Coordinating with State regulators and Trade Associations to
            identify potential registrants and provide education and
            outreach;
      --Conducting analysis of the Bank Secrecy Act reports for leads on
            locating money service business identified by other financial
            institutions as unregistered, non-compliant or engaged in
            suspicious activity. FinCEN will then point the IRS or law
            enforcement to those entities for action.
      --Improving the registration form and regulatory requirements to
            simplify the registration and filing process, reduce filer
            error and improve quality of the data provided by filers.

         TREASURY'S TERRORIST FINANCING INITIATIVE NEEDS DEADLINES AND
                                   MILESTONES

        Question. Mr. Secretary, a variety of oversight agencies, including
    the GAO and others have criticized your national money laundering
    strategy and other elements of the war on terrorist financing because
    they tend to lack milestones and deadlines. You are now standing up a
    new office of Terrorism and Financial Intelligence within the Treasury
    Department to improve coordination between all of the agencies within
    your department that work on this important effort.
        Do you think it is reasonable to have the new head of this office
    submit a comprehensive series of department-wide deadlines and
    milestones for each of the elements of your war on terrorist financing?
        Answer. Treasury and the Executive Office for Terrorist Financing
    and Financial Crimes already use measures or milestones to help mark
    and guide our efforts in the areas of terrorist financing and financial
    crime. These have been incorporated into Treasury's comprehensive
    strategic plan, which is attached. Elements of this plan specifically
    focus on terrorist financing and financial crimes.
        The ultimate goal of our efforts is to detect, deter and disrupt
    terrorist activity by cutting off access to sources of funds and
    systems. The most valuable way to measure our success in this effort is
    often intelligence information that suggests to us the impact we are
    having on the terrorist organization that we are targeting. This
    information is often anecdotal. Recognizing that we are dealing with a
    nefarious and clandestine network about which it is hard to obtain hard
    facts on cash flows, we have tried to identify other measures on how to
    evaluate success.
        Question. How soon do you think you would be in a position to
    submit this to the committee?
        Answer. A copy of Treasury's strategic plan is attached, and we
    will continue to develop adequate measures to help monitor our efforts.
        [Clerk's Note.--A copy of this document has been retained in
    Committee files.]

                     ARE THERE MORE RIGGS BANKS OUT THERE?

        Question. Mr. Secretary, one of the last acts of the Clinton
    Administration was to issue a new money laundering guidance that
    specifically addressed requirements of financial institutions to
    monitor the financial transactions of senior foreign political figures.
    A lot of attention has been paid in the press to the possibility that
    Riggs Bank, here in the District of Columbia, knowingly violated those
    procedures since they do so much business with the Foreign Diplomatic
    Corps.
        How widespread do you believe the problem is?
        Answer. We have no reason to believe that the industry as a whole
    is not complying with the Bank Secrecy Act (BSA) requirements, although
    we recognize that we may need to improve coordination and enhance
    regulatory oversight.
        Question. Are there other financial institutions besides Riggs
    Banks that are currently under investigation for failing to monitor the
    transactions of foreign government officials and foreign diplomats?
        Answer. It would be inappropriate to comment on current
    investigations. However, at any given time, banks are examined by their
    functional Federal regulator for compliance with the Bank Secrecy Act
    (BSA). In fact, Federal bank regulators have explicit BSA examination
    cycles for institutions under their supervision. If an institution is
    found not to be in compliance with its requirements under the BSA,
    appropriate measures are taken to ensure full investigation and
    appropriate resolution of the matter.
        Question. To what extent do you believe that the transactions that
    were not reported by Riggs Bank or others are in fact directly
    attributable to terrorist financing?
        Answer. FinCEN is not in a position to confirm or deny the
    possibility that Riggs Bank facilitated terrorist financing. The
    transactions identified as suspicious were referred to law enforcement,
    as is our standard procedure for all such reporting for any financial
    institution.
        Question. Have we established any direct links between actual
    terrorist groups and some of the transactions that have been discussed
    in the press?
        Answer. FinCEN has no factual basis for concluding that the
    transactions not reported by Riggs Bank involved the financing of
    terrorism, and the transactions identified as suspicious were referred
    to law enforcement for possible investigation.

             WHAT ACCOMPLISHMENTS ARE HOPED FOR IN NEXT G-8 SUMMIT?

        Question. Mr. Secretary, exactly 7 weeks from today, President Bush
    will host the Sea Island G-8 Summit in Georgia. The theme of the summit
    is ``Freedom, Prosperity and Security'', and the efforts of the
    international community in fighting terrorism are on the agenda.
        Can you specify for us what specific accomplishments in the area of
    combating terrorist financing are you hoping to bring about at the next
    G-8 summit?
        Answer. The G-8 heads of state have provided crucial leadership to
    the international coalition against terrorist finance, which met in
    June 2004 at the Sea Island Summit. They have charged the G-7 Finance
    Ministers with the lead operational role in these efforts, and the
    Finance Ministers have reported to Heads at the end of last year about
    their accomplishments and their plans for this year, which included
    work on cash couriers, alternative remittance systems, and making asset
    freezing regimes more effective. They have also continued to implement
    the heads' charge to undertake outreach efforts to countries outside
    the G-7 by hosting meetings with key finance ministers and central bank
    governors in September 2003 (Dubai) and April 2004 (Washington, DC).

                            IRS STAFFING REDUCTIONS

        Question. In January, IRS announced plans to reorganize.
        What is the status of the reorganization? Please list current and
    proposed reductions by number of employees, type of work performed,
    center location including State, and date of reduction or proposed
    reduction.
        Answer. In January, the Internal Revenue Service (IRS) announced
    changes designed to create operational efficiencies that will
    ultimately allow the IRS to re-direct the savings towards approximately
    2,200 new enforcement positions. These changes include: Income Tax
    Returns Processing, Consolidation of Back Office Operations, and
    Reduction of Agency Overhead. Below are the specific details of each
    initiative, in turn.
        Income Tax Returns Processing.--The IRS is gaining efficiency from
    the increase in e-filed returns and the drop in the more labor-
    intensive paper filings. Since 1990, the number of returns filed
    electronically has grown from 4 million to 60 million in 2004, reducing
    the need for employees to enter the data manually. It is expected that
    in 2005 over half of the returns received by IRS will be electronically
    filed. Some time ago, after realizing ten centers would not be needed
    to process tax returns, IRS developed a plan that would, over time,
    reduce the number of centers processing paper returns. The IRS
    Brookhaven center stopped processing paper returns in September 2003.
    In January, the IRS announced the second step in this process. The IRS
    Memphis center will stop processing paper returns in October 2005. At
    the Memphis location, about 2,200 employees currently process tax
    returns. Almost 2,000 of these employees are either seasonal employees
    or employees hired under a limited-term appointment. The IRS
    Philadelphia center is scheduled to stop processing paper returns in
    2007, and the Andover center will be scheduled after Philadelphia,
    depending on experiences with the other locations. IRS has taken steps
    in Philadelphia to limit the impact on career employees.
        Consolidation of Back Office Operations.--For approximately 3
    years, the IRS studied the reengineering of two administrative case
    management operations: case processing and insolvency operations. Case
    processing employees are responsible for a variety of back-office
    administrative tasks in support of examination and collection casework,
    such as processing cases, computer research and inventory controls. The
    insolvency organization protects the government's interests by ensuring
    that the government's claim in bankruptcy proceedings receives the
    highest possible priority relative to other creditors.
        The case processing initiative involves more than 1,200 employees
    in over 80 locations. The insolvency initiative involves more than 300
    employees in more than 50 locations. IRS is currently examining the
    impacts on each State, but will work to minimize the impact on
    employees by providing the maximum opportunities possible in affected
    areas.
        The current structure of these two operations is a vestige of the
    old IRS structure prior to the reorganization mandated by the IRS
    Reform and Restructuring Act of 1998. Under this structure, many of the
    posts of duty have very few employees; indeed, some locations have only
    one employee performing case processing or insolvency work. As a
    result, we have minimal ability to respond to peak demand or manage
    workload; and employees have little opportunity to develop specialized
    skills or advance their careers. In addition, this widely dispersed
    geographic structure results in a variety of non-standard processes and
    makes quality review difficult.
        The new operational structure builds on existing processes
    currently being performed at IRS campuses; provides economies of scale
    and standardization; allows the creation of a quality review unit;
    offers staffing flexibility; and creates space savings due to shift
    work. Specifically, Case Processing operations will be centralized at
    four campuses (Cincinnati, Memphis, Ogden, and Philadelphia), and a new
    function will be created to support the redesigned organization through
    help-desk support, technical assistance and quality review. Insolvency
    operations will be realigned across clerical, paraprofessional and
    professional staff. The clerical and paraprofessional staff will be
    consolidated in Philadelphia. (Approximately 900 Insolvency Specialists
    and Advisors will remain in field offices.)
        Even after taking into account costs such as severance, hiring,
    training, salary cost differentials, and infrastructure, we expect
    these initiatives to yield savings in excess of $300 million over the
    next 10 years. These savings will allow us to redirect the equivalent
    of 350 to 425 full-time employees to front line tax law enforcement
    over the next 3 to 5 years.
        Reduction of Agency Overhead.--The IRS has studied human resources
    and other support functions to identify staff efficiencies and
    determine the proper size of these activities. Streamlining and
    centralization of these functions will generate annual savings of
    approximately 750 staff years, primarily two initiatives in the human
    resource area: Personnel Field Services and Transaction Processing
    Centers. The staff reductions are expected to occur in late 2005. IRS
    is in the process of finalizing these plans and will announce the
    details as they are able.
      --Personnel Field Services.--The Personnel Field Services provides
            internal and external staffing support for the IRS business
            units, and administers over 30 benefit and work life programs.
            This initiative will take advantage of new technologies, such
            as a new automated Personnel system, HR Connect, mandated for
            use throughout Treasury and CareerConnector, as well as
            improved business processes and consolidation to create
            efficiency gains. Through this initiative, we will consolidate
            the Employment operations organizationally and geographically,
            producing economies of scale and improved operations, and
            yielding substantial support resource savings. Employment
            services will be consolidated in locations to support on-site
            campus operations.
      --Transactional Processing Centers.--Transactional Processing Centers
            (TPCs) process payroll and timekeeping for the IRS. Currently,
            these operations are located at nine sites, each of which have
            a timekeeping, payroll, and employee inquiry function. As we
            implement HR Connect, we anticipate a 50 percent decrease in
            workload at the TPCs. The TPC consolidation is also part of a
            larger process of integrating the staff of the Employee
            Resource Center (which handles all administrative inquiries
            from Service employees) and the TPCs. Since about one-third of
            the administrative inquiries concern payroll, integration of
            these functions will permit us to answer more inquiries on
            first contact.
        Question. What is the rationale for these reductions?
        Answer. As noted above, in January, the Internal Revenue Service
    (IRS) announced changes designed to create operational efficiencies
    that will ultimately allow the IRS to re-direct the savings towards
    approximately 2,200 new enforcement positions. These changes include:
    Income Tax Returns Processing, Consolidation of Back Office Operations,
    and Reduction of Agency Overhead. Below are the specific details of
    each initiative, in turn.
        Income Tax Returns Processing.--The IRS is gaining efficiency from
    the increase in e-filed returns and the drop in the more labor-
    intensive paper filings. Since 1990, the number of returns filed
    electronically has grown from 4 million to 60 million in 2004, reducing
    the need for employees to enter the data manually. It is expected that
    in 2005 over half of the returns received by IRS will be electronically
    filed. Some time ago, after realizing ten centers would not be needed
    to process tax returns, IRS developed a plan that would, over time,
    reduce the number of centers processing paper returns. The IRS
    Brookhaven center stopped processing paper returns in September 2003.
    In January, the IRS announced the second step in this process. The IRS
    Memphis center will stop processing paper returns in October 2005. At
    the Memphis location, about 2,200 employees currently process tax
    returns. Almost 2,000 of these employees are either seasonal employees
    or employees hired under a limited-term appointment. The IRS
    Philadelphia center is scheduled to stop processing paper returns in
    2007, and the Andover center will be scheduled after Philadelphia,
    depending on experiences with the other locations. IRS has taken steps
    in Philadelphia to limit the impact on career employees.
        Consolidation of Back Office Operations.--For approximately 3
    years, the IRS studied the reengineering of two administrative case
    management operations: case processing and insolvency operations. Case
    processing employees are responsible for a variety of back-office
    administrative tasks in support of examination and collection casework,
    such as processing cases, computer research and inventory controls. The
    insolvency organization protects the government's interests by ensuring
    that the government's claim in bankruptcy proceedings receives the
    highest possible priority relative to other creditors.
        The case processing initiative involves more than 1,200 employees
    in over 80 locations. The insolvency initiative involves more than 300
    employees in more than 50 locations. IRS is currently examining the
    impacts on each State, but will work to minimize the impact on
    employees by providing the maximum opportunities possible in affected
    areas.
        The current structure of these two operations is a vestige of the
    old IRS structure prior to the reorganization mandated by the IRS
    Reform and Restructuring Act of 1998. Under this structure, many of the
    posts of duty have very few employees; indeed, some locations have only
    one employee performing case processing or insolvency work. As a
    result, we have minimal ability to respond to peak demand or manage
    workload; and employees have little opportunity to develop specialized
    skills or advance their careers. In addition, this widely dispersed
    geographic structure results in a variety of non-standard processes and
    makes quality review difficult.
        The new operational structure builds on existing processes
    currently being performed at IRS campuses; provides economies of scale
    and standardization; allows the creation of a quality review unit;
    offers staffing flexibility; and creates space savings due to shift
    work. Specifically, Case Processing operations will be centralized at
    four campuses (Cincinnati, Memphis, Ogden, and Philadelphia), and a new
    function will be created to support the redesigned organization through
    help-desk support, technical assistance and quality review. Insolvency
    operations will be realigned across clerical, paraprofessional and
    professional staff. The clerical and paraprofessional staff will be
    consolidated in Philadelphia. (Approximately, 900 Insolvency
    Specialists and Advisors will remain in field offices.)
        Even after taking into account costs such as severance, hiring,
    training, salary cost differentials, and infrastructure, we expect
    these initiatives to yield savings in excess of $300 million over the
    next 10 years. These savings will allow us to redirect the equivalent
    of 350 to 425 full-time employees to front line tax law enforcement
    over the next 3 to 5 years.
        Reduction of Agency Overhead.--The IRS has studied human resources
    and other support functions to identify staff efficiencies and
    determine the proper size of these activities. Streamlining and
    centralization of these functions will generate annual savings of
    approximately 750 staff years, primarily two initiatives in the human
    resource area: Personnel Field Services and Transaction Processing
    Centers. The staff reductions are expected to occur in late 2005. IRS
    is in the process of finalizing these plans and will announce the
    details as they are able.
      --Personnel Field Services.--The Personnel Field Services provides
            internal and external staffing support for the IRS business
            units, and administers over 30 benefit and work life programs.
            This initiative will take advantage of new technologies, such
            as a new automated Personnel system, HR Connect, mandated for
            use throughout Treasury and CareerConnector, as well as
            improved business processes and consolidation to create
            efficiency gains. Through this initiative, we will consolidate
            the Employment operations organizationally and geographically,
            producing economies of scale and improved operations, and
            yielding substantial support resource savings. Employment
            services will be consolidated in locations to support on-site
            campus operations.
      --Transactional Processing Centers.--Transactional Processing Centers
            (TPCs) process payroll and timekeeping for the IRS. Currently,
            these operations are located at nine sites, each of which have
            a timekeeping, payroll, and employee inquiry function. As we
            implement HR Connect, we anticipate a 50 percent decrease in
            workload at the TPCs. The TPC consolidation is also part of a
            larger process of integrating the staff of the Employee
            Resource Center (which handles all administrative inquiries
            from Service employees) and the TPCs. Since about one-third of
            the administrative inquiries concern payroll, integration of
            these functions will permit us to answer more inquiries on
            first contact.
        Question. What kind of hires will occur as a result of the
    reorganization?
        Answer. The savings from the reorganization initiatives will
    ultimately be re-directed towards approximately 2,200 new enforcement
    positions. The case processing and insolvency initiative will result in
    the creation of positions in Cincinnati, Memphis, Ogden and
    Philadelphia. Case processing operations will be centralized at four
    campuses and a new function will be created to support the redesigned
    organization through help-desk support, technical assistance and
    quality review. Insolvency operations will be realigned across
    clerical, paraprofessional and professional staff. The clerical and
    paraprofessional staff will be consolidated in Philadelphia.
    (Approximately 900 Insolvency Specialists and Advisors will remain in
    field offices.)
        The reduction in agency overhead will fund expected efficiencies of
    $18 million directed by the administration in the IRS's fiscal year
    2005 budget.
        IRS returns processing savings anticipated in fiscal year 2005 are
    approximately $6 million and 147 FTE. These savings, along with $105
    million additional savings will be reapplied as follows:

    ------------------------------------------------------------------------
                                                Millions of
                  Reinvestment                    Dollars           FTE
    ------------------------------------------------------------------------
    Curb Egregious Noncompliance............            31.4             293
    Select High Risk Cases for Examination..             6.0  ..............
    Embedded Quality........................             1.6              26
    Consolidation--Case Processing..........            13.7              80
    Consolidation--Insolvency...............             2.1              15
    Combat Corporate Abusive Tax Schemes....             5.0              34
    Leverage/Enhance Special Agent                       2.5              28
     Productivity...........................
    Standardize CLMC Training Rooms.........             0.5  ..............
    IRS Reorganization Transition...........             5.0  ..............
    Service-wide Competitive Sourcing.......             9.1  ..............
    MITS Reorganization Transition..........            34.0             236
                                             -------------------------------
          Total.............................           110.9             712
    ------------------------------------------------------------------------

        Downstream rent savings will be used to reduce rent deficits,
    allowing IRS to protect enforcement initiatives.

                            IRS ENFORCEMENT INCREASE

        Question. Mr. Snow, at our recent hearing with IRS Commissioner
    Everson, we heard about the unbudgeted-for costs at IRS and how funding
    that was to be used for enforcement, instead went to help pay for these
    unbudgeted costs such as pay, postage and rent.
        Can you give us the same commitment that Commissioner Everson did,
    that every dollar that this subcommittee provides for enforcement for
    this year and next year actually be spent on enforcement activities?
        Answer. Yes, if the Congress provides the requested enforcement
    funds, the committee can count on those funds going toward enforcement.
        The only caveat is, as noted by Commissioner Everson when he
    testified before the committee, is a government-wide rescission or
    similar device is enacted, we will take them across the board and that
    may affect the total enforcement resource level as it will affect all
    of the other IRS accounts.
        Question. Also, Mr. Secretary, we have been told by IRS that for
    the past 3 years, enforcement has been declining at IRS. Now, IRS is
    changing its focus and making enforcement a top priority.
        Why has it taken 3 years for the IRS to stem the reduction in
    enforcement activities?
        Answer. The decline in enforcement activities was driven by
    concurrent declines in frontline enforcement personnel and
    implementation of significant process changes required to respond to
    the mandates of the Restructuring and Reform Act of 1998. From fiscal
    year 1996 to fiscal year 2003, the combined FTE for revenue agents,
    revenue officers and criminal investigators declined by 27 percent.
    During this period, IRS placed an increased emphasis on improving
    taxpayer service, often to the detriment of enforcement. Despite this,
    enforcement outputs increased in 2003 across all major programs. IRS
    expects these increases to continue in 2004 with additional hires and
    continued roll-out of reengineered processes. The fiscal year 2005
    budget seeks to further restore IRS to a balanced program emphasizing
    both service and enforcement.

                    OFFICE OF FOREIGN ASSETS CONTROL (OFAC)

        Question. Recently, OFAC provided supplemental budgetary
    information to the Appropriations Committee outlining six areas of
    focus relating to Executive Orders, followed by two significant efforts
    on joint task force actions.
        Please provide for the record how many FTEs or employee hours--
    whichever is more applicable--are allocated for the above-mentioned
    areas.
        Answer.

    ------------------------------------------------------------------------
                       Executive Order \1\                          FTE
    ------------------------------------------------------------------------
    President's Financial War on Terrorism (E.O. 13224).....          30.443
    Charities and Regulatory Strategy/Financial War on                 2.930
     Terrorism (E.O. 13224).................................
    Blocking Saddam's Misappropriated Assets (E.O. 13315)...           5.820
    Western Balkans Executive Order (E.O. 13219)............           1.070
    Kingpin Act Program.....................................           9.095
    SDNT--Colombian Cartels Program.........................       \2\ 7.045
                                                             ---------------
          Total.............................................          56.403
    ------------------------------------------------------------------------
    \1\ These numbers are estimates based on current workload and allocation
      of resources to meet these needs. As workload demands change, the
      numbers will fluctuate as well. Numbers in these tables include
      allocation of resources for program implementation and support.
    \2\ Includes Operation Dynasty and Operation Panama Express.

        Question. What are the remaining FTEs or employee hours allocated
    to?
        Answer.

    ------------------------------------------------------------------------
                          Programs \1\                              FTE
    ------------------------------------------------------------------------
    Afghanistan/Taliban.....................................           0.69
    Cuba....................................................          21.43
    Iran....................................................          13.62
    Iraq....................................................           5.43
    Libya...................................................           5.06
    North Korea.............................................           0.34
    Sudan...................................................           4.1
    Syria...................................................           0.75
    Burma...................................................           0.021
    Liberia.................................................           2.06
    Zimbabwe................................................           0.58
    Haiti...................................................           0.045
    Other Programs..........................................           6.971
    Program Support.........................................           9.61
                                                             ---------------
          Total.............................................          70.707
    ------------------------------------------------------------------------
    \1\ These numbers are estimates based on current workload and allocation
      of resources to meet these needs. As workload demands change, the
      numbers will fluctuate as well. Numbers in these tables include
      allocation of resources for program implementation and support.

        Question. Please list for the record, how many FTEs and employee
    hours are dedicated to administering and enforcing the restrictions on
    travel to Cuba.
        Answer. Cuba, because of its proximity and distinctive relationship
    with the United States, has a unique and critical sanction program
    which receives strict attention. OFAC has the equivalent of 21.43 FTEs
    who administer, oversee and enforce the Cuba program, including the
    travel embargo and remittance restrictions. These FTEs focus on a full
    range of OFAC services required for the administration of the program,
    including licensing, enforcement, supervision and other important
    aspects of the embargo. Of the 21.43 FTEs, approximately half are
    devoted to processing travel-related license requests, which include
    family, educational, humanitarian, religious, professional,
    journalistic, governmental, and other types of travel.
        Question. How has this differed from FTEs and hours spent during
    each of the past 5 years?
        Answer. Departmental Offices' financial management reporting system
    does not have the capability of allocating the number of employees
    dedicated to administering and enforcing the restrictions on travel to
    Cuba over the past 5 years. The financial reporting system reflects the
    total number of employees, authorized, on-board, and project FTE usage.
        Question. How does the fiscal year 2005 budget request allocate
    resources for this purpose?
        Answer. The fiscal year 2005 budget request allocates resources for
    this purpose based on the current FTE level (21.43 FTEs). It is
    anticipated that this FTE level will remain approximately the same.

       PROPOSED MERGER OF THE U.S. MINT AND THE BUREAU OF ENGRAVING AND
                                    PRINTING

        Question. Mr. Secretary, in March, the Treasury Department hired a
    consulting company to study ways to merge the U.S. Mint and the Bureau
    of Engraving and Printing (BEP). This is not a new idea and is one that
    has been studied by GAO in 1997, by the National Performance Review in
    1995, and by the Treasury Inspector General in 1987. In all cases, the
    idea of a merger was rejected as impractical and potentially costly.
    Despite these facts, the decision was made to pay for a new study at a
    cost that will exceed $400,000. I have been told that this study will
    not make a recommendation, that it is only a 60-day study that will
    simply provide options.
        Is this a wise use of taxpayer dollars when the idea has already
    been rejected on three separate occasions?
        Answer. The Treasury Department continues to look for taxpayer
    savings and efficiencies in all its bureaus. Due to changing market
    conditions, review of the Treasury Department's structure is necessary
    to best serve the public. By studying the structure of the U.S. Mint
    and Bureau of Engraving and Printing, the Treasury Department ensures
    effective use of taxpayer resources.
        Question. Is this expenditure reflected as a line-item in the
    Fiscal Year 2005 President's Budget? If not, why not?
        Answer. The expenditure is not a line item in the President's
    Fiscal Year 2005 Budget. The U.S. Mint and the Bureau of Engraving and
    Printing allocate resources for efficiency assessments they believe
    necessary. The specifics of these studies are not always known when the
    budget is formulated.
        Question. Who at the Treasury Department made the decision to hire
    the consultant?
        Answer. The Secretary directed senior officials at the Bureau of
    Engraving and Printing and the U.S. Mint to work with his staff. These
    efforts at the Department are run out of the Office of the Assistant
    Secretary for Management.
        Question. Why wasn't this an open competition? Only three firms
    were considered off the GSA schedule. Who were they and what factors
    led to the winner's selection over the other two?
        Answer. This was an open competition. The Department complied with
    the requirements for full and open competition by obtaining three
    experienced companies from the GSA Schedule. IBM, Logistic Management
    Institute (LMI), and Booz Allen Hamilton are prominent and respected
    firms in this field.
        LMI was selected because the contracting officer determined the
    firm submitted the best proposal based on their:
      --1. Management Approach.--This includes ``Understanding of the
            Requirement'' and ``Demonstrated Ability to Meet Timeframes
            with Quality Products''
      --2. Experience of Proposed Personnel in Cost Modeling, Government
            Management Improvement Efforts, Redevelopment of Excess Plant
            Capacity/Office Space, and OMB/Congressional Budget Issues
      --3. Past Performance.--Includes the proposed individuals and the
            firm.
        Question. Why is this study being rushed in 60 days in order to
    provide information for the fiscal year 2006 budget cycle? This is not
    a new issue. Why is it imperative to cut corners and go to unnecessary
    expense for this proposal?
        Answer. The study was designed to be completed in approximately 60
    days in order for Treasury to consider an inclusive approach that
    assesses the possible impact of changing market conditions. This
    inclusive approach calls for augmenting the business case for BEP/Mint
    efficiencies within the context of current ``good government''
    initiatives.
        While the issue is not new, the environment (impact of E-Commerce
    on demand and 9/11 impact on security) has changed since the prior
    studies.
        We believe this timeframe was reasonable for the assessment and is
    a necessary expense and integral to implementing our approach for the
    study.
        Question. Will you provide your assurance, Mr. Secretary, that from
    this point further, the Treasury Department will not expend any
    additional funding to implement a Mint-BEP merger until such a time
    that this committee and the Congress provide its approval?
        Answer. We will not pursue any of these options without a full
    consultation with Congress and, in fact, Treasury will not call for any
    merger of any system or function during the 108th Congress.
                                     ______

                 Questions Submitted by Senator Robert C. Byrd

        Question. Congress included in the Fiscal Year 2004 Consolidated
    Appropriations bill, enacted as Public Law 108-199, on January 23,
    2004, language that directs the administration to negotiate a solution
    to the World Trade Organization's (WTO) ruling against the Continued
    Dumping and Subsidy Offset Act. When will the United States present its
    negotiating position on this matter to the WTO?
        Answer. In accordance with the Appropriations bill language, the
    United States filed and presented a formal paper in the World Trade
    Organization (WTO) Negotiating Group on Rules for its meeting the week
    of April 26, 2004, raising the issue of the right of WTO Members to
    distribute monies collected from antidumping and countervailing duties.
    That paper is publicly available on the WTO website (www.wto.org),
    under the document designation TN/RL/W/153.
        It should be noted that the November 2001 Doha Ministerial
    Declaration mandate for the WTO Rules Group calls for an initial phase
    of issue identification before any negotiations over specific changes.
    Given this Doha mandate, it has been U.S. practice with respect to all
    the issues we have raised thus far in the Rules negotiations to begin
    with a submission identifying the issue generally, and we followed this
    practice in our paper with respect to this issue as well.
        Question. In report language accompanying the Fiscal Year 2004
    Consolidated Appropriations bill, enacted as Public Law 108-199,
    Congress directed the administration to report to the Senate
    Appropriations Committee every 60 days on the progress of these
    negotiations.
        Can you explain why the first report was not provided to the
    Appropriations Committee 60 days from enactment of the Consolidated
    Appropriations bill, meaning on or about March 23, 2004? Can you
    confirm that the next report will be provided 60 days from March 23,
    2004?
        Answer. The United States Trade Representative (USTR) is working to
    schedule a briefing with Senate Appropriations Committee staff to
    report on this issue as soon as it can be arranged.
        Question. The Bush Administration currently does not pursue trade
    remedies under the U.S. countervailing duty law against non-market
    economies like China, even though: (1) the United States negotiated
    subsidy disciplines with China as part of its accession to the WTO; (2)
    the United States has worked to see that China participates in the
    ongoing OECD steel subsidy negotiations; and (3) USTR reports that
    various agricultural industries are experiencing ongoing export
    subsidies by China. Can you tell me whether the administration is
    reexamining this issue? If not, why not?
        Answer. The Department of Commerce has informed us that it does not
    currently apply the countervailing duty (CVD) law to non-market
    economies (NMEs), a practice upheld in 1984 by the Court of Appeals for
    the Federal Circuit in Georgetown Steel Corp. v. United States. In that
    case, the Court affirmed Commerce's view of NMEs as devoid of the kinds
    of market benchmarks necessary to identify a subsidy. The Court also
    relied on Congress's 1974 effort to address unfairly traded NME exports
    through the AD law by enacting the factors-of-production methodology.
    Commerce has re-affirmed Georgetown many times, most recently in the
    1997 preamble to the post-URAA CVD regulations. Congress enacted
    substantial amendments to the CVD law in 1988 and 1994 without
    disturbing Commerce's practice in this area.
        The Commerce Department recognizes that the reasoning underlying
    the Georgetown decision may not apply to China today to the extent that
    it did 20 years ago. However, applying the CVD law to NMEs would raise
    complex issues of policy and methodology, including implications for
    antidumping policy and practice. Any such shift away from 20 years of
    trade practice should therefore only be implemented after careful
    consideration and review.
        Question. The U.S. Bureau of Customs and Border Protection (CBP)
    issued a report in March, which revealed that at least $130 million in
    import duties were uncollected in fiscal year 2004, primarily in cases
    involving imports from the People's Republic of China. Several weeks
    ago CBP Commissioner Bonner suggested that an interagency task force
    had been launched specifically to ensure that antidumping duties,
    including those imposed on Chinese imports, are properly assessed and
    collected by the U.S. government.
        Please advise as to whether U.S. Treasury Department officials are
    involved in this task force and, if they are, provide specific
    information regarding what they plan do to solve this problem.
        Answer. Assessment and collection of duties, including antidumping
    duties, have been delegated to the Department of Homeland Security
    pursuant to the Homeland Security Act. Treasury Department and CBP
    officials have, nevertheless, discussed the issue of how to ensure that
    antidumping duties are properly assessed and collected. Treasury
    officials, however, are not involved in the particular work group to
    which you are referring, which involves CBP and Department of Commerce
    staff. CBP has informed us that it currently has in place trade
    strategies that focus specifically on antidumping/countervailing duty
    and revenue. Each of these plans has a multi-office working group
    responsible for the development, oversight and evaluation of the plans.
    These plans have already developed and implemented a number of actions
    that address dumping as a whole and by inclusion, China. These actions
    include identification and clean up of outstanding dumping entries,
    increased operational oversight of the dumping process, development of
    improved mechanisms to ensure and monitor adequate bonding of dumping
    entries, and improved communication with the Department of Commerce.
                                     ______

                 Questions Submitted by Senator Byron L. Dorgan

        Question. I'm very concerned about the finding in a recently-
    released U.S. General Accounting Office (GAO) report. The GAO report
    found that a majority of foreign-based and U.S.-based companies pay
    absolutely no Federal income taxes each year despite doing trillions of
    dollars of business here. There is compelling evidence that many
    multinational companies are using transfer pricing to shift their U.S.-
    earned profits abroad to tax-haven countries. And the ``arm's length''
    pricing enforcement methodology that has been advocated by the Treasury
    Department--and applied by the IRS--is simply not putting a stop to
    this blatant tax gimmickry. Repeated attempts by the United States to
    make the current ``arm's length'' system work over the past decade have
    failed.
        At what point will this administration decide that it's time to
    finally abandon its ``arm's length'' pricing approach and develop a
    more effective way to administer and enforce our tax laws with respect
    to firms that operate across national borders?
        Answer. The arm's length standard provides a clear, consistent
    principle for dividing the income of a multinational enterprise among
    the countries where it operates. The policy is neutral in its treatment
    of companies within a multinational group versus independent companies
    and thus does not favor one form of business organization over the
    other. These positive features have contributed to the broad acceptance
    of the arm's length standard as the international standard for
    determining the income of multinational enterprises.
        Another compelling reason to continue with the arm's length
    standard is because it represents the best way to deal with related
    party transactions under today's economic circumstances. The conditions
    that make formulary apportionment possible at the State level do not
    exist at the international level. Internationally there are neither
    common accounting standards nor common approaches for measuring income.
    Moreover, there is no umbrella framework or organization comparable to
    the Federal income tax or the Internal Revenue Service. Unless
    countries were to adopt a common accounting system and some sort of
    international body were to be established with authority to examine the
    worldwide financial statements of all multinational companies, it would
    not be feasible to abandon the internationally-accepted arm's length
    approach in favor of global formulary apportionment.
        The Treasury Department continues working to improve the
    administration of the arm's length standard and to build upon the
    advances made in the last 15 years. The Treasury Department is devoting
    significant resources to ensuring that the transfer pricing regulations
    are up-to-date and reach appropriate results consistent with the arm's
    length standard. This effort includes appropriate revisions of the
    applicable regulations as well as an administrative compliance
    initiative that is being directed by the Internal Revenue Service.
        Question. The administrative problems associated with the current
    ``arm's length'' pricing methodology are well-documented. A number of
    prominent tax experts share my view that U.S. tax avoidance by
    sophisticated multinational firms has been perpetuated, in large part,
    by the Treasury Department's blind allegiance to this antiquated tax
    enforcement method.
        I think we should replace the ``arm's length'' pricing method with
    an objective, formula-based approach for apportioning the world-wide
    income of related companies. This approach would be similar to the
    system that States have used successfully for decades to allocate the
    overall income of corporations among the States in which they operate.
    A formulary method avoids many of the problems caused by the overly
    subjective and factually-sensitive nature of intercompany sale pricing
    under the ``arm's length'' standard.
        What do you believe are the major impediments, if any, to the
    United States moving to a formula method for apportioning the world-
    wide income of related companies? If there are impediments, what steps
    do you think would be needed to overcome them?
        Answer. The United States could not implement a global formulary
    apportionment regime unilaterally. The implementation of a global
    formulary apportionment regime would require substantial international
    coordination and consensus on predetermined formulae. Thus, a
    significant number of steps would need to be taken if a global
    formulary apportionment regime were to be implemented.
        First, significant changes to our longstanding statutory and
    regulatory rules would be required.
        Second, reconsideration of the entire U.S. network of bilateral
    income tax treaties would be necessary. If global formulary
    apportionment were to be implemented, it would be necessary to ensure
    that U.S. income tax treaties require or permit the use of such
    apportionment to determine the taxable income of multinational
    enterprises. The U.S. network of bilateral income tax treaties is the
    means by which we reach agreement with our treaty partners on the rules
    and mechanisms for avoiding double taxation and preventing tax evasion.
    Each bilateral income tax treaty represents a negotiated balance of the
    two countries' interests and is necessarily tailored to the two
    countries' particular circumstances. Current U.S. income tax treaties
    contain articles pursuant to which each country applies the arm's
    length standard in transfer pricing matters.
        Third, and perhaps most significantly, a consensus regarding the
    implementation and administration of a global formulary apportionment
    regime would have to be reached among all of our major trading partners
    at a minimum. As a longer term matter, a consensus would need to be
    reached among all countries. Absent such an international consensus,
    there would be double or multiple taxation of the same income (and also
    the potential for income to escape taxation altogether). The likelihood
    that American companies would be subjected to double taxation would be
    very high if the United States were to attempt to implement a formulary
    apportionment system without such an international consensus.
        Formulary apportionment would require international consensus on
    the following basic items as a starting point: (1) how to measure the
    global tax base, including a common accounting system; (2) how to
    define the scope of the worldwide unitary business subject to the
    formulary apportionment; (3) the factors to be used to apportion the
    tax base; (4) how to measure and weight the apportionment factors; (5)
    how to address the potential for distorting the results under the
    formula by artificially shifting the factors; and (6) how to address
    the particularly complex questions relating to intangible property. In
    addition, proper implementation of a global formulary apportionment
    system would require establishment of some sort of international body
    that would have to be vested with the authority to examine the
    worldwide financial statements of all multinational companies and to
    which the United States (and other countries) would have to cede the
    ability to define taxable income.
        This summary description of steps that would be required for
    implementation of a global formulary apportionment regime provides some
    insight into why the arm's length standard has become the international
    standard for dividing the income of a multinational enterprise among
    the countries where it operates. The arm's length standard provides a
    clear and consistent principle which is grounded in economics and to
    which all countries can agree. The fact that the arm's length standard
    is grounded in the underlying economics of the transactions has made it
    possible to develop an international consensus in favor of the arm's
    length standard among countries with very different economic interests.

                              SUBCOMMITTEE RECESS

        Senator Shelby. Mr. Secretary, appreciate your leadership
    and look forward to continuing to work with you.
        Thanks for your appearance today.
        Secretary Snow. Thank you, Mr. Chairman.
        Senator Shelby. This concludes the subcommittee hearing.
        [Whereupon, at 11:40 a.m., Tuesday, April 10, the
    subcommit-
    tee was recessed, to reconvene subject to the call of the
    Chair.]

      DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND
              RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2005

                                  ----------

                            THURSDAY, APRIL 22, 2004

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:02 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard C. Shelby (chairman)
    presiding.
        Present: Senators Shelby, Stevens, Murray, and Dorgan.

                          DEPARTMENT OF TRANSPORTATION

                        Federal Aviation Administration

    STATEMENT OF MARION C. BLAKEY, ADMINISTRATOR
        Senator Shelby. The subcommittee will come to order. Today
    we welcome Ms. Marion Blakey, the Administrator of the Federal
    Aviation Administration, and Mr. Ken Mead, the Inspector
    General of the Department of Transportation. I thank you both
    for being here this morning. I look forward to our discussion.
        Madam Administrator, your agency and the aviation industry
    are to be commended for operating the safest aviation system in
    the world. The 3-year average for fatal commercial accidents is
    at an all-time low.
        Obviously no mission is more important than the Federal
    Aviation Administration and we should strive to improve upon
    this impressive safety record. I look forward to hearing from
    our witnesses what additional steps can be taken to improve the
    safety of our airways.
        The FAA and the aviation industry face other challenges, as
    well. Our current fiscal constraints require us to make choices
    between priorities and programs. We are at a critical juncture
    in the modernization and operation of our air traffic control
    system. After almost a decade of vigorously growing budgets, we
    are faced this year with a budget request and a budget
    environment that would seem to indicate that tough choices will
    have to be made at the FAA.
        Mr. Mead's written statement points out that FAA has not
    been accustomed to operating within a budget-constrained
    environment and that changing the organizational culture to
    accept budget constraints will be a challenge. Yet when I look
    at the FAA budget request I am struck that the choices made in
    this budget request are remarkably similar to the choices of
    the past. The agency's operations account grows by 5 percent
    while funding for facilities and new air traffic control
    equipment is squeezed. When other Federal agencies are facing
    1.5 percent growth, I find it astonishing that a request for 5
    percent growth is viewed as constrained.
        Madam Administrator, you are to be commended again for your
    commitment to slow the growth rate in the FAA's operational
    costs and in your efforts at personnel reform. Clearly we have
    a long way to go to bring the FAA's operational cost growth
    into line with the budget realities that we are likely to face
    for the next several years. While you have all the legal
    authority to implement virtually any reform you can imagine,
    true personnel reform is elusive and remains exceptionally
    difficult at the FAA.

                                PAY PERFORMANCE

        Your effort to link pay and performance is a step in the
    right direction. I note that you have had mixed success in
    tying pay raises to meeting performance goals. It is ironic
    that the controllers did not participate in this linkage
    between raises and performances last year, even though one of
    the three organizational goals that FAA missed was air traffic
    control operational errors.
        Administrator Blakey, tying pay to performance is
    appropriate, I believe, and overdue. While your action last
    year was only a step on a path toward linking pay and
    performance, I commend you for taking this necessary first
    step. I look forward to hearing what further steps you plan to
    make.
        I also want to mention your efforts to restructure air
    traffic services and research and acquisition offices into a
    performance-based organization called the Air Traffic
    Organization. If this structure is properly implemented, it
    will instill personal accountability throughout the FAA. On the
    other hand, if the ATO is implemented incorrectly, it will only
    add another layer of bureaucratic structure to an already
    dysfunctional organization.

                          PROBLEMS WITH MODERNIZATION

        I believe that we must improve FAA's workforce productivity
    if we are to achieve any type of meaningful budgetary savings.
    A major contributor to improving productivity should come
    through making the right investments in modernization of the
    National Airspace System. Yet when I review the facilities and
    equipment budget, I am disappointed that this is where the cuts
    to the FAA budget have been taken. I am concerned that the
    lion's share of the remaining facilities and equipment funding
    is poured into the same money pits that consumes a
    disproportionate amount of our capital funding, including the
    Wide Area Augmentation System (WAAS) and Advanced Technologies
    and Oceanic Procedures (ATOP).
        Further, I am increasingly concerned with the En Route
    Automation Modernization procurement to replace the aging Host
    system. The funding profile for ERAM is unrealistically
    aggressive; the program structure is unnecessarily complex; and
    the procurement strategy virtually guarantees substantial cost
    growth, schedule slippage, and questionable outcomes. I am
    interested in hearing from the Inspector General, his
    suggestions for minimizing the risk associated with this
    program.
        We may be coming to the realization that the FAA is not
    capable of developing realistic cost estimates and schedules
    for major acquisition and development programs. We may also
    need to determine what steps to take to protect the taxpayer
    from what the Inspector General characterizes as historical
    ``cost growth, schedule slips, and shortfalls in performance.''
        What concerns me most about the statement is the
    implication that cost growth, schedule slippage, and
    performance shortfalls are expected and seem to have become
    part of the FAA culture. The FAA's failure to cost-effectively
    modernize and redesign the National Airspace System is only
    matched in spending and failure by the IRS's on-going failed
    attempts to modernize its computer system.

                                 FLIGHT DELAYS

        The Bureau of Transportation Statistics recently published
    its monthly analysis of airline on-time statistics and causes
    of flight delays. The 6-month analysis shows that almost half
    of flight delays are caused by insufficient infrastructure or
    failures of the National Airspace System itself. I believe this
    data underscores the primary issue facing the FAA in this
    budget request: are we making the right decisions to address
    constraints in the system, enhance safety, and improve
    efficiency, or are we failing to question our assumptions and
    merely following the same programs, procurements and pitfalls
    that the FAA has slavishly adhered to in prior budgets? It is
    an important question to ask and an even more important
    question to honestly answer. I hope we can get some of these
    answers here today.
        Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you, Mr. Chairman. I am glad you have
    called this meeting this morning to focus specifically on the
    needs and challenges facing the Federal Aviation
    Administration.
        The President's budget for fiscal year 2005 proposes to
    effectively freeze overall funding for the Transportation
    Department at the level of $58.7 billion. However, within that
    proposed freeze are selected increases and corresponding cuts.
    The largest single cut of any agency within the Transportation
    Department is roughly the $400 million that President Bush
    wants to cut from the FAA's efforts to modernize our air
    traffic control system. Frankly, I was dismayed when I learned
    of the President's planned retrenchment in aviation investment.
        As a long-standing member of this subcommittee, I know well
    that there have been several problems that have beset the FAA's
    efforts to modernize the equipment that keeps the National
    Airspace System operating each day. As the Inspector General
    will tell us this morning, certain programs continue to
    encounter significant cost overruns and schedule delays.
        But in my mind, the solution to these problems is not the
    wholesale disinvestment that is proposed by the President.
    While a lot of attention has been focused on the $400 million
    cut proposed for 2005, a little known fact is that President
    Bush's multi-year budget anticipates even further cuts will be
    made in the FAA's procurement budget in the future. For 2006,
    the Bush Administration intends to cut air traffic control
    modernization by an additional $61 million. Taken together,
    under the President's proposal total funding for air traffic
    control modernization over the 4-year period covered by the
    Vision-100 Aviation Authorization Bill that the President just
    signed a few months ago would be more than $2.3 billion less
    than the level authorized in that bill.
        What is even more perplexing is that the Bush budget
    proposes that modernization funding stay almost $2 billion
    below the level that President Bush himself proposed in his own
    Aviation Reauthorization Bill. Finally, under the Bush budget,
    funding for aviation modernization would be almost $1.3 billion
    lower than the level we would achieve if we just froze
    modernization funding at the current level.
        This is truly harsh treatment. It seems no sooner did the
    President sign the Vision-100 bill than he turned his back on
    it. His wholesale retrenchment will mean that the flying public
    will have to wait even longer to see the woefully outdated Air
    Traffic Control System brought up to modern standards.
        My principal concern with the President's decision to
    disinvest in aviation is what it means for the future of
    aviation and America's leadership in aviation. After leading
    the world in aviation for its first 100 years, I have to wonder
    whether the President is now creating an opportunity for
    Europeans or others to control the next 100 years. When you
    look at many of the modernization projects that have been
    eliminated from the budget to accommodate the President's
    proposed cuts, many of them were designed to bring the cutting
    edge of technology into our air traffic control system to make
    our aviation system safer and more efficient.
        Just last week I had the opportunity of visiting the Air
    Traffic Management enterprise at the Boeing Company in my home
    State of Washington. They are making great strides in
    developing plans for the next generation, satellite-based air
    traffic control regime. These are the kinds of initiatives in
    which we must continue to invest if we are to stay ahead of our
    foreign competitors and lead the way in aviation. Leadership
    means having a plan that addresses the future, not just a plan
    to survive day to day with inadequate staff and outdated
    equipment.
        One case in point is the situation we find ourselves in
    with our air traffic controllers. Today the number of air
    traffic controllers at our 24 en route centers is 747
    controllers--10 percent less than the level called for under
    the FAA's own staffing standard. Some of these facilities are
    currently staffed as much as 30 percent below the level called
    for under the FAA's staffing standard.
        The Inspector General will testify to us that the FAA is
    going to need to take great care in planning for what is
    expected to be a wave of controller retirements potentially
    bringing the number of available air traffic controllers for
    these facilities to an even lower level. The FAA needs the kind
    of resources to implement a plan that is focused on the future
    to ensure that as air traffic continues to grow there will be a
    steady stream of fully trained controllers to manage our air
    space so that our system can continue to be the safest in the
    world.

                              AIRCRAFT MAINTENANCE

        Another case in point is the area of aircraft maintenance.
    The Inspector General will testify that the FAA has real
    deficiencies in its inspection oversight of maintenance
    activities that were formerly executed by the air carriers
    themselves but are now commonly contracted out to third
    parties. On January 8 of last year, a US Airways Express plane
    crashed while taking off at Charlotte, North Carolina,
    resulting in 21 fatalities. The NTSB's investigation of this
    crash revealed that the cause was partially related to
    defective maintenance by a third-party contractor.
        We need to have an FAA that is sufficiently focused on the
    future so that its inspectors are ahead of the industry trends,
    not playing catch-up.
        Mr. Chairman, we have an obligation to keep this agency
    focused on the future, even if the President's budget wants to
    focus them solely on survival from day-to-day. I hope this
    subcommittee will not allow our Nation to lose its leadership
    in aviation and undermine the progress we have made in ensuring
    that our aviation system remains the safest in the world.
        Thank you very much, Mr. Chairman.
        Senator Shelby. Senator Dorgan.

                      STATEMENT OF SENATOR BYRON L. DORGAN

        Senator Dorgan. Mr. Chairman, thank you. I am sorry I was
    delayed. My understanding is that we have not yet had the
    statement by the witnesses; is that correct?
        Senator Shelby. We have not. This is the opening statements
    of Senators.
        Senator Dorgan. I will be very brief. I do have some
    questions for the FAA Administrator.
        This is obviously a big job. We are threatened in this
    country with the prospect of terrorists that want to kill
    innocent Americans and we know that they have used airplanes to
    do that. The FAA has had a big job even notwithstanding
    terrorism but add terrorism to the issue and it is significant.
        I think the airline industry has had plenty of struggles in
    recent years and our country and our economy depends on a
    commercial airline network that works and that is safe and
    provides reliable transportation. We have gone through a series
    of things over many years of crowding and delays and passenger
    issues and then the terrorist attacks and the shutdown of that
    industry, so I think Administrator Blakey has her plate full
    and I appreciate the work she does.
        I do want to say this. I am concerned again about the
    recommendation in the President's budget to cut funding for
    essential air services by half, more than half, in fact. I
    think it is a serious mistake. I remain concerned about the
    prospect of contracting out or privatization of certain air
    traffic control functions, and I will talk about that with the
    Administrator.
        Mr. Mead, thank you for the continuing work you do. You
    have been, I think, very important to the work that we have
    done on the Commerce Committee on many issues and important to
    the work in the Appropriations Committee, so thank you very
    much for being here, as well.
        I will then hear the testimony and then ask questions, Mr.
    Chairman.

                PREPARED STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Shelby. Thank you, Senator Dorgan. Senator Durbin
    has submitted a prepared statement which will also be included
    in the record.
        [The statement follows:]
                Prepared Statement of Senator Richard J. Durbin
        Chairman Shelby, Senator Murray, thank you for holding this
    important hearing today on the fiscal year 2005 budget for the Federal
    Aviation Adminstration (FAA).
        I'd like to begin by welcoming FAA Administrator Marion Blakey and
    Inspector General Ken Mead back to the committee for today's hearing. I
    look forward to your testimony.
        This morning, I'd like to briefly touch on a few issues of
    importance to my home State of Illinois.
        Administrator Blakey, I want to thank you and the Federal Aviation
    Administration (FAA) for your continuing support of the Chicago O'Hare
    modernization project. I'm told the City of Chicago and the FAA are
    working well together and that a project office has been opened and a
    time line established. As you know, this project remains a high
    priority for me and it is vitally important to our national aviation
    system.
        It's my understanding that the FAA will begin the Environmental
    Impact Statement (EIS) process in February 2005 and will endeavor to
    have a signed EIS Record of Decision by September 2005. I hope this
    project will remain on schedule. I encourage both the FAA and the City
    of Chicago to keep working together to develop the roadmap for this
    project. The positive impact that O'Hare modernization will have on the
    region and the national aviation system is simply too important to
    delay.
        The O'Hare modernization project is the long-term solution to
    chronic congestion and delays at the airport. However, in the interim
    we need to pursue operational changes--better and more efficient
    technology and procedures as well as flight operations.
        Yesterday, Secretary Mineta announced an additional 2.5 percent
    voluntary flight reduction by both American and United Airlines at
    Chicago O'Hare during peak travel times. This follows a 5 percent
    voluntary flight reduction in January, designed to help relieve
    aviation congestion and flight delays at the ``World's Busiest
    Airport.'' I was pleased to join you and the Secretary in pushing for a
    temporary, voluntary reduction of flights during the peak hours at
    O'Hare.
        However, I want to ensure that these flight reductions do not
    disproportionately affect smaller communities, like Downstate Illinois.
    I look forward to reviewing the data on this initiative and working
    with you and the airlines.
        Finally, I would like to ask you to look into two Chicago Airport
    System projects that were included in the fiscal year 2004 Omnibus
    Appropriations conference report (Transportation-Treasury title), at my
    request. First, $4 million for various improvements at Midway Airport
    related to capacity expansion. And $1.5 million for CAT II/III
    instrumentation for Runways 27L and 27R at O'Hare. It is my
    understanding that this funding has not yet been released by the FAA. I
    hope you can help resolve any outstanding issues on these projects
    within the FAA in the near future.
        Thank you, Mr. Chairman.

        Senator Shelby. Both of your written statements will be
    made part of the hearing record in their entireties. You may
    proceed as you wish. We will start with you, Ms. Blakey.

                         STATEMENT OF MARION C. BLAKEY

        Ms. Blakey. Thank you, Chairman Shelby. And I do
    appreciate, Senator Murray, all of the leadership that the
    Senate is exercising in this area, and I do want to thank you,
    Senator Dorgan, for all of your attention to aviation. We have
    had some good conversations, and it has been very helpful from
    my standpoint.
        It is a pleasure to appear before you today to represent
    the men and the women of the Federal Aviation Administration. I
    am also proud to be following Secretary Mineta, who I know
    appeared before you last month.
        Let me take a moment if I could, also, to recognize our
    Inspector General. Ken Mead and his staff have worked very
    closely with us over the last year and we do appreciate their
    work to help us address a number of difficult issues. We also
    appreciate their commitment to helping us improve the way we do
    business.
        Last year I testified before this committee for the first
    time as the Administrator of the FAA. I told you then that I
    had witnessed the best the agency has to offer, operating the
    best aviation system in the world safely and efficiently; major
    advances in modernization, capacity and, of course, safety. But
    I also told you that the FAA has not achieved its full
    potential. It had not become the performance-based organization
    that it could be, that Congress intended it to be, and I said
    we could do better.

                                  FLIGHT PLAN

        I am happy to say that we are doing better, Mr. Chairman.
    In the past year we have made changes that will fundamentally
    alter the way the agency operates. First, we began tracking
    goals, programs and spending through our Flight Plan, the
    agency's blueprint for action through 2008. For the first time
    in FAA history, our business plan is tied directly to our
    budget. The Flight Plan is making the FAA more businesslike,
    more performance-driven, more customer-centered, and more
    accountable.
        And for the first time, each FAA organization now has its
    own individual business plan that is linked to the Flight Plan,
    costed out, and built into a performance tracking system that
    our senior management regularly reviews. In fact, we get
    together, all of us, once a month to look at this to see how we
    are doing--are we hitting our numbers or not? And we post this
    on the FAA website so everyone can see the status of our
    reviews.
        The chart next to me shows you the kind of information that
    we are making publicly available. It is a very simple, very
    accessible, red, yellow, and green system. It shows how we are
    doing on things like decreasing runway incursions, increasing
    our airport arrival efficiency rate, and bringing in our
    critical acquisitions on schedule and on budget, as I
    understand this committee has concern about.
        We list all 30 targets in the Flight Plan and you can see
    the progress we are making on them. For example, if you are on
    the website and you click on that top red bar there, what you
    are going to see is our general aviation accident data. And, as
    you can see, we are currently in danger of missing our target
    in this area. At the same time, we are well on our way to
    meeting our goal on another one of the bars up there, of
    reducing the most serious operational errors by 15 percent,
    thanks to the very hard work of our controllers. You can see
    the details of it again on this kind of chart. We are providing
    this information to anyone who needs it.

                            AIR TRAFFIC ORGANIZATION

        Just this past year we launched a new Air Traffic
    Organization to eliminate bureaucratic stovepipes and provide
    more cost-efficient services for our customers. We hired our
    Chief Operating Officer from the private sector. This had been
    a major goal from a congressional standpoint and certainly one
    we shared. I would therefore like to introduce Russ Chew, our
    new COO, behind us. Russ is really building the tactical engine
    that is going to help us become more bottom-line-focused.

                         CHIEF FINANCIAL OFFICER (CFO)

        Just weeks ago we hired a new Chief Financial Officer (CFO)
    and I would like to introduce Ramesh Punwani, who is the former
    CFO of Travelocity, TWA, and Pan Am, so we have wonderful
    experience that we are drawing on.
        Across the agency we are implementing the tools that will
    allow us to operate more like a business. We have cost
    accounting in two of our lines of business and several support
    organizations. By the end of this fiscal year the remaining
    lines of businesses for the FAA will have cost accounting up
    and running.

                                COST ACCOUNTING

        Now as an example of cost accounting, I think you will find
    this interesting. The chart next to me shows a breakdown of the
    FAA's hourly cost of providing en route services to individual
    aircraft. We have not been able to do this before. It is
    currently $139 per hour. With this data, the FAA can now
    understand the cost of providing services and identify better
    ways to drive those costs down.
        On the other chart we have broken down the cost by
    facilities, again en route services, and while there are very
    legitimate differences between facilities, you can learn a lot
    by looking at those that are operating at a lower cost per
    flight hour. So again this illustrates what we are trying to
    do.
        Mr. Chairman, cost control is a priority, and I assure you
    we are working on reducing the increases in those operating
    costs that you talked about.

                               AIR TRAFFIC MOU'S

        Now in response to concerns regarding the air traffic
    control memoranda of understanding, we have implemented a
    strict new internal process of reviewing all labor agreements.
    We are also working to improve our performance-based pay
    systems by strengthening our employees' incentives to perform.

                              PAY-FOR-PERFORMANCE

        Within the last year we increased the percentage of our
    employees under pay-for-performance from 35 percent of the
    workforce to 75 percent of the workforce. Our sick leave,
    workers comp, overtime costs, yes, the FAA's costs are among
    the highest in government and we are aggressively working to
    manage those costs.

                                     SAFETY

        While we are striving to control our costs and operate more
    like a business, safety always remains the FAA's top priority.
    I am pleased to announce that the Nation's commercial fatal
    accident rate is at an all-time low--.022 fatal accidents per
    100,000 departures. This chart, I think, really tells an
    amazing story. Admittedly, .022 is a difficult number to
    comprehend, so what does it mean? I thought one of the best
    examples of this was articulated by Dr. Arnold Barnett, who is
    Professor of Management Science at MIT. He puts it this way.
    Pick a random flight every day. You will fly 21,000 years
    before you are involved with a fatal crash.
        This year we made good progress in bringing new technology
    on line that will improve safety. Just take, for example,
    required navigation performance or RNP, a revolutionary
    approach that will move the United States from a ground-based
    navigation system to one located within the aircraft itself.
    Saves time, avoids delays for the traveling public, improves
    safety, and improves the environment. What is not to like? And
    because the equipment is already located on board many of our
    aircraft, it saves the airlines, the government, and the
    traveling public money.

                                REPAIR STATIONS

        In addition to improving safety through modernization, we
    are sharpening our focus on airline maintenance. Again that was
    a focus of Senator Murray's discussion this morning. We are
    looking very hard at repair stations, both here and abroad. We
    have enhanced our new oversight programs for stations that
    perform out-sourced maintenance work. In January, in fact, we
    implemented sweeping revisions to repair station rules. It
    gives us more surveillance authority, tougher standards for
    contract maintenance, and mandates FAA-approved training
    programs for these workers.

                                    CAPACITY

        Finally let me turn to capacity. Our budget requests $3.9
    billion to expand capacity and improve mobility within the
    Nation's aviation system. As we return to full capacity, we are
    taking immediate and direct steps to avert a repeat of the
    delay-ridden summer of 2000. We remember it all too well. We
    forecast a return to pre-
    9/11 traffic levels by 2006.
        Less than a month ago we convened a Growth Without Gridlock
    Conference that Russ Chew and his team put together that was a
    first-of-its-kind meeting of industry, decision-makers and
    government to see what we could do. Together, this group agreed
    to new procedures, including express lanes. Those essentially
    give us a way of streamlining our structure in the sky. We also
    agreed to a policy that would impose minor delays at strategic
    airports occasionally in order to avert massive delays across
    the Nation.
        So I am confident that these kinds of efforts are going to
    lay an important foundation to greater capacity without
    diminished efficiency.

                               PREPARED STATEMENT

        So in closing, let me just emphasize we are working hard to
    manage the FAA. We are changing the agency structure, with a
    major shift to customer service and performance-focused
    organization.
        So with that, thank you, and I look forward to your
    questions.
        [The statement follows:]
                     Prepared Statement of Marion C. Blakey

        Mr. Chairman, Senator Murray, and the distinguished members of this
    committee, thank you for the opportunity to be here this afternoon. I'm
    pleased to be following Secretary Mineta's appearance before you last
    month and proud to be here representing the men and women of the
    Federal Aviation Administration, which operates an aviation system that
    is second to none in safety, complexity, and system efficiency.
        Your message to the FAA last year was both clear and direct: The
    FAA needs to operate more like a bottom-line business. We need to pay
    greater attention to delivering high performance and cost-efficient
    programs, and we need to show where we can save and redirect resources
    to higher priorities.
        These are very tough economic times for aviation, and we must
    exercise care and caution with the taxpayer's dollar. In the past year,
    the FAA has implemented several changes that will streamline our
    operations, much in the same way a private sector corporation would
    respond to a changing economy. From the way we deploy equipment to the
    way we compensate our employees, we are working to make better use of
    the monies appropriated to us. While we still have a ways to go, in the
    past year, we achieved 75 percent of our performance goals, including
    on-time arrival, exposure to noise, airport daily arrival capacity, and
    airport arrival efficiency rate. The agency also is on track to meet
    our performance goal of an 80 percent reduction in fatal commercial
    accidents by 2008. The 3-year average for fatal commercial accidents is
    at an all-time low.

                        THE FAA'S FLIGHT PLAN, 2004-2008

        Step one for the agency was to put in place a strategy for setting
    goals and achieving them. We call it our ``Flight Plan,'' modeled after
    the specific routes a pilot follows from takeoff to touchdown. It is
    the FAA's business plan--a blueprint for action through 2008. What's
    more, for the first time in the history of the FAA, the plan is tied
    directly to our budget. The leadership of the Secretary of
    Transportation has made this possible. Mr. Mineta has provided the
    Department of Transportation and this agency with a strategic direction
    that has translated into results for the taxpayer.
        The Flight Plan commits the FAA to four broad goals: increased
    safety, greater capacity, increased U.S. international leadership, and
    organizational excellence. The plan will make the FAA more business-
    like, more performance-based, more customer-centered, and more
    accountable. It is dynamic, adaptable, and cost-driven.
        For the first time, as part of our Flight Plan, each FAA
    organization now has its own individual business plan. Each of these
    plans is linked to the Flight Plan, costed out, and tied to the budget.
    Our business plan goals have been built into a performance-based
    tracking system that we post to the FAA web site. It lists each of the
    goals, performance targets, who's responsible, and the status of each.
    Using this data, the senior management team conducts a monthly half-day
    review of agency performance. This effort represents a first for the
    FAA and is proving itself to be time well spent and money well
    invested. When associated with other cost and performance data, this
    information lets us see, clearly and precisely, the true cost of a
    program. All the FAA lines of business are also implementing cost
    accounting tools and practices.

                                     SAFETY

        Secretary Mineta has made it clear: there is no effort more
    important to the Department of Transportation than improving safety,
    and our budget reflects that commitment. Out of a total request of
    $13.97 billion, almost two-thirds--about $8.8 billion--is dedicated to
    improving or maintaining the safety of aviation. The Flight Plan lays
    out an aggressive safety agenda. It supports further progress on
    reducing the commercial and general aviation fatal accident rate and on
    reducing the numbers of runway incursions, operational errors, and
    HAZMAT incidents. It also establishes five new safety goals: reducing
    accidents in Alaska; decreasing cabin injuries from turbulence;
    preventing commercial space launch accidents; completing implementation
    of a safety management system; and developing a single, composite
    safety index. The overarching goal is to measure and achieve the lowest
    possible accident rate, while constantly enhancing safety.
        Already this year, we have made headway by bringing new technology
    online. We are implementing a revolutionary new technology: required
    navigational performance (RNP). Pilots and controllers use ``RNP'' in
    areas where terrain can make it difficult or impossible to locate
    traditional navigational aids, such as an instrument landing system. In
    Juneau, Alaska, an unforgiving landscape and brutal weather conditions
    make arrivals difficult. RNP enables Alaska Airlines to make smoother
    arrivals. According to Alaska Airlines, this saves them $3 million per
    year. I have had the privilege of flying an RNP approach into Juneau
    firsthand. Controllers and pilots agree: RNP works.
        From a technological standpoint, RNP combines the precision
    information from satellite, airborne, and ground-based navigational
    equipment into new procedures that enable the pilot to touch down at a
    precise point on the runway. Its use allows for lower minima, enabling
    pilots to land at airports that would previously have been unavailable
    in bad weather. Much like computer software, there is no RNP to hold in
    your hands, but its benefits are without question. RNP enhances safety.
    It saves time and avoids delays for the traveling public. This will
    help improve the environment. Because the equipment is already onboard
    the aircraft, additional savings will be realized as well.
        We remain equally committed to reducing the number of accidents
    overall, not just those where fatalities or injuries occur. We
    successfully installed the Airport Movement Area Safety System at 34
    airports. ASDE-X is a similar success story. Designed to increase
    airport safety by enhancing controller awareness, this surveillance
    system detects potential conflicts on runways and taxiways. It depicts
    aircraft and vehicle position with location information overlaid on a
    color map showing the area. The first operational site was commissioned
    last fall. Almost two dozen will be delivered by the end of 2005.
        Our budget request includes $243 million to continue the Enroute
    Automation Modernization, or ERAM. This is a critical program that
    replaces obsolete hardware and software of the main host computer
    system that is the backbone of en route operations. This level of
    funding is vital to accomplishing our baseline schedule. I'm happy to
    report that ERAM is progressing well. For example, one of the
    precursors to deploying ERAM just went operational on February 25, more
    than one month ahead of schedule. Another major milestone--the first
    major software deliverable--was completed on time in December. However,
    we do not underestimate the magnitude of this undertaking. But we have
    the right team, the right approach, and a single-minded focus to bring
    this program in on time and within budget.
        In February, FAA alerted the airlines and aircraft manufacturers to
    the possibility of an equipment change based on the FAA's consideration
    of new regulations, whose object would be to reduce fuel tank
    explosions. Years before, prospects seemed dim for a cost-effective
    solution. Experts said it couldn't be done, but an FAA researcher
    devised an inexpensive process to prevent fuel tank explosions. The
    process replaces the oxygen inside the empty fuel tank with nitrogen,
    an inert gas that will not explode. Statistics and research show that
    this, combined with our efforts to remove ignition sources, will pretty
    much close the book on fuel tank explosions for the U.S. fleet. Boeing
    already is moving ahead to implement this technology aboard its
    airliners, although the FAA is several months away from making a
    decision on proposing new regulation.
        We're also successful in deploying equipment to decrease the
    effects of bad weather on aviation. Controllers, managers, and airlines
    use our integrated terminal weather system--ITWS--for real-time
    situational weather information that not only reduces weather-induced
    delays and diversions, but also avoids wind shear. We already have
    installed this system at Atlanta, Miami, Kansas City, Houston, St.
    Louis, Chicago and Washington, DC. ITWS is currently being rebaselined;
    we will provide you with our fiscal year 2005 plans for deploying
    additional systems soon.
        In addition, we are sharpening our focus on airline maintenance.
    The FAA relies on almost 3,400 inspectors, 20 percent more than were
    onboard at the time of the ValuJet accident, to ensure airlines meet
    safety obligations. Over the last few years, we trained our inspectors
    to work smarter in response to industry changes. We continue to
    emphasize risk assessment and trend analysis to identify lapses. This
    approach targets our surveillance to where it produces the greatest
    safety benefit. Staying out in front of the cause--prevention--is still
    the best way to stop an accident.
        We're focusing on repair stations, both here and abroad. We're
    enhancing new oversight programs for stations that perform
    ``outsourced'' maintenance work. In January, we implemented sweeping
    revisions to repair station rules. This gives us more surveillance
    authority, tougher standards for contract maintenance, and mandates
    FAA-approved training programs for workers.

                                    CAPACITY

        While safety is our primary concern, we're also committed to
    expanding capacity throughout the aviation system--both in the air and
    on the ground. The budget requests $3.9 billion to expand capacity and
    improve mobility within the Nation's aviation system. This request
    supports expansion of capacity on the ground with new runways, as well
    as the continued deployment of new technologies for increasing the
    efficiency of the existing system.
        We forecast a return to pre-9/11 traffic levels by 2006, and we are
    taking steps to be ready. 2003 was a banner year for new runways--at
    Houston, Miami, Denver, and Orlando--four of our busiest airports. In
    each case, we reduced congestion problems at the specific location, as
    well as providing relief to the overall system. We are well aware that
    new runways are important at smaller airports, too. That's why our
    reauthorization legislation gives small airports more flexibility for
    capital improvements.
        Our Flight Plan commits us to improving overall capacity at the
    Nation's top 35 airports by 30 percent, over a 10-year period;
    redesigning the airspace of eight major metropolitan areas (New York,
    Philadelphia, Washington/Baltimore, Boston, San Francisco, Chicago,
    Atlanta, and Los Angeles Basin); addressing environmental issues;
    improving traffic efficiencies; and reducing airline delays. As you
    know, if any of our major airports are suffering from congestion, the
    whole system can be dramatically affected. Airport expansion and
    enhancements are extremely challenging. But when it comes to finding a
    solution, nothing can be ruled out--even building new airports.
        As we increase capacity, we must ensure environmental
    responsibility. The budget requests $571.6 million to support
    environmental stewardship for noise mitigation, fuel efficiency
    enhancements, and a comprehensive approach to addressing both noise and
    emissions.
        We continue to have success with the traffic management advisor--a
    system that is designed to optimize the flow of high-altitude aircraft
    into busy airports. It's operational at eight sites and has increased
    the capacity at these airports by as much as 5 percent. We plan to
    install this software at Chicago next year with the expectation that it
    will increase capacity there by at least 2 percent.
        The Standard Terminal Automation Replacement System (STARS)
    provides controllers with standardized color displays and supporting
    processors to display radar targets for control of the terminal
    airspace. It replaces several generations of the existing terminal
    automation systems. STARS' most significant feature is its open
    architecture, enabling it to expand and adapt to new functional
    requirements, and changing system configurations due to airspace
    changes and runway modifications. Its unique fusion tracking allows it
    to receive inputs from 16 locations to depict aircraft location more
    precisely. It also represents a substantive increase in security and
    redundancy over the existing terminal systems. STARS will be the
    backbone for the next generation of safety and capacity tools. STARS is
    operational at 19 FAA TRACON facilities and 13 DOD air traffic control
    facilities. Our fiscal year 2005 plan for STARS will be provided to you
    shortly, as we are currently undergoing a baseline review.
        The Flight Plan charts our course to 2008. Beyond that, the
    Operational Evolution Plan, our current 10-year rolling plan, sets out
    the aviation community's strategy to increase capacity by 31 percent by
    2010.
        Looking further into the future, the aviation community needs to
    develop a shared vision for aviation. That's why we launched a joint
    planning and development office--called the JPDO. It is formulating a
    plan for the evolution of aviation between now and 2025. The joint
    planning and development office is housed in the FAA and comprised of
    members from the Department of Transportation (DOT), NASA, the White
    House Office of Science and Technology Policy, and the Departments of
    Commerce, Defense, and Homeland Security. For the first time, we will
    put in place a unified national plan to meet the aviation needs of U.S.
    businesses, consumers, and the military.
        Aviation is critical to the growth of the U.S. economy. This work
    will lay an important foundation for the future. For example, some 51
    million international visitors come to the United States every year,
    making a contribution of more than $100 billion to the economy. Since
    the tourism and aerospace industries generate about 10 percent of the
    U.S. gross domestic product, we're preparing for both an increasing
    number of domestic users and the opportunities of an ever-expanding
    global sky.

               INTERNATIONAL LEADERSHIP AND GLOBAL HARMONIZATION

        The third goal in our Flight Plan is international leadership. The
    United States must lead aviation into the second century of flight, as
    it did in the first. Today, the FAA has operational responsibility for
    approximately half of the world's air traffic, certifies nearly three-
    quarters of the world's large jet aircraft, and provides assistance on
    improving aviation systems to more than 100 countries. However, we must
    become even more globally focused to ensure that U.S. citizens can
    travel safely around the world, while being a catalyst for the smooth
    flow of safety and capacity enhancing technology around the world. The
    budget requests $45.2 million to support international leadership and
    global connectivity.
        Several weeks ago, I returned from a trip to Beijing, Hong Kong,
    and Tokyo. Chinese aviation is thriving. The United States remains
    China's largest export market, taking over one-third of China's
    exports. According to forecasts, China, over the next 20 years, will
    buy more transport category aircraft than any other country. By 2020,
    China's air traffic operations will be second only to our own. In terms
    of sheer numbers, China will be an important component of the expanding
    global aviation system. Our goal is to work with Chinese aviation
    officials to implement a system that is safe, efficient, and
    interoperable with Western technology. The FAA already is laying the
    groundwork to assist China's aviation system in supporting the 2008
    Olympic games.
        It is clear that the FAA needs to have a central role in advancing
    the international leadership of the United States in aviation, and not
    just in Asia. The numbers and the activity point to the need for a
    globally regulated sky, and we are working to shape that destiny. I
    have had the unique privilege of signing bilateral aviation safety
    agreements with key aviation partners in Asia and Latin America,
    literally within weeks of each other. These agreements are good for all
    of us--for passengers, for government, and for the aviation industry.

                           ORGANIZATIONAL EXCELLENCE

        The fourth goal is at the heart of the entire plan: to fulfill our
    mission, the FAA must become a world-class organization. The people of
    the FAA are the key to achieving this goal. We are committed to finding
    and eliminating barriers to equity and opportunity. We believe that
    fairness and diversity fortify our strength. Furthermore, we must give
    our people the tools and resources they need to overcome the challenges
    we face and to become more accountable and cost efficient. In turn, our
    employee compensation and salary increases should be performance-based,
    allowing the agency to pay for results and reward success.
        In simple terms, our objectives are: to have stronger FAA
    leadership, to meet our organizational goals, to control costs while
    delivering quality customer service, and to make decisions based on
    reliable data. The budget requests $428 million for organizational
    excellence initiatives.
        We can't be more accountable, cost efficient, and customer service
    oriented unless we continue to change our way of doing business. The
    FAA launched a new Air Traffic Organization (ATO) late last year. Our
    previous organizational structure followed typical bureaucratic
    stovepipes that often stymied progress. To overcome this, we hired a
    chief operating officer who comes from the private sector, where
    success is predicated on efficient organizational structures. This
    group, known as the ATO, is taking its first steps toward becoming a
    bottom-line-focused, results-driven service organization. One thing is
    certain: the air traffic organization is the tactical engine that will
    help us achieve the near-term goals of our Flight Plan and, eventually,
    lead the FAA to a new way of doing business.
        This is a real change in the agency's operating philosophy. We are
    organizing around what we produce for our customers. We have 10
    operating service units that will be responsible for not only
    operations, but also for implementing new technology and capabilities
    within their own business unit. The ATO is making changes across the
    board. We recently hired a new vice president of safety. This position
    provides day-to-day focus on safety from within the air traffic
    organization. We also have created an office located outside the new
    organization to provide independent air traffic safety oversight.
        I am very excited about the possibilities that this new
    organization holds for us in streamlining our operations and being more
    accountable and productive. I will keep the committee apprised of its
    activities and progress.
        Like our counterparts in the private sector, we are determining how
    best to utilize our human capital in the years to come. Our people are
    our greatest resource, and the safety of the NAS, our greatest
    priority. We have several challenges on the way to achieving
    organizational excellence, one of which is the impending controller
    retirements. As required by law, we have initiated a rulemaking to
    consider waiver requests by individual controllers who want to work
    beyond the current mandatory retirement age of 56. This rulemaking has
    potentially significant personnel, budgetary, and other issues, so
    although we have accelerated the process, it is not yet completed.
        In addition, we are looking for other ways to become more
    efficient. Specifically, we are investigating ways to right-size our
    facilities. We are working to make our training programs more efficient
    in order to reduce the time it takes to train new controllers.
    Additional steps may need to be taken, and I will keep the committee
    apprised of our actions.
        I'm also pleased to note that FAA employees are, overall, adapting
    well to the changes that are being made in the FAA and aviation, in
    general. Our latest employee attitude survey shows a 71 percent job
    satisfaction approval rating. That's an increase of 3 percent.
        My initial impression is that while these survey numbers are moving
    in the right direction, we still have a lot of work to do. As in past
    surveys, employee ratings in several key areas are high, but in other
    key categories, such as trust in upper management, accountability of
    the organization, and communications, the numbers are not where they
    should be. At this time, each line of business and staff office is
    working to identify action plans that we must undertake to further
    improve our scores in these areas. We are also looking at administering
    the survey more frequently, as well as capitalizing on the success of
    the private sector employee survey instruments and action planning used
    by some of our external aviation partners.

                                  COST CONTROL

        One of our major objectives in the Flight Plan is cost control. As
    you have requested, we are working on reducing our operating costs,
    which have increased by 22 percent over the last 5 years. We are taking
    the following steps to be more cost efficient:
      --In response to your concerns regarding the proliferation of
            memoranda of understandings (MOU's), last year, we implemented
            a strict new internal process for reviewing all labor
            agreements. We also renegotiated a number of costly pay rules
            and MOU's with the National Air Traffic Controllers Association
            (NATCA), as part of the controller's contract extension. We now
            conduct an assessment of the budget impact and legal
            implications of labor side agreements before we sign. We also
            established an automated database for memoranda of
            understanding that will allow us to track and analyze those
            agreements.
      --We are committed to negotiating pay-for-performance with our unions
            until 100 percent of our workforce is under the system, and we
            are actively working to control the growth of our labor costs.
            Currently, 75 percent of the workforce is under a pay-for-
            performance system. We have a very well compensated work
            force--and deservedly so. They strive every day to achieve the
            highest level of safety and service for the American people. At
            the same time, we know we cannot sustain the growth in our
            operating costs, and we are addressing it. We recently
            negotiated an extension of the NATCA contract that links a
            portion of pay increases to controller performance. Discussions
            with the Professional Airways Systems Specialists (PASS) are
            continuing. The NATCA multi-unit, a group of administrative
            employees represented by NATCA independent of air traffic
            controllers, has been at impasse for some time.
      --Although FAA's Office of Worker's Compensation Program (OWCP) bill
            has increased at a rate well below that of the rest of
            government over the last several years, at a cost of $90
            million, this program continues to be a major issue for us. We
            have undertaken several initiatives that have begun to reduce
            costs, and we plan to devote additional resources to the
            program. A major OWCP issue facing not only the FAA, but also
            the entire Federal Government is the right of beneficiaries to
            stay on OWCP rolls well beyond normal retirement age. Forty-two
            percent of former FAA employees on the OWCP rolls are 60 years
            of age or older. Even more significantly, these individuals
            account for almost 70 percent of the FAA's chargeback costs to
            the Department of Labor (DOL), totaling well over $60 million!
      --The agency's transition to a new financial management system,
            DELPHI, remains under way. Bringing the system online has
            proved to be a challenge. Slowly but steadily, the agency is
            working to reduce the number of outstanding vouchers and
            overdue vendor payments that were delayed during the transition
            to the new system. Importantly, the agency received a clean
            audit opinion on our financial statements for the third
            consecutive year.
      --We also are working diligently to implement the administration's
            call for cost-effective business operations. An FAA study of
            automated flight service stations is being conducted to compare
            the cost of performing the function by Federal employees to the
            cost of contracting it out. The study, initiated under the A-76
            program, is designed to ensure that automated flight service
            stations operate in the most cost-effective manner without
            compromising safety or service. Our goal is to get the best
            deal for the taxpayer, while focusing on the services required
            for safe and efficient flight. The taxpayer stands to realize
            substantial savings because of reduced annual operating costs,
            which stand at $502 million in fiscal year 2003. The FAA enters
            the process with an open mind and a commitment to make sure the
            process is fair.
      --The FAA is consolidating many of our personnel and accounting
            functions to streamline the numbers of offices performing
            duplicative functions. Much of our accounting operation will be
            centrally located in Oklahoma City.
      --The agency has implemented cost accounting in two lines of business
            and several support organizations. We will implement cost
            accounting in the remaining lines of business later this year.
            The Office of the Inspector General has raised several concerns
            with our labor distribution system, CRU-X, and we are refining
            it to account more accurately for the distribution of labor
            costs. The Inspector General raised justifiable concerns about
            an ``automatic sign off'' feature in CRU-X that would, in
            essence, punch an individual's time card without actually being
            certain of when he or she stopped working. The Inspector
            General also raised concerns about the ability for the system
            to track all types of official time--such as breaks or when
            conducting official union business.

                                   CONCLUSION

        In closing, let me emphasize that we are taking decisive steps to
    manage the agency, its programs, and its expenditures. We are changing
    the agency's structure with a major shift to a performance-based
    organization, making hard, tough choices with our funding. We are
    implementing cost accounting. We're operating more like a business. We
    will continue to work on increasing the capacity of the system as it
    returns to pre-9/11 levels. With that, I thank you for your time and
    welcome the opportunity to discuss these issues in greater detail.

        Senator Shelby. Thank you.
        Mr. Mead.

                        Office of the Inspector General

    STATEMENT OF KEN MEAD, INSPECTOR GENERAL
        Mr. Mead. Thank you, Mr. Chairman, Senator.
        I want to point out first that I think the feeling is
    mutual with regard to the IG relationship with the FAA. The
    management at FAA is clearly, unambiguously improving, in my
    opinion, and the rigor of cost control, which is important in
    these times, is clearly evident.
        And as for you, I appreciate the kind words. It almost
    seems to me like yesterday that I can recall testifying before
    you. I can recall some of the exact questions and observations
    you made just 2 weeks after 9/11, first in that extraordinary
    joint House and Senate appropriations hearings and then the
    Senate Secure Conference facility. It is etched in my mind.
        The CBO has estimated that the deficit is going to be about
    $477 billion this year. In 2001, FAA estimated that the trust
    fund revenues next year would be about $14 billion. That number
    has come down. It is now projected to be about $11 billion. So
    their budget request of $14 billion is about $3 billion more
    than the trust fund is going to bring in.
        As the Administrator has said, a major focus for FAA this
    coming year must be the control of costs. And as you noted,
    Senator Shelby, in our statement we say that historically FAA
    is not used to living in this type of environment.
        I would like to make just a number of points here but the
    first I would like to highlight is that FAA has got to be in a
    position for rebounding air traffic. Domestic traffic levels
    still fall short of the peak experienced in 2000, but there is
    no question that traffic is rebounding.

                             PASSENGER ENPLANEMENTS

        Some data points as a frame of reference here. In February
    2004, the number of passenger enplanements is down 12 percent
    from February of 2000. That represents a 5 percent growth over
    enplanements last year. And I think this is an interesting
    statistic, that in 13 of the 31 largest airports, including
    some of those that experienced serious delays in 2000, the
    number of scheduled flights in March 2004 is actually exceeding
    the number of scheduled flights in March of 2000. But at 11 of
    those 13 airports, the number of available seats scheduled is
    still lagging behind the number offered in March 2000. One
    reason that the operations in the air traffic control system
    can be up but the number of passengers still down is the huge
    growth in the use of regional jets. Since this time in 2000,
    the number of regional jet flights has increased by 134
    percent. That is a pretty astonishing figure.
        Airports that bear watching include Chicago O'Hare. As you
    could tell from the papers this morning, the Secretary and the
    FAA took some additional actions yesterday. I would watch
    Atlanta, and the three New York metropolitan airports. At those
    five airports, arrival delays during the first 2 months of 2004
    ranged from between 20 and 35 percent of scheduled flights and
    the delays were generally 50 minutes or more, which is not
    dissimilar from where we were in 2000.
        Another watch item I would like to put on your RADAR screen
    is Dulles Airport. The launch of Independence Air by former
    United Airlines regional carrier Atlantic Coastal Airlines will
    increase Dulles traffic this summer to historically high
    levels. You can probably expect at least a 50 percent increase
    in traffic there. That is going to place additional demands on
    the air traffic control system, to say nothing of the already
    taxed security checkpoints there.

                                     SAFETY

        Safety. It has already been mentioned that the January 2003
    Air Midwest crash in Charlotte was the only fatal commercial
    accident in the past 2 years. I do think that record is almost
    remarkable. I can report that FAA has made progress again this
    year in reducing runway incursions. Those are potential
    collisions on the ground. Actually it is 3 years running that
    those numbers are down, but at 324 this past year, that number
    is still much too high.
        Operational errors where controllers allow planes to come
    too close together in the air, that remains a significant
    safety risk. They continue to increase--over 1,000 of them in
    2003, with an average of about one very serious error every 7
    days. So those must come down.
        On maintenance, there has been, as Senator Murray pointed
    out, a gravitation of maintenance from in-house to out-sourced.
    There are domestic repair stations and there are foreign repair
    stations. We did issue a report last year on it that contained
    a series of recommendations. The FAA has agreed with them all
    and is proceeding to implement them.
        The budget. Operating costs are mostly salaries and at $7.8
    billion, those costs are the largest portions of the FAA's
    budget. They continue to increase but not as markedly as they
    had been in these last several years and I attribute that to
    Administrator Blakey and her team.

                                     MOU'S

        We reported last year that FAA and NATCA had entered into
    sidebar agreements called memoranda of understanding. Sometimes
    FAA management did not even know about these and they had no
    real inventory of them and there were a number that were costly
    and rather wasteful.
        Just one example. One memorandum of understanding allowed
    controllers that were getting transferred to receive their pay
    increase by as much as $45,000 before moving and sometimes they
    would get that money a year ahead of time. Well, this past year
    FAA and the controllers union have rescinded or modified a
    large number of those memoranda of understanding. There are a
    couple that I think still need attention but there has been a
    lot of progress this year.
        Getting big reductions in FAA's operating costs is tough,
    Mr. Chairman, and that is because FAA has a very high salary
    base and much of that salary base is covered by contract.

                             CONTROLLER RETIREMENTS

        A cost driver this subcommittee needs to be aware of,
    though, is a bubble of pending controller retirements. You have
    in front of you two hand-outs and I would like to focus on the
    first one. The hand-out that we provided indicates that FAA's
    estimate is that about 7,000 controllers will leave the agency
    over the next decade. As you can see from the chart, it begins
    to hit big-time in 2006 and increases steadily from then on up
    through 2012.
        Now whether FAA is going to have to replace all these
    controllers on a one-for-one basis is going to depend on a
    variety of factors like the number of facilities and how many
    people they need at each facility and initiatives that FAA
    undertakes in its hiring and training process.
        Well, we just completed an audit of FAA's process for
    replacing and training controllers. I think it is with FAA for
    comment and we will be issuing it soon. We see some
    opportunities here.
        First, I do not think FAA has a good handle on where the
    vacancies are going to occur and when you are talking about
    hiring people in these numbers, you really have to know where
    they occur, because you have 300 facilities in the system. And
    there is also a need for getting some solid, good estimates of
    where they are going to occur and how many and when.
        When we visited FAA facilities we found that they were all
    over the map in how they were counting. While they all had
    estimates of attrition, they differed. For example, one only
    counted mandatory retirements. That is when you get to age 56.
    Another used only transfers and excluded retirements and
    another included all types of attrition, so they need to
    calculate their estimates on a common basis.

                                  OJT TRAINING

        We also found that there were some huge differences in how
    FAA facilities handle on-the-job training of new controllers.
    They do not keep data on such things as the time and cost
    required to complete OJT and we tried to calculate it at some
    sample facilities and what we found was pretty astonishing. The
    average time to train a new controller is about 3 years but we
    found in some instances it would go up to almost 7 years.

                                COST ACCOUNTING

        Cost accounting. Administrator Blakey is correct that they
    have made progress at the agency on cost accounting but I am
    really disappointed with the lack of progress in fielding a
    labor distribution system plan for air traffic control. Until
    you have that in place, it is going to be almost a crap shoot
    to figure out where you are going to need controllers and when.
    So I am hoping that we see some progress this next year on
    that.

                                CAPITAL ACCOUNT

        I will go to the capital account that both the chairman and
    Senator Murray referred to. Last year we did analyze 20
    projects and found schedule slips of up to 7 years. Fourteen
    projects experienced cost growth of over $4.3 billion. That
    number is an interesting number because it exceeds by more than
    100 percent the annual appropriation for this account. FAA is
    aware of this. We have seen some very positive signs as the
    Administrator and her team are focused on addressing problems.
    FAA has a lot on its plate with the existing acquisitions, plus
    they're starting some new ones.
        I would like to speak to the half-billion-dollar reduction
    for a moment. It is not fair to say that the projects that were
    cut lack merit but it is fair to say that the projects that
    were cut did face some fundamental issues, like not having a
    realistic cost estimate. And I do not mean just off by a little
    bit; I mean by in some cases $100 million. In other cases there
    were serious miscalculations about the benefits.

                              ACQUISITION PROGRAM

        There are two things on the overall acquisition program
    that FAA needs to do. The first is too many expensive projects
    do not have reliable cost and schedule estimates, and I am
    talking about huge swings. I know FAA is working on that but
    until you get some reliable cost and schedule baselines you are
    going to have a very difficult time figuring out what the game
    plan is going to be for the future.
        And second, stay away from these long-term cost-plus
    contracts. By long-term I am not talking about just a couple of
    years. I am saying sometimes a decade-long contract where you
    enter into it and you say it is cost-plus, which is where the
    contractor basically can bill the government and it is open-
    ended. ERAM, as you mentioned, Senator Shelby, which is the
    brain for controlling the high altitude air traffic, is one
    such new system.

                                    AIRPORTS

        Airports. I would like to close on a couple of points on
    airports. First is revenue diversion. Revenue diversion is
    illegal in most cases. Congress put in some caveats and
    grandfather clauses and so forth but overall, revenue diversion
    is illegal and what revenues diversion is is that money that is
    going to the airport, that the airport generates, is not
    supposed to go to the city or the State, except to pay for
    reimbursement for the services that are provided. We are
    finding too much revenue diversion out there. I think FAA could
    step up its efforts to provide some oversight.

                               PREPARED STATEMENT

        Second is you have had some big plus-ups in the airport
    account. It has gone from $1.5 billion, I think, to almost $3.5
    billion. In addition, you authorized an increase in the
    passenger facility charge, increased that to about $4.50. That
    is yielding about $2 billion a year. Those funds are directed
    by law toward airport-related projects, such as new runways.
    However, FAA also incurs costs to support many airport
    projects. Well, you are going to have to get money from
    somewhere to provide the nav aids, the air traffic equipment,
    and things of that nature that have to support those capacity
    enhancements. I see this as a looming issue as to where you are
    going to get the money to pay for those, particularly as FAA's
    capital account gets squeezed more and more, because that is
    the account where the money has historically come from.
        Thank you, Mr. Chairman.
        [The statement follows:]

                         Prepared Statement of Ken Mead

        We appreciate the opportunity to testify today as the subcommittee
    begins deliberations on the fiscal year 2005 appropriations for the
    Federal Aviation Administration (FAA). This year, we are facing an
    austere budgetary environment, one that will likely continue for at
    least the next several years. The Congressional Budget Office estimates
    that the Federal deficit will be $477 billion this year.
        Within this context, FAA must also be positioned for a rebound in
    air traffic. Domestic traffic levels still fall short of the peaks
    experienced in 2000, but there is no question that traffic is
    rebounding. In February 2004, the number of revenue passenger
    enplanements (35.1 million) was down 12 percent from February 2000, but
    this represents a 5 percent growth over enplanements in February 2003
    (33.3 million).
        While systemwide operations in February 2004 were slightly down
    from February 2000, the story is very different on an airport-by-
    airport basis. In 13 of the 31 largest airports, including some of
    those that experienced serious delays in 2000, the number of scheduled
    flights in March 2004 actually exceeded the number of scheduled flights
    in March 2000. However, in 11 of those 13 airports the number of
    available seats scheduled still lagged behind the number of available
    seats offered in March 2000. This is an indication, at least in part,
    of how network carriers are using regional jets in the place of narrow-
    body jets to connect traffic to the network hubs.
        It is unlikely that the situation will reach the level of
    widespread system failures we experienced in the summer of 2000, but it
    is possible that some airports could experience disruptions in service.
    Airports that bear watching include Chicago O'Hare, Atlanta, and the
    three New York metropolitan airports. At these five airports, arrival
    delays during the first 2 months of 2004 ranged between 20 and 35
    percent of scheduled flights.
        The FAA and the Department have been working with the industry to
    identify potential solutions to delays that might occur this summer
    such as creating high-altitude express lanes and voluntary schedule
    reductions. At Chicago O'Hare, arrival delays during March 2004
    represented a 74 percent increase over delays in the same period in
    2003 but down from triple digit increases during the period between
    November and January.
        One situation that bears watching, in particular, is the expected
    service growth at Washington's Dulles airport. In June, when
    Independence Air is launched by former regional carrier Atlantic Coast
    Airlines as a new low-cost carrier, traffic at Dulles will increase
    significantly. Some estimates put that increase at over 50 percent by
    this summer. In addition to airside congestion, there are concerns with
    airport terminal services, including the resources needed to process a
    significantly increased number of passengers through security
    checkpoints.
        While air traffic levels continue to show improvement from the
    sharp declines of 2001, there still remains a substantial decline in
    projected Aviation Trust Fund revenues. In 2001, FAA estimated that
    Trust Fund revenues in 2005 would be about $14.5 billion. That estimate
    has now been reduced to $11.1 billion.\1\ FAA's fiscal year 2005 budget
    request of $14 billion exceeds those revenues by nearly $3 billion.
    ---------------------------------------------------------------------------
        \1\ Even though air traffic operations are rebounding, Aviation
    Trust Fund revenues have not returned to previous levels partially
    because of lower enplanements, lower air fares, and more point-to-point
    service operations, all of which affect the amount of tax revenue
    collected.

        Clearly, a major focus for FAA this coming year, and for some time
    to come, must be controlling costs. FAA has not been accustomed to
    operating within this type of environment, and changing the
    organizational culture to reflect that focus will be a challenge. This
    past year, we have seen positive signs of leadership and commitment on
    the part of Administrator Blakey and her staff to address FAA's costs.
    For instance, there has been notable progress this past year in reining
    in FAA's unabated cost growth in its operations account. Progress is
    also being made toward restructuring the Air Traffic Organization into
    a performance-based organization. However, much more remains to be done
    to bring FAA's costs under control. Actions such as:
      --developing realistic cost and schedule baselines for major
            acquisitions,
      --avoiding long-term cost-plus contracts,
      --improving contract oversight,
      --implementing a cost accounting and labor distribution system, and
      --identifying ways to increase workforce productivity
    will be key to effectively manage the Agency's budget, and this will be
    the focus of our testimony today.

                                     SAFETY

        It is important to note that the U.S. aviation industry continues
    to be the safest in the world. The January 2003 Air Midwest crash in
    Charlotte was the only fatal commercial accident in the United States
    in the past 2 years. This past year, FAA has made progress in reducing
    runway incursions (potential collisions on the ground), but operational
    errors (when controllers allow planes to come too close together in the
    air) continue to increase. In fiscal year 2003, runway incursions
    decreased 4 percent to 324, while operational errors increased 12
    percent to 1,186, with an average of 3 operational errors each day and
    1 serious error (those rated as high risk) every 7 days.
        Additionally, a significant challenge for FAA will be to adjust its
    safety oversight to emerging trends in the aviation industry, such as
    outsourcing maintenance. While major air carriers outsourced 37 percent
    of their aircraft maintenance in 1996, the amount spent on outsourced
    maintenance increased to 47 percent of maintenance costs in 2002.

                                OPERATING COSTS

        FAA is requesting $7.849 billion for its fiscal year 2005 operating
    budget, which is about $370 million above the fiscal year 2004 enacted
    amount of $7.479 billion. Operating costs represent the largest portion
    of FAA's fiscal year 2005 total budget, over 56 percent, whereas FAA's
    airports and capital accounts represent 25 percent and 18 percent,
    respectively. This past year Administrator Blakey and her staff have
    made notable progress in beginning the process of reining in FAA's
    history of operating cost growth.
        Last year we reported that FAA and the National Air Traffic
    Controllers Association (NATCA) had entered into numerous sidebar
    agreements or Memoranda of Understanding (MOU's). Many of those MOU's
    had significant cost and/or operational impacts on the Agency, but we
    found that FAA had no controls over the process.
        This past year, FAA developed new policies and procedures that, if
    properly implemented, should significantly improve controls over MOU's.
    As part of an agreement to extend the controllers' collective
    bargaining agreement for another 2 years, FAA and NATCA also rescinded
    or modified many of the most costly MOU's. For example, FAA and NATCA
    rescinded an MOU that allowed controllers transferring to larger
    consolidated facilities to begin earning the higher salaries associated
    with their new positions substantially in advance of their transfer or
    taking on new duties.
        However, one costly MOU that we identified last year was not
    renegotiated. This MOU concerns ``Controller Incentive Pay'' (CIP),
    which provides controllers at 110 locations with an additional cost-of-
    living adjustment of between 1 and 10 percent, which is in addition to
    Government-wide locality pay. In fiscal year 2003, this additional
    cost-of-living adjustment cost FAA about $35.6 million.
        FAA also made progress in linking pay and performance--a key tenet
    of FAA's personnel reform efforts. As part of the 2-year extension of
    the controllers' agreement, FAA and NATCA agreed to tie a portion of
    controllers' salary increases to meeting four national performance
    metrics, which include goals for reducing operational errors and runway
    incursions. It is important to note, however, that the performance
    increase represents a very small percentage of the controllers' total
    annual pay increase. For each goal reached, controllers will receive a
    pay increase of 0.2 percent. However, even if none of the performance
    goals are met, controllers will still receive an average increase of
    about 4.9 percent this year because of contractual requirements.
        Achieving substantial reductions in operating costs represents a
    tremendous challenge because salaries and benefits make up
    approximately 73 percent of FAA's operating budget. Because FAA's
    salary base is relatively fixed, it is unlikely that significant
    reductions in operating cost growth can be achieved in the near term
    without substantial improvements in the Agency's workforce
    productivity.
        Initiatives such as new air traffic systems, technological
    improvements, efforts to redesign the National Airspace System, and
    consolidating locations all have the potential to significantly improve
    productivity. In the past, FAA has embarked on similar initiatives on a
    limited basis but was unable to demonstrate any credible gains in
    productivity partially because FAA did not have systems to accurately
    capture reliable cost and workforce-related data.
        Accurate cost and workforce data are particularly critical in light
    of the anticipated wave of controller retirements. FAA currently
    estimates that about 7,000 controllers could leave the Agency over the
    next decade. Whether FAA will need to replace all of them on a one-for-
    one basis depends on many factors, including future air traffic levels,
    new technologies, and initiatives that FAA undertakes in its hiring and
    training process. However, it is clear that as a result of the
    anticipated increases in attrition, FAA will begin hiring and training
    controllers at levels the Agency has not experienced since the early
    1980's.
        A substantial challenge for FAA will be to hire and train new
    controllers within a tightly constrained operating budget. FAA has
    recently made significant progress in this area by renegotiating
    several pay rules with NATCA that previously allowed some newly hired
    controllers to earn base salaries in excess of $79,000 while in
    training. The renegotiated rules now allow FAA to set newly hired
    controllers' salaries at levels that are more commensurate with an
    entry-level position (from $25,000 to $52,000), which should help FAA
    avoid higher costs as it begins hiring and training greater numbers of
    new controllers.
        We have just completed an audit of this issue and will be issuing a
    report next month. We found that this is an area where management
    attention is needed to better prepare for the expected increase in
    retirements. For example, FAA has national estimates of expected
    attrition within the controller workforce, but those estimates do not
    take into account where vacancies will occur.
        While most locations we visited had estimates of attrition over the
    next 2 years, they included different information in developing those
    estimates. One facility only projected mandatory retirements, another
    projected attrition for transfers but not retirements, and another
    provided estimates on all types of attrition (i.e., retirements,
    transfers, hardships, resignations, and removals).
        In addition, FAA does not keep national statistics on the
    controller on-the-job training (OJT) process, which is the longest
    portion of controller training. At the locations we visited, we found
    that the overall time required for newly hired controllers to become
    certified averaged 3.1 years, but in some cases it took as long as 7
    years. To effectively manage the OJT process as hiring increases, FAA
    will need data such as the time and costs required to complete OJT, the
    number of training failures, and any delays in the process to benchmark
    against and improve the time and costs associated with OJT.
        The expected increase in controller attrition reinforces the need
    for FAA to have its cost accounting and labor distribution systems in
    place and operating effectively. This past year, FAA has made some
    progress with its cost accounting system, but there has been very
    little progress in fielding the labor distribution system planned for
    air traffic employees. That system is critical for managing the
    expected wave of controller retirements. FAA is aware of this need and
    the Chief Operating Officer for the Air Traffic Organization has
    committed to putting both of these systems in place.

                               MAJOR ACQUISITIONS

        FAA modernization projects have historically experienced
    considerable cost growth, schedule slips, and shortfalls in
    performance. In the current budget environment, cost growth and
    schedule slippages experienced in the past are no longer affordable or
    sustainable. Cost and schedule problems with ongoing modernization
    efforts have serious consequences because they result in postponed
    benefits, the crowding out of other modernization projects, costly
    interim systems, or a reduction in the number of units procured. In the
    past, the severity of these problems has been masked by the size of a
    modernization account that either grew or stayed constant.
        We note that FAA has made downward adjustments in its fiscal year
    2005 request for a number of modernization projects. These projects
    have merit but they face fundamental problems with respect to
    misjudging technological maturity, unexpected cost growth, or concerns
    about how to move forward in a cost-effective way.
      --The Local Area Augmentation System (LAAS) is a new precision
            approach and landing system. In December 2002, we reported that
            expectations for the cost, schedule, and performance of the new
            system needed to be reset because the new landing system was
            not as mature as FAA expected. Category I LAAS was planned for
            2006, and more demanding Category II/III performance is now a
            research and development effort with uncertain completion
            dates. After assessing contractor progress, FAA believes that
            it will take considerably longer, as much as 21 months, to
            complete just the first phase of LAAS.
      --Controller-Pilot Data Link Communications (CPDLC) is a new way for
            controllers and pilots to share information that is analogous
            to wireless email. FAA is deferring plans for CPDLC because of
            concerns: (1) about how quickly users would equip with new
            avionics; (2) that the approved program baseline of $167
            million was materially understated and no longer valid; and,
            (3) about the impact on the operations account, which is
            already overburdened.
      --Next Generation Air-to-Ground Communications System (NEXCOM) is an
            effort to replace aging analog radios and foster the transition
            to digital communications. The first segment of NEXCOM (new
            radios and new ground infrastructure for digital
            communications) was expected to cost $986 million. However, the
            full cost of implementing NEXCOM throughout the National
            Airspace System was uncertain, but later segments were
            estimated to cost $3.2 billion. In addition, NEXCOM was
            controversial with airlines because of FAA's preferred
            technology. While FAA will move forward with replacing older
            radios, it has postponed making decisions about NEXCOM ground
            system development.
        While we see positive signs that the Administrator and her team are
    addressing fundamental problems with major acquisitions, additional
    steps are needed.
      --Developing reliable cost and schedule estimates.--Last year, we
            reported that despite the benefits of acquisition reform
            granted in 1996, cost growth and scheduled slips in
            modernization efforts are all too common. For example, we
            analyzed 20 major acquisition projects and found that 14 of
            these projects experienced cost growth of over $4.3 billion
            (from $6.8 billion to $11.1 billion), which represents
            considerably more than the FAA's annual appropriation for
            modernizing the National Airspace System.
          For example, the cost of the Standard Terminal Automation
            Replacement System (STARS), which will supply new controller
            displays and related computer equipment for FAA's terminal
            facilities, has nearly doubled from $940 million to $1.69
            billion.
          FAA has already obligated $1.1 billion through fiscal year 2003
            and has installed 20 STARS systems, of which 19 are
            operational. The Agency is currently reviewing its deployment
            plans. We reported in September 2003 that STARS is not the same
            program that was planned 8 years ago. The program has shifted
            from a commercial off-the-shelf procurement to one that has
            required more than $500 million in development costs. Moreover,
            because of cost growth and a schedule slip to fiscal year 2012,
            the benefits that supported the initial acquisition are no
            longer valid.
          The Fiscal Year 2004 Appropriations Conference Report directs our
            office to review and validate the Agency's revised STARS
            lifecycle cost estimates. We are encouraged that FAA has made
            recent changes in the STARS program. To control cost growth,
            FAA has developed a phased approach to STARS that will use a
            fixed price contract and consider contractor performance before
            moving to the next phase. Last Tuesday, FAA approved the first
            phase limiting STARS to 50 locations. FAA is also developing a
            business case to complete its terminal modernization program.
            When FAA has completed its business case, we will review and
            validate the cost estimates.
      --Avoiding long-term cost-plus contracts.--Our work on the cost,
            schedule, and performance problems of 20 major FAA acquisitions
            illustrates why the Agency needs to avoid entering into long-
            term cost-plus contracts before Agency requirements and user
            needs are fully understood. Cost growth associated with
            additional development work and changing requirements for both
            STARS and the Wide Area Augmentation System was absorbed fully
            by the government and ultimately the taxpayer.
          FAA is now undertaking a large and complex automation effort
            through a long term, cost-plus contract called the En Route
            Automation Modernization (ERAM) program, which FAA estimates
            will cost about $2 billion between now and 2011. FAA expects to
            spend over $200 million annually on the project beginning in
            fiscal year 2005. ERAM is designed to replace the Host Computer
            System, the central nervous system for facilities that manage
            high-altitude traffic.
          One significant exception to programs with major cost overruns
            with cost-plus contracts is the Advanced Technologies and
            Oceanic Procedures program (ATOP), an effort to modernize FAA
            facilities that manage air traffic over the Atlantic and
            Pacific Oceans. Because FAA has relied on what is largely a
            fixed price contract and kept requirements stable, the costs
            associated with additional software development and correcting
            software problems discovered during testing, until recently,
            have been absorbed by the contractor.
          Due to software development problems and pending delays, FAA
            modified the contract and increased its value by $11 million in
            an effort to maintain the Agency's schedule for deploying the
            new system to Oakland by the end of June. This is a modest
            adjustment compared to what we have seen with other
            modernization projects that relied on cost-plus contracts.
          While the $11 million can be accommodated in the current ATOP
            cost baseline, the critical issue is what happens between now
            and February 2005. This time frame is important because the
            recent contract modification limits the contractor's
            responsibility for paying to fix software problems FAA finds in
            ATOP after February 28, 2005. FAA expects to complete work on
            the initial version of ATOP software (required for Oakland)
            shortly and plans to test the more advanced version of ATOP
            software by the end of this year. Given the change in the
            contract and tight time frames, it will be critical for FAA to
            identify all software problems before February 28, 2005.
      --Improving contract management.--Last year, we reported that FAA's
            management of cost-reimbursable contracts was deficient, lacked
            accountability, and did not adequately protect against waste
            and abuse. Our audits have found that FAA officials did not:
            (1) obtain audits of billions of dollars in expenditures on
            cost-reimbursable contracts; (2) ensure reliable government
            cost estimates were prepared and used in evaluating contracts;
            and, (3) properly account for billing and expenditures to
            prevent overpayments. For example, our current audit work has
            identified that FAA officials did not obtain audits of 17 cost-
            reimbursable contracts with a total value of $6.7 billion.
          In January 2004, when we rendered our opinion on the Department's
            financial statements, we identified these deficiencies as a
            material weakness, and FAA is implementing a detailed action
            plan to correct the deficiencies. We are working with FAA to
            ensure that these actions are fully implemented. We do want to
            note that FAA achieved a ``clean'' opinion on its fiscal year
            2003 financial statements.

                                    AIRPORTS

        Finally, funding for the airport improvement programs (AIP) has
    seen substantial increases over the past several years. FAA's AIP
    account has increased from $1.5 billion in 1996 to $3.5 billion in
    2005. This is on top of passenger facility charges (PFCs) that airports
    collect (up to $4.50 per passenger) that FAA estimates will generate
    over $2 billion in fees in 2004. FAA projections suggest that a similar
    amount will be collected in 2005.
        The increased amounts of AIP funding and PFC collections are
    directed by law toward airport-related projects, such as new runways.
    However, FAA also incurs costs to its other accounts in order to
    support many of the airport projects. For example, FAA's Facilities and
    Equipment (F&E) and Operations accounts bear the cost of air traffic
    related projects, such as new weather or instrument landing systems and
    the redesign of airspace to support new runways.
        An emerging issue for FAA's budget is whether or not airport funds
    should be used to support some air traffic control related projects. In
    its budget request, FAA observes that new systems once considered
    beneficial to FAA air traffic operations have evolved to provide
    significant benefits to airport operators and users. FAA's budget
    submission identifies several systems that should be considered for AIP
    funding instead of funding from the F&E account.
        Although AIP funds can be used for this purpose, the change would
    represent a shift in the allocation of budgetary resources. FAA
    estimates that this would impact the AIP account in fiscal year 2005 by
    about $30 million, but this number could grow as more capacity projects
    come on line. Accordingly, FAA needs to identify and quantify all the
    specific systems that will be needed to support new infrastructure
    projects and then identify the funding sources that will be used to pay
    for them.
        A longstanding problem that we continue to address through our work
    is diversion of airport revenues by airport sponsors or owners. We have
    been reviewing revenue diversions for over 13 years. Between 1991 and
    2000, our audits disclosed over $344 million in diverted revenue. Last
    year, we reported on revenue diversions at five large airports,
    including one airport whose sponsor, a local government agency,
    diverted about $40 million to projects not related to the airport.
        Our work shows that FAA's oversight of revenue diversions is
    limited. In the past, FAA has maintained that it did not have the
    resources to devote to this issue. We recently met with the Associate
    Administrator for Airports and members of her staff to discuss FAA's
    specific plans to increase the Agency's oversight of revenue
    diversions. We plan to meet next month to review progress and discuss
    how we can coordinate efforts. These are steps in the right direction;
    the key now is follow-through.

                             AVIATION SAFETY ISSUES

        In terms of safety, FAA and U.S. air carriers have maintained a
    remarkable safety record. The January 2003 Air Midwest crash in
    Charlotte was the only fatal commercial accident in the past 2 years.
    However, operational errors pose a significant safety risk, with an
    average of three operational errors per day and one serious error
    (those rated as high risk) every 7 days. In fiscal year 2003, the
    number of operational errors increased 12 percent to 1,186, or 125 more
    than the number of incidents that occurred in fiscal year 2002.
    Additionally, while runway incursions have continued to decline for a
    second year in a row, there is still an average of nearly 1 runway
    incursion per day and an average of 1 serious runway incursion every 11
    days (those incursions that barely avoided or had significant potential
    for a collision).

        As shown in the following table, while the total number of runway
    incursions has decreased, during the first 6 months of fiscal year
    2004, the most serious runway incursions have increased. Also, the
    total number of operational errors continue to increase, even though
    the most serious, or high severity, operational errors decreased during
    this same time period.

                  RUNWAY INCURSIONS AND OPERATIONAL ERRORS--OCTOBER 1, 2003 THROUGH MARCH 31, 2004 \1\
    ----------------------------------------------------------------------------------------------------------------
                                                           Total Incidents               Most Serious Incidents
                                                 -------------------------------------------------------------------
                                                    Fiscal     Fiscal     Percent     Fiscal     Fiscal     Percent
                                                  Year 2003  Year 2004    Change    Year 2003  Year 2004    Change
    ----------------------------------------------------------------------------------------------------------------
    Runway Incursions...........................        165        157         (5)         13         18         38
    Operational Errors..........................        495        511          3          27         21        (22)
    ----------------------------------------------------------------------------------------------------------------
    Fiscal year 2004 information is preliminary as all incidents may not have received a final severity rating.
      Serious incidents for runway incursions include category A and B incidents. Serious incidents for operational
      errors include high-severity incidents.

        This past year, we also reported that improvements are needed in
    FAA's oversight of a growing trend toward air carrier use of outsourced
    maintenance facilities. While major air carriers outsourced 37 percent
    of their aircraft maintenance expense in 1996, the amount spent on
    outsourced maintenance increased to 47 percent of maintenance costs in
    2002. Yet, over 90 percent of FAA's inspections are still focused on
    in-house maintenance, leaving contract repair stations inadequately
    reviewed. In response to our audit, FAA agreed to develop a new process
    to identify repair stations that air carriers use to perform safety-
    critical repairs and target inspector resources to those facilities.

                    ABATING A TREND OF OPERATING COST GROWTH

        FAA is requesting $7.849 billion for its fiscal year 2005 operating
    budget, which is about $370 million above the fiscal year 2004 enacted
    amount of $7.479 billion. Operating costs represent the largest portion
    of FAA's fiscal year 2005 total budget, over 56 percent, whereas FAA's
    airports and capital accounts represent 25 percent and 18 percent
    respectively. As shown in the following graph, FAA's operating costs
    have been increasing substantially over the past 9 years.

        This past year Administrator Blakey and her staff have made notable
    progress in beginning the process of reining in FAA's history of
    operating cost growth. Several areas stand out in particular.
      --MOU's.--Last year, we reported that FAA and the National Air
            Traffic Controllers Association (NATCA) had entered into
            numerous sidebar agreements or Memoranda of Understanding
            (MOU's). Many of those MOU's had significant cost and/or
            operational impacts to the Agency, but we found that FAA had
            virtually no controls over the process. This past year, FAA
            developed new policies and procedures that, if properly
            implemented, should significantly improve controls over MOU's.
            As part of an agreement to extend the controllers' collective
            bargaining agreement for another 2 years, FAA and NATCA also
            rescinded or modified many of the most costly MOU's. For
            example:
        --FAA and NATCA rescinded an MOU that allowed controllers
                transferring to larger consolidated facilities to begin
                earning the higher salaries associated with their new
                positions substantially in advance of their transfer or
                taking on new duties. At one location, controllers received
                their full salary increases 1 year in advance of their
                transfer (in some cases going from an annual salary of
                around $55,000 to over $99,000). During that time, they
                remained in their old location, controlling the same
                airspace, and performing the same duties. At three
                locations alone, we found FAA incurred over $2.2 million in
                unnecessary one-time costs as a result of this MOU.
        --FAA and NATCA also renegotiated another MOU for a new free flight
                tool that originally gave each controller two $250 cash
                awards and a time-off award of 24 hours for meeting certain
                training milestones on the new system. The MOU contained no
                distinction of awards for individual contributions other
                than coming to work and attending training. At six
                facilities alone, this MOU resulted in FAA incurring
                approximately $1.3 million in individual cash awards and
                62,500 hours in time off, which is the equivalent of
                approximately 30 full-time positions.
          However, one costly MOU that we identified last year was not
            renegotiated. This MOU concerns ``Controller Incentive Pay''
            (CIP), which provides controllers at 110 locations with an
            additional cost-of-living adjustment of between 1 and 10
            percent, in addition to Government-wide locality pay. For
            example, like all other Federal and FAA employees in the
            Washington Metropolitan area, controllers receive 14.63 percent
            in Government-wide locality pay (for Calendar Year 2004).
            However, as a result of this MOU:
        --Controllers at Dulles International also receive 4.6 percent in
                CIP;
        --Controllers at Reagan National also receive 3.3 percent in CIP;
        --Controllers at Andrews Air Force Base also receive 5.9 percent in
                CIP; and
        --Controllers at Baltimore Washington International also receive
                1.7 percent in CIP.
          In fiscal year 2003, this additional cost-of-living adjustment
            cost FAA about $35.6 million.
      --Flight Service Stations.--Another area of progress this past year
            is FAA's A-76 study of its flight services functions, which
            provide general aviation pilots with aeronautical information
            and services such as weather briefings, flight planning
            assistance, and aeronautical notices. In December 2001, we
            issued a report showing that FAA could save approximately $500
            million over 7 years by consolidating its automated flight
            service stations in conjunction with deployment of new flight
            services software. In response, FAA began an A-76 study to
            determine if flight services should be retained within the
            government or contracted out.
          FAA has made strides in the process this past year. FAA plans to
            review proposals from several contractors, as well as the
            government's ``More Efficient Organization'' proposal, within
            the next several months and believes it will be ready to make a
            final determination by March 2005. A key challenge will be
            completing those actions under what are already tight
            timeframes. Keeping this process on track is important because
            the potential for cost savings is significant. FAA is requiring
            a 22 percent cost savings, or about $478 million, over 5 years
            as a selection factor for determining if a proposal will be
            considered.
      --Pay for Performance.--FAA also made progress in linking pay and
            performance--a key tenet of FAA's personnel reform efforts. As
            part of the 2-year extension of the controllers' agreement, FAA
            and NATCA agreed to tie a portion of controllers' salary
            increases to meeting four national performance metrics: (1) a
            reduction in the number of operational errors; (2) a reduction
            in the number of runway incursions; (3) improvements in arrival
            efficiency rates; and (4) improvements in on-time performance.
          This now means that 78 percent of FAA's workforce will be on a
            pay-for-performance plan, up from 36 percent last year at this
            time. It is important to note, however, that in the case of
            controllers, the performance increase represents a very small
            percentage of their total annual pay increase. For each goal
            reached, controllers will receive a pay increase of 0.2 percent
            However, even if none of the performance goals are met,
            controllers will still receive an average increase of 4.9
            percent this year because of contractual requirements.
          Other FAA employees who are on other pay systems will receive
            different pay increases. For example, non-bargaining unit
            employees on the Agency's ``core compensation plan'' will
            receive a 4.5 percent average pay increase. However, those
            employees are still eligible to receive a performance increase,
            which averages about 0.6 percent, based on an individual's job
            performance and not on specific goals as in the case of
            controllers.
      --FAA Review of Overtime and Sick Leave Usage.--In the past, our
            office received several hotline complaints alleging that FAA
            employees at five large facilities were abusing credit hours
            and manipulating work schedules to increase overtime. When we
            made FAA aware of the allegations, the Agency took little or no
            action. Recently, however, we met with senior FAA officials who
            briefed us on measures taken to identify and address the
            allegations at two of the cited locations. According to FAA
            managers, the actions taken during the previous fiscal year
            have resulted in a $4 million reduction in personnel costs and
            a 19 percent reduction in overtime costs. These actions appear
            to be steps in the right direction, but it is unclear what
            measures have been taken at the other FAA facilities identified
            in the hotlines. Accordingly, we are initiating a review of the
            measures planned and taken at each location cited in the
            hotline complaints and will be issuing a report within the next
            few months.
        Mr. Chairman, the actions taken by the Administrator and her staff
    this past year are encouraging. However, it is important to keep in
    mind that achieving significant reductions in operating costs
    represents a tremendous challenge. This is because salaries and
    benefits make up approximately 73 percent of FAA's operating budget or
    about $5.7 billion in fiscal year 2005.
        FAA's operating costs are further compounded by the fact that FAA
    has a very high average salary base. For example, last year, the
    average base salary for all FAA employees was over $87,000. We estimate
    that this year, the average base salary for controllers, FAA's largest
    workforce, will be about $111,000,\2\ which is exclusive of premium
    pay. Against FAA's high salary base, pay increases (which are a
    percentage of base pay) result in large dollar increases to FAA's
    operating costs. For example, FAA's fiscal year 2005 budget request of
    $7.8 billion for operations is a total increase of about $370 million
    over fiscal year 2004 appropriations. However, FAA estimates that
    approximately $200 million of the $370 million will be consumed by pay
    increases alone.
    ---------------------------------------------------------------------------
        \2\ Based on a 4.9 percent average increase, which does not take
    into account possible additional increases for meeting performance
    goals.
    ---------------------------------------------------------------------------
        Because FAA's salary base is relatively fixed, it is unlikely that
    significant reductions in operating cost growth can be achieved without
    substantial improvements in the Agency's workforce productivity.
    Initiatives such as new air traffic systems, technological
    improvements, efforts to redesign the National Airspace System, and
    consolidating locations all have the potential to significantly improve
    productivity. In the past, FAA has embarked on similar initiatives on a
    limited basis, but it was unable to demonstrate any credible gains in
    productivity partially because FAA did not have systems to accurately
    capture reliable cost and workforce-related data.
        Expected Increases in Controller Attrition.--A significant issue
    for FAA is the expected increase in controller attrition. Attrition in
    FAA's air traffic controller workforce is expected to rise sharply in
    upcoming years as controllers hired after the 1981 Professional Air
    Traffic Controllers Organization controllers' strike become eligible
    for retirement. FAA currently estimates that nearly 7,100 controllers
    could leave the Agency over the next 9 years (Fiscal Years 2004-2012).
    In contrast, FAA has only experienced total attrition of about 2,100
    controllers over the past 8 years (Fiscal Years 1996-2003).
        Whether FAA will need to replace all 7,100 controllers on a one-
    for-one basis depends on many factors, including future air traffic
    levels, new technologies, and long-term initiatives that FAA
    undertakes. However, it is clear that as a result of the anticipated
    increases in attrition, FAA will begin hiring and training controllers
    at levels that the Agency has not experienced since the early 1980's.

        We have just completed an audit of FAA's process for placing and
    training air traffic controllers and will be issuing a report next
    month. We found that this is an area where additional management
    attention is needed. For example:
      --FAA has national estimates of expected attrition within the
            controller workforce, but those estimates do not take into
            account where vacancies will occur. It is almost certain that
            many will be at some of the busiest and most critical
            facilities within the National Airspace System.
      --While most locations we visited had estimates of attrition over the
            next 2 years, they included different information in developing
            those estimates. One facility only projected mandatory
            retirements, another projected attrition for transfers but not
            retirements, and another provided estimates on all types of
            attrition (i.e., retirements, transfers, hardships,
            resignations, and removals).
      --In addition, FAA does not currently have a selection process for
            determining if newly hired controllers have the knowledge,
            skills, and abilities to complete training and become certified
            at the facility level of their assigned location.
      --FAA does not keep national statistics on the controller on-the-job
            training (OJT) process, which is the longest portion of
            controller training. At the locations we visited, we found the
            overall time required for newly hired controllers to become
            certified averaged 3.1 years but in some cases took as long as
            7 years. To effectively manage the OJT process as hiring
            increases, FAA will need data such as the time and costs
            required to complete OJT, the number of training failures, and
            delays in the process to benchmark against and improve the time
            and costs associated with OJT.
        A substantial challenge for FAA will be to hire and train new
    controllers within a tightly constrained operating budget. FAA has
    recently made significant progress in this area by renegotiating
    several pay rules with NATCA that previously allowed some newly hired
    controllers to earn base salaries in excess of $79,000 while in
    training. The renegotiated rules now allow FAA to set newly hired
    controllers' salaries at levels that are more commensurate with an
    entry-level position (from $25,000 to $52,000), which should help FAA
    avoid higher costs as it begins hiring and training greater numbers of
    new controllers.
        One point worth noting, Mr. Chairman, is that new controllers will
    generally have lower base salaries than the retiring controllers they
    replace. Over time, this could help reduce FAA's average base salary
    and, in turn, help reduce FAA's operating cost growth. However, if FAA
    does not place new controllers where and when they are needed, the
    potential reductions in base salaries will be offset by lower
    productivity as a result of placing too many or too few controllers at
    individual facilities.
        To effectively manage the expected increase in controller
    attrition, FAA needs accurate cost and workforce data, which
    underscores the urgency of getting the Agency's cost accounting and
    labor distribution systems in place and operating effectively. The
    Chief Operating Officer for the Air Traffic Organization has committed
    to putting both of these systems in place. This past year, FAA has made
    some progress with its cost accounting system, but there has been very
    little progress in fielding the labor distribution system planned for
    air traffic employees. That system is critical for managing the
    expected wave of controller retirements.
      --Cost Accounting.--In 2003, FAA's cost accounting system was
            partially operational in two of FAA's five lines of business.
            FAA produced limited cost accounting information for the Air
            Traffic Services line of business, a major component of the new
            Air Traffic Organization, and for the Commercial Space
            Transportation line of business. FAA made progress during the
            year by assigning some overhead costs properly, but much more
            needs to done. For example, FAA is unable to assign about $1.3
            billion of costs to individual facilities. Until these costs
            can be assigned, managers will lack the information they need
            to determine the true cost of facility operations.
      --Labor Distribution.--CRU-X is the labor distribution system FAA
            chose to track hours worked by air traffic employees. As
            designed, CRU-X could have provided credible workforce data for
            addressing concerns about controller staffing, related overtime
            expenditures, and help determine how many controllers are
            needed and where. However, CRU-X has not been deployed as
            designed because of a September 2002 agreement between FAA and
            NATCA that limited the system's capability to gather data
            regarding workforce productivity. Specifically, the agreement
            eliminated (1) requirements for controllers to sign in and out
            of the system when arriving or leaving work, and (2) tracking
            time spent by employees performing collateral duties.
          In February 2004, FAA provided NATCA with substantive changes
            planned for the system and began negotiations with the union in
            March. FAA and NATCA need to complete actions to resolve
            internal control deficiencies with CRU-X and implement the
            system as quickly as possible so the Agency and union have
            objective data to determine how many controllers are needed and
            where.

      BRINGING FISCAL DISCIPLINE AND ACCOUNTABILITY TO FAA MODERNIZATION
                                    EFFORTS

        FAA is requesting $2.5 billion for the Facilities and Equipment
    account for fiscal year 2005. This represents a reduction of over $350
    million from last year's appropriated level of $2.86 billion and nearly
    $500 million less than the authorized level. Historically, FAA's
    modernization projects have experienced considerable cost growth,
    schedule slips, and shortfalls in performance.
        In the current budget environment, cost growth and schedule
    slippages experienced in the past are no longer affordable or
    sustainable. As the following chart shows, only 56 percent of FAA's
    $2.5 billion budget request for Facilities and Equipment is for
    developing and acquiring air traffic control modernization projects.
    The remaining funds are for salaries, FAA facilities, and mission
    support.

        Cost and schedule problems with ongoing modernization efforts have
    serious consequences because they result in postponed benefits (in
    terms of safety and capacity), the crowding out of other modernization
    projects, costly interim systems, or a reduction in units procured. In
    the past, the severity of these problems has been masked by the size of
    a modernization budget that either grew or stayed constant.
        Adjustments to FAA Modernization Projects.--FAA has reduced or
    eliminated funding in its fiscal year 2005 request for a number of
    modernization projects, including, the Local Area Augmentation System,
    Controller-Pilot Data Link Communications, and the Next Generation Air
    to Ground Communications System. These efforts were longer-term in
    nature and called for airspace users to purchase and install new
    avionics. Funding reductions also reflect an emphasis on near-term FAA
    infrastructure projects.
        These projects have merit but they face problems irrespective of
    funding that needed to be addressed with respect to misjudging
    technological maturity, unexpected cost growth, or concerns about how
    to move forward.
      --The Local Area Augmentation System (LAAS) is a new precision
            landing and approach system. It was expected to cost $696
            million and to be deployed in 2006, 4 years later than
            originally planned. FAA is not requesting funds for LAAS in
            fiscal year 2005 and will use funds from fiscal year 2004 to
            continue work on the new system. In December 2002, we reported
            that expectations with respect to cost, schedule, and
            performance needed to be reset because the new landing system
            was not as mature as FAA expected.\3\ Category I LAAS was
            planned for 2006 and the more demanding CAT II/III LAAS is now
            a research and development effort with uncertain completion
            dates.\4\
    ---------------------------------------------------------------------------
        \3\ FAA Needs to Reset Expectations for LAAS Because Considerable
    Work Is Required Before It Can Be Deployed for Operational Use (AV-
    2003-006, December 16, 2002).
        \4\ CAT I precision approach has a 200 foot ceiling/decision height
    and visibility of \1/2\ mile. CAT II precision approach has a 100 foot
    ceiling/decision height and visibility of \1/4\ mile. CAT III precision
    approach and landing has a decision height and visibility of less than
    100 feet down to the airport surface.
    ---------------------------------------------------------------------------
          Considerably more development work is required for LAAS than FAA
            expected just a year ago. The key issue is how to ensure the
            system will work as safely as intended. After assessing
            contractor progress, FAA estimated that it could take up to 21
            months and an additional $37 million for the contractor to
            recover and complete just the first phase for LAAS.
      --Next Generation Air-to-Ground Communications System (NEXCOM) is an
            effort to replace aging analog radios and foster the transition
            to digital communications. The first segment of NEXCOM (new
            radios and new ground infrastructure for digital
            communications) was expected to cost $986 million. FAA is
            requesting $31 million for NEXCOM in fiscal year 2005, $54
            million less than last year's appropriated level of $85
            million. FAA will move forward with replacing older radios (the
            least complex element of the NEXCOM effort) but has postponed
            making decisions about NEXCOM ground system development and is
            re-evaluating its approach for modernizing the air to ground
            communications. The full cost of implementing NEXCOM throughout
            the NAS was uncertain but later segments were estimated to cost
            $3.2 billion. Also, NEXCOM has been controversial with the
            airlines because of FAA's preferred technology.
          FAA's decision to postpone decisions about NEXCOM gives the
            Agency opportunities to develop a cost-effective approach for
            meeting the air-to-ground communications needs of the National
            Airspace System. While FAA replaces older radios, the Agency
            needs to needs to determine how it will: (1) sustain existing
            communications infrastructure; (2) address frequency congestion
            problems in the short term; and, (3) meet the communications
            needs of FAA and airspace users in the most cost-effective way.
      --Controller-Pilot Data Link Communications (CPDLC) is a new way for
            controllers and pilots to share information that is analogous
            to wireless email and considered an enabling technology for
            Free Flight. FAA began using CPDLC at Miami Center in October
            2002 and planned to deploy the system to other facilities that
            manage high altitude traffic at a cost of $167 million. FAA
            deferred these plans for expanding CPDLC last year. The
            Conference report for the fiscal year 2004 Appropriations Act
            directed our office to look into, among other things, the
            circumstances leading to termination of the CPDLC program and
            what control could have been put in place to avoid a program
            failure of this type.
          We found that a number of factors contributed to FAA's decision,
            including concerns about how quickly users would equip with new
            avionics and the fact the approved program baseline of $167
            million was no longer valid. FAA estimates that it would cost
            $236.5 million for eight locations--an increase of $69 million
            for fewer than half the locations initially planned.
          Another factor was the impact on the operations account, which is
            already overburdened. CPDLC would have added $63 million in
            cost to the operations account for, among other things,
            controller training and overtime (for just eight locations),
            and $20 million annually for the cost of data link messages. We
            are continuing our work on CPDLC and will report back to this
            committee later this year.
          We see positive signs that the Administrator and her team are
            addressing problems with major acquisitions. However, there
            should be no mistake that FAA's efforts are in the early stages
            and a number of fundamental steps are needed. They include:
        --Developing reliable cost and schedule estimates,
        --Avoiding long-term cost-plus contracts, and
        --Establishing controls to prevent waste and abuse.
        Developing Reliable Cost and Schedule Estimates.--Last year, we
    reported that despite the benefits of acquisition reform granted in
    1996, cost growth and scheduled slips in modernization efforts are all
    too common. For example, we analyzed 20 major acquisition projects and
    found that 14 of these projects experienced cost growth of over $4.3
    billion (from $6.8 billion to $11.1 billion), which represents
    considerably more than the FAA's annual appropriation for modernizing
    the National Airspace System. Also, 13 of the 20 projects accounted for
    delays ranging from 1 to 7 years. FAA recognizes these problems and the
    Agency's strategic plan--Flight Plan 2004-2008--establishes a
    performance target so that 80 percent of critical acquisitions are both
    on schedule and within 10 percent of budget. This is an important step.
        A number of key modernization projects that have been delayed still
    do not have reliable cost and schedule baselines. Without better
    information, FAA cannot effectively plan, manage the modernization
    portfolio, or determine what is affordable. The following table
    provides information on selected acquisitions that do not have reliable
    cost and schedule baselines.

                              FOUR KEY PROJECTS NEEDING UPDATED COST AND SCHEDULE BASELINES
                                                  [Dollars in Millions]
    ----------------------------------------------------------------------------------------------------------------
                                         Estimated Program                   Implementation Schedule
                                               Costs         Percent -------------------------------------- Schedule
                 Program              ----------------------   Cost                                           Delay
                                        Original   Current    Growth       Original           Current         Years
    ----------------------------------------------------------------------------------------------------------------
    Wide Area Augmentation System....     $892.4  \1\ $2,92      227  1998-2001........  2003-TBD \2\.....         5
                                                        2.4
    Standard Terminal Automation           940.2    1.690.2       80  1998-2005........  2002-2012 \2\....         7
     Replacement System.
    Airport Surveillance Radar-11....      743.3    1,040.0     39.9  2000-2005........  2003-2013........         8
    Integrated Terminal Weather            276.1      283.7        3  2002-2003........  2003-2008........         5
     System.
    ----------------------------------------------------------------------------------------------------------------
    \1\ This includes the cost to acquire geostationary satellites.
    \2\ Costs and schedules are under review.

        Mr. Chairman, I would like to discuss three of these projects.
      --Standard Terminal Automation Replacement System (STARS) will supply
            new controller displays and related computer equipment for
            FAA's terminal facilities. FAA's official STARS acquisition
            cost estimate has nearly doubled from $940 million to $1.69
            billion.
          FAA has already obligated $1.1 billion through fiscal year 2003
            but has only installed 20 systems, of which 19 are operational.
            The Agency is currently reviewing its deployment plans. We
            reported in September 2003 that STARS is not the same program
            that was planned 8 years ago. The program has shifted from a
            commercial off-the-shelf procurement to one that has required
            more than $500 million in development costs. Moreover, because
            of cost growth and a schedule slip to fiscal year 2012, the
            benefits that supported the initial acquisition are no longer
            valid. \5\ Due to STARS delays, FAA deployed Common Automated
            Radar Terminal System (Common ARTS) hardware and software to
            141 terminal facilities over the past 5 years.
    ---------------------------------------------------------------------------
        \5\ FAA Needs to Reevaluate STARS Costs and Consider Other
    Alternatives, AV-2003-058, September 9, 2003.
    ---------------------------------------------------------------------------
          In our 2003 report, we recommended that FAA select the most cost-
            effective and affordable strategy to complete terminal
            modernization by augmenting STARS deployment with Common ARTS.
            We estimated that implementing this approach would allow FAA to
            put at least $220 million to better use. To date, the Agency
            has not ruled out keeping some Common ARTS as an alternative if
            STARS proves to be unaffordable or does not perform as
            expected.
          FAA officials maintain that STARS has important capabilities,
            such as ``Sensor Fusion,'' which is designed to merge data from
            multiple radars on controllers' displays. However, FAA
            continues to experience problems with the Sensor Fusion
            software. We have not yet seen sufficient evidence to justify
            FAA's conclusion that the capabilities of STARS are far
            superior to the capabilities of Common ARTS, and both systems
            are certified for use in the National Airspace System.
          The fiscal year 2004 Appropriations Conference Report directs our
            office to review and validate the Agency's revised STARS
            lifecycle cost estimates. We are encouraged that FAA has made
            recent changes in the STARS program. To control cost growth,
            FAA has developed a phased approach to STARS that will use a
            fixed price contract and consider contractor performance before
            moving to the next phase. Last Tuesday, FAA approved the first
            phase, limiting STARS to 50 locations. FAA is also developing a
            business case to complete its terminal modernization program.
            When FAA has completed its business case, we will review and
            validate the cost estimates.
      --The Wide Area Augmentation System (WAAS) is a new satellite-based
            navigation system to enhance all phases of flight. The program
            has a long history of uncertainty regarding how much the system
            will cost, when it will be delivered, and what benefits can be
            obtained. Limited WAAS services became available in July 2003,
            but additional work is needed to expand WAAS coverage through
            additional ground stations. FAA has obligated over $800 million
            on WAAS and expects to spend $100 million on the new system in
            fiscal year 2005.
          WAAS was expected to provide Category I performance to the
            majority of the Nation's airports but will provide something
            less when the system is deployed. Based on our discussions with
            FAA, the subcommittee should expect to see a reduction in
            overall WAAS baseline costs in the $300 to $400 million range
            to reflect the fact that Agency will not pursue Category I
            performance.
      --The Integrated Terminal Weather System (ITWS) provides air traffic
            managers with a 20-minute forecast of weather conditions near
            airports and can help the National Airspace System recover from
            periods of bad weather. FAA initially planned to complete
            deployment of 38 systems by 2003 at a cost of about $276
            million, but production costs increased significantly from
            $360,000 to $1 million per system. According to FAA officials,
            the Agency now plans to establish new cost and schedule
            parameters this April, and accelerate an ITWS enhancement (the
            Convective Weather Forecast product) in response to our
            December 2002 report.
        Avoiding Long-Term Cost-Plus Contracts.--Our work on the cost,
    schedule, and performance problems of 20 major FAA acquisitions
    illustrates why the Agency needs to avoid entering into long-term cost-
    plus contracts before Agency requirements and user needs are fully
    understood. Cost growth associated with additional development work and
    changing requirements for both STARS and WAAS was absorbed fully by the
    government. In the future, FAA needs to use a more incremental approach
    to complex long-term efforts until the scope of work and development
    are clearly defined and rely more on fixed price contracts.
        FAA is now undertaking a large and complex automation effort
    through a long term, cost-plus contract called the En Route Automation
    Modernization (ERAM) program, which FAA estimates will cost about $2
    billion between now and 2011. FAA expects to spend over $240 million
    annually on the project beginning in fiscal year 2005. ERAM is designed
    to replace the Host Computer System, the central nervous system for
    facilities that manage high altitude traffic. The fiscal year 2004
    Appropriations Conference Report directs our office to look at
    executability of the program and identify program risks, including
    security.
        The following chart illustrates planned funding for ERAM and as
    well as funding profiles for STARS and WAAS, two projects that have
    been delayed for years and do not have reliable cost estimates.\6\ Any
    cost increases with these programs will have a cascading effect on
    other efforts and limit FAA's flexibility to begin new projects.
    ---------------------------------------------------------------------------
        \6\ STARS and WAAS funding profiles are currently under review by
    FAA.

        ERAM is the largest and most complex automation effort FAA has
    embarked on since the Advanced Automation System. We anticipate
    completing our first review of this complex program this year. At this
    stage, we see key ERAM program risks as: (1) an aggressive schedule;
    (2) complex software development and integration; and, (3) successfully
    managing a long-term cost-plus contract that is already valued at close
    to $1 billion. As FAA moves closer to the production phases of ERAM,
    the Agency should seek opportunities to use fixed-price contracting
    mechanisms.
        One significant exception to programs with major cost overruns is
    the Advanced Technologies and Oceanic Procedures program (ATOP), an
    effort to modernize FAA facilities that manage air traffic over the
    Atlantic and Pacific Oceans. \7\ This effort has experienced some
    serious and unexpected software development and testing problems.
    Problems are traceable to the fact that the contractor relied on non-
    development software that could not meet FAA requirements.
    ---------------------------------------------------------------------------
        \7\ For additional details on ATOP, see Status Report on FAA's
    Advanced Technologies and Oceanic Procedures (report number AV-2004-
    037, March 31, 2004).
    ---------------------------------------------------------------------------
        In June 2001, FAA awarded a $217 million contract for ATOP to
    provide oceanic air traffic systems. Since the contract was awarded,
    the contractor has experienced problems with software development and
    testing. As a result, the first phase of testing, known as factory
    acceptance testing, was completed 12 months behind schedule. In October
    2003, FAA began operational testing to determine whether the new
    automation system would perform as intended. This testing uncovered
    further software problems that forced FAA to halt testing of ATOP's air
    traffic management functions. FAA subsequently resumed and completed
    that round of testing and begin site acceptance testing in April 2004.
        FAA has relied on what is largely a fixed price contract and kept
    requirements stable. Consequently, the costs associated with additional
    software development and correcting software problems discovered during
    testing have been absorbed by the contractor--not the government.
    However, due to the software problems and pending delays, FAA decided
    to modify the contract in an effort to maintain the schedule to install
    the system in Oakland. The modification will expand the use of cost-
    plus contract elements (including time and materials) and increase the
    value of the contract by approximately $11 million.
        While this $11 million adjustment is modest and can be accommodated
    in the current ATOP cost baseline, the critical issue is what happens
    between now and February 2005. This time frame is important because the
    recent contract modification limits the contractor's responsibility for
    paying to fix software problems FAA finds in ATOP after February 28,
    2005. According to FAA, after work on the initial version of ATOP
    software (required for Oakland) is complete, the Agency will test the
    more advanced version at its Atlantic City Technical Center by the end
    of this year. Given the change in the contract and tight time frames,
    it will be critical for FAA to identify all software problems before
    February 28, 2005.
        We will continue to monitor progress with ATOP. The Conference
    report accompanying the Appropriations Bill for fiscal year 2004
    directed our office to compare FAA's pursuit of oceanic automation
    capabilities to the experiences of NAVCanada and other oceanic air
    traffic service providers. We intend to begin work on this later this
    year.
        Improving Contract Management.--Last year, we reported that FAA's
    management of cost-reimbursable contracts was deficient, lacked
    accountability, and did not adequately protect against waste and abuse.
    Our audits have found that FAA officials did not: (1) obtain audits of
    billions of dollars in expenditures on cost-reimbursable contracts; (2)
    ensure reliable government cost estimates were prepared and used in
    evaluating contracts; and (3) properly account for billing and
    expenditures to prevent overpayments.
        For example, our current audit work has identified that FAA
    officials did not obtain audits of 17 cost reimbursable contracts with
    a total value of $6.7 billion. In addition, we reported that FAA
    officials did not ensure that contractor employees were qualified to do
    the work. For example, a contractor employee charged approximately
    $255,000 as a senior systems engineer, even though that individual had
    only a Bachelors of Arts Degree in Psychology, and his past work
    history indicated no experience in engineering.
        When we rendered our opinion on the Department's financial
    statements we identified these deficiencies as a material weakness, and
    FAA has developed and begun implementation of a detailed action plan to
    correct the deficiencies. For example, FAA has made progress in
    reducing the backlog of 459 completed contracts by closing out 279
    contracts valued at $2.55 billion. In addition, FAA is providing
    adequate funding to perform cost-incurred audits of contract
    expenditures. Congress provided $3 million in fiscal year 2004 funds
    for this purpose, and FAA is establishing procedures to ensure the
    funds are applied effectively by focusing on larger contracts.
        FAA is also establishing a centralized control in FAA headquarters
    to track the status of all completed and ongoing cost reimbursable
    contracts in order to meet Congressional direction to audit 100 percent
    of contracts over $100 million and 15 percent of contracts less than
    $100 million. We are working with FAA to ensure that these plans are
    implemented.

                             AIRPORT FUNDING ISSUES

        Funding for the airport improvement programs (AIP) has seen
    substantial increases over the past several years. FAA's AIP account
    has increased from $1.5 billion in 1996 to $3.5 billion in 2005. This
    is on top of passenger facility charges (PFCs) that airports collect.
    The maximum amount allowed has increased from $3.00 to $4.50 per
    passenger, and FAA estimates that PFCs will generate over $2 billion in
    fees in 2004. FAA projections suggest that a similar amount will be
    collected in 2005.
        The following chart illustrates funding levels for FAA's airports,
    operations, and facilities and equipment accounts from fiscal year 1996
    through fiscal year 2005. It shows that AIP is taking up an increasing
    share of FAA's overall budget. For example, in fiscal year 1996 AIP
    made up 18 percent of FAA's total budget whereas in fiscal year 2005
    AIP represents 25 percent of the Agency's total budget.

        Emerging Issue for AIP.--The increased amounts of AIP funding and
    PFC collections are directed by law toward airport-related projects,
    such as new runways. However, FAA also incurs costs to its other
    accounts in order to support many of the airport projects. For example,
    FAA's Facilities and Equipment (F&E) and Operations accounts bear the
    cost of air traffic related projects such as new weather or instrument
    landing systems and redesigning airspace in order to support new
    runways.
        An emerging issue for FAA's budget is whether or not airport funds
    should be used to support some air traffic control related projects. In
    its budget request, FAA observes that new systems once considered
    beneficial to FAA air traffic operations have evolved to provide
    significant benefits to airport operators and users. FAA's budget
    submission identifies several systems that should be considered for AIP
    funding instead of funding from the F&E account.
        Although AIP funds can be used for this purpose, the change would
    represent a shift in the allocation of budgetary resources. FAA
    estimates that this would affect the AIP account in fiscal year 2005 by
    about $30 million but this number could grow as more capacity projects
    come on line. Accordingly, FAA needs to identify and quantify all the
    specific systems that will be needed to support new infrastructure
    projects and then identify the funding sources that will be used to pay
    for them.
        Revenue Diversions.--A longstanding problem that we continue to
    address through our work is diversion of airport revenues by airport
    sponsors or owners and a lack of effective FAA oversight. It is a
    matter of law that all airports receiving Federal assistance use
    airport revenues for the capital or operating costs of an airport. Any
    other use of airport revenue is considered a ``revenue diversion.''
    Examples of common revenue diversions include charges to the airport
    for property or services that were not provided, indirect costs such as
    promotional activities that were improperly allocated to the airport,
    and payments of less than fair market value for use of airport
    property.
        We have been reviewing revenue diversions for over 13 years.
    Between 1991 and 2000, our audits disclosed over $344 million in
    diverted revenue. Last year, we reported on revenue diversions at five
    large airports, including one airport whose sponsor, a local government
    agency, diverted about $40 million to other projects not related to the
    airport. We also just completed an audit at San Francisco International
    last month which disclosed about $12 million in diverted revenue.
    Additionally, we have begun reviews regarding potential revenue
    diversion and contracting irregularities at Los Angeles International
    Airport.
        Our work shows that FAA's oversight of revenue diversions is
    limited. In the past, FAA has maintained that it did not have the
    resources to devote to this issue. We recently met with the Associate
    Administrator for Airports and members of her staff to discuss FAA's
    specific plans to increase the Agency's oversight of revenue
    diversions. We plan to meet next month to review progress and discuss
    how we can coordinate efforts. Clearly, these are steps in the right
    direction, but the key now is follow-through.

                 BEING POSITIONED FOR A REBOUND IN AIR TRAFFIC

        Mr. Chairman, our testimony this morning has focused primarily on
    cost issues within FAA's budget. However, an important issue for this
    subcommittee is the fact that air traffic levels are beginning to
    rebound. While domestic traffic levels still fall short of the peaks
    experienced in 2000, there is no question that traffic is rebounding.
    In February 2004, the number of revenue passenger enplanements (35.1
    million) was down 12 percent from February 2000, but this represents a
    5 percent growth over enplanements in February 2003 (33.3 million).
    While this is good news for the airlines, the increased traffic levels
    are bringing pressure to bear on our Nation's airports, air traffic
    control systems, and the traveling public.

        Aircraft operations have also increased significantly since
    September 2001. In February 2004, domestic operations handled by Air
    Route Traffic Control Centers were less than 1 percent below the
    operations handled in February 2000. The 3.63 million February 2004
    operations represented nearly 11 percent growth over operations handled
    in February 2003.

        While systemwide operations in February 2004 were slightly down
    from February 2000, the story is very different on an airport-by-
    airport basis. In 13 of the 31 largest airports, including some of
    those that experienced serious delays in 2000, the number of scheduled
    flights in March 2004 actually exceeded the number of scheduled flights
    in March 2000. For example, at Denver International, the number of
    flights scheduled for March 2004 exceeded March 2000 schedules by 10
    percent and at Chicago O'Hare, scheduled flights in March exceeded 2000
    levels by 9 percent.
        In 11 of the 13 airports where March 2004 scheduled flights
    exceeded March 2000 levels, the number of available seats scheduled
    still lagged behind the number of available seats offered in March
    2000. This is an indication, at least in part, of how network carriers
    are using regional jets in the place of narrow-body jets to connect
    traffic to the network hubs.
        For example, in Cincinnati, a major Delta hub, scheduled flights in
    March 2004 were 11.5 percent higher than in March 2000, while available
    seats were down 7.7 percent. During this same period, regional jets, as
    a percentage of all aircraft operations in Cincinnati, grew from 53.8
    percent to 72.3 percent. Overall, the number of flights scheduled to be
    operated by regional jets in March 2004 was 134 percent greater than in
    March 2000.
        The growth in aircraft operations, especially at some of what have
    historically been our Nation's busiest airports creates a situation
    that merits careful monitoring. Although systemwide arrival delays in
    January and February 2004 were still 22 percent below those experienced
    in the first 2 months of 2000, the number is up 33 percent from the
    same period in 2003.
        In some individual markets, the growth is particularly pronounced.
    At Chicago O'Hare, arrival delays during the month of March 2004
    represented a 74 percent increase over delays during the same period in
    2003, down from the 90 percent increase during the first 2 months of
    2004. At Dallas-Fort Worth, arrival delays in January and February
    combined were up 80 percent over the same period in 2003.

        The Department and FAA are aware of this growth in delays and the
    potential near-term affects on the quality of air transportation
    service if the growth goes unchecked. The subcommittee should also
    follow the situation closely. It is unlikely that the situation will
    reach the level of widespread system failures we experienced in the
    summer of 2000, but it is possible that some airports could experience
    disruptions in service. The FAA and the Department have been working
    with the industry to identify potential solutions to delay problems
    that might occur this summer such as high-altitude express lanes and
    voluntary schedule reductions.
        One situation that bears watching, in particular, is the expected
    service growth at Washington's Dulles Airport. In June, when
    Independence Air is launched by former regional carrier Atlantic Coast
    Airlines as a new low-fare carrier, traffic at Dulles will increase
    significantly. Executives at Independence Air anticipate operating
    between 200 and 300 daily departures primarily between Dulles and East
    Coast destinations.
        Assuming that United does not reduce service in any of the markets
    it had previously served using Atlantic Coast Airlines as a regional
    partner--and it has made no indications that it plans to do so--daily
    aircraft operations at Dulles could increase by more than 50 percent
    this summer. In addition to airside congestion, there are concerns with
    airport terminal services, including the resources needed to process a
    significantly increased number of passengers through security
    checkpoints.
        That concludes my statement,\8\ Mr. Chairman. I would be pleased to
    address any questions you or other members of the subcommittee might
    have.
    ---------------------------------------------------------------------------
        \8\ This testimony was conducted in accordance with Government
    Auditing Standards prescribed by the Comptroller General of the United
    States. The work supporting this testimony was based on prior and
    ongoing audits conducted by the Office of Inspector General. We updated
    material to reflect current conditions or to reflect fiscal year 2005
    budget requests as necessary.
    ---------------------------------------------------------------------------
                                     ______

      ATTACHMENT 1.--RELATED OFFICE OF INSPECTOR GENERAL REVIEWS 1998-2004

    Operations
        Using CRU-X to Capture Official Time Spent on Representational
    Activities--AV-2004-033, February 13, 2004
        FAA's Management of Memorandums of Understanding with the National
    Air Traffic Controllers Association--AV-2003-059, September 12, 2003
        Safety, Cost and Operational Metrics of the Federal Aviation
    Administration's Visual Flight Rule Towers--AV-2003-057, September 4,
    2003
        FAA's Oversight of Workers' Compensation Claims in Air Traffic
    Services--AV-2003-011, January 17, 2003
        FAA's National Airspace System Implementation Support Contract--AV-
    2003-002, November 15, 2002
        FAA's Air Traffic Services' Policy of Granting Time Off Work to
    Settle Grievances--CC-2002-048, December 14, 2001
        Subcontracting Issues of the Contract Tower Program--AV-2002-068,
    December 14, 2001
        Automated Flight Service Stations: Significant Benefits Could be
    Realized by Consolidating AFSS Sites in Conjunction with Deployment of
    OASIS--AV-2002-064, December 7, 2001
        Compensation Issues Concerning Air Traffic Managers, Supervisors,
    and Specialists--AV-2001-064, June 15, 2001
        Technical Support Services Contract: Better Management Oversight
    and Sound Business Practices Are Needed--2000-127, September 28, 2000
        Contract Towers: Observations on FAA's Study of Expanding the
    Program--AV-2000-079, April 12, 2000
        Staffing: Supervisory Reductions will Require Enhancements in FAA's
    Controller-in-Charge Policy--AV-1999-020, November 16, 1998
        Personnel Reform: Recent Actions Represent Progress but Further
    Effort is Needed to Achieve Comprehensive Change--AV-1998-214,
    September 30, 1998
        Liaison and Familiarization Training--AV-1998-170, August 3, 1998
    Acquisition and Modernization
        FAA's Advanced Technologies and Oceanic Procedures--AV-2004-037,
    March 31, 2004
        FAA Needs to Reevaluate STARS Costs and Consider Other
    Alternatives--AV-2003-058, September 10, 2003
        Status of FAA's Major Acquisitions--AV-2003-045, June 27, 2003
        Integrated Terminal Weather System: Important Decisions Must Be
    Made on the Deployment Strategy--AV-2003-009, December 20, 2002
        FAA's Progress in Developing and Deploying the Local Area
    Augmentation System--AV-2003-006, December 18, 2002
        Follow-up Memo to FAA on STARS Acquisition--CC-2002-087, June 3,
    2002
        Letter Response to Senator Richard Shelby on FAA's Advanced
    Technologies and Oceanic Procedures (ATOP)--CC-2001-210, April 12, 2002
        Status Report on the Standard Terminal Automation Replacement
    System--AV-2001-067, July 3, 2001
        Efforts to Develop and Deploy the Standard Terminal Automation
    Replacement System--AV-2001-048, March 30, 2001
    Aviation Safety
        Review of Air Carriers' Use of Aircraft Repair Stations--AV-2003-
    047, July 8, 2003
        Operational Errors and Runway Incursions--AV-2003-040, April 3,
    2003
        Air Transportation Oversight System (ATOS)--AV-2002-088, April 8,
    2002
        Oversight of FAA's Aircraft Maintenance, Continuing Analysis, and
    Surveillance Systems--AV-2002-066, December 12, 2001
        Further Delays in Implementing Occupational Safety and Health
    Standards for Flight Attendants Are Likely--AV-2001-102, September 26,
    2001
        Despite Significant Management Focus, Further Actions Are Needed To
    Reduce Runway Incursions--AV-2001-066, June 26, 2001
    Airports
        Revenue Diversions at San Francisco International Airport--SC-2004-
    038, March 31, 2004
        Oversight of Airport Revenue--AV-2003-030, March 20, 2003
        These reports can be reviewed on the OIG website at http://
    www.oig.dot.gov.

        Senator Shelby. Senator Stevens, do you have an opening
    statement?
        Senator Stevens. I apologize for being late. There are too
    many other meetings, but I am happy to see the witnesses here
    today and I will have some questions when the time comes.
        Senator Shelby. Thank you.
        Senator Murray. Mr. Chairman, before you go to questions I
    just want to recognize that our National Teacher of the Year
    has joined us in the audience today, Dennis Griner from Palouse
    High School in Palouse, Washington, and we are proud to see you
    here today.
        Senator Shelby. Thank you, Senator Murray.

                                     SAFETY

        Safety is, and I believe must always remain, FAA's top
    priority. Madam Administrator, I know how serious your
    commitment to improving aviation safety is. What are your top
    safety priorities for fiscal year 2005? You are doing well, but
    you want to do better.
        Ms. Blakey. You are absolutely right. One of the things
    that we are most committed to is working with our carriers, the
    airline industry, to develop a safety system approach that
    means we are all looking at risk factors. That we are all
    looking at the way we should manage together that potential
    risk, and not wait till an accident or incident happens, but
    really getting in front of it.
        Senator Shelby. What is your biggest safety concern?
        Ms. Blakey. Well, I think right now what we would like to
    do is marry up data and marry up information in a way that we
    have never done before. For example, we have two systems out
    there that are great. One is called Arrival Sequencing Program
    (ASP), which gives pilots, dispatchers, all of those who are
    operating the system a way to voluntarily say something went
    wrong here. They can do it without penalty and that gives us
    again access to information we would not have from their
    perspective. You know, a dispatcher who says later on, I
    probably should not have done that--a little too close to scud-
    running; a pilot who says yes, I probably did make an error
    there that is worth taking note.
        We also have a way now, a program called Flight Operational
    Quality Assurance (FOQA), which takes data, routine data off
    the flight data recorder and lets us analyze that and see what
    the machine is doing, see what is happening. We think we need
    to marry that kind of information together and as an industry
    and as the FAA, really work to make sure that we are inspecting
    the right things, analyzing the right things, making training
    changes, and doing air traffic control procedures better. All
    of this will help.

                            FAA'S OPERATIONS ACCOUNT

        Senator Shelby. The FAA's operations account has witnessed
    significant increases over the years. Could both of you
    identify the major cost drivers of the Operations
    appropriation? First, Ms. Blakey.

                                PERSONNEL COSTS

        Ms. Blakey. Mr. Chairman, I think the Inspector General has
    it right. There is no question about the fact that the major
    cost driver is our personnel costs. After all, that is what the
    FAA is about. It is an operating agency and about 80 percent of
    that operations cost goes to personnel. Also there are a lot of
    contractual obligations that limit the flexibility we have in
    controlling costs. I would also say that the way we have gone
    about modernization has increased capacity and added additional
    personnel requirements. It was not done to drive down
    operations costs. It was done with an eye to increasing
    capacity in the system, with more nav aids, with more
    technology, which means more things to maintain and more people
    to operate them. All of that has, as we have overlaid better
    and better programs, increased safety, but that takes people
    and certainly that has driven the costs up, as well.

                                     MOU'S

        Senator Shelby. Last year it became clear that FAA's
    oversight of MOU's was seriously inadequate. The situation has
    been well documented by the Inspector General, Mr. Mead. While
    MOU's often serve useful purposes, they also have cost
    implications. In the 2004 Appropriations Act, Congress required
    the FAA to establish a central database on all MOU's. Has this
    been accomplished? And what was the total budgetary impact of
    the MOU's and what processes of control have been put in place?
        Do you want to answer that first, Mr. Mead?
        Mr. Mead. Well, we are not at an end state yet. I cannot
    say exactly what the total budgetary impact is but I would put
    the figure probably that the steps they have taken may have
    avoided costs something on the order of $50 million. They have
    a much better handle on having an inventory of these and they
    have put the brakes on entering into new ones, at least ones
    where the Administrator would not even know about them.
        I think there are one or two more out there. One that I
    think is particularly interesting is all Federal employees get
    locality pay and the controllers entered into a memorandum of
    understanding with FAA so they get something called controller
    incentive pay, which is on top of that at 110 locations. That
    one item is running FAA something on the neighborhood of $25 to
    $30 million per year. They have a very generous pay package.
        Senator Shelby. What is your recommendation to get control
    of the process?
        Mr. Mead. I think FAA is doing the right things and has the
    right things. I think right now I would have no additional
    recommendations except that they continue doing what they are
    doing on the memoranda of understandings.
        The issue on the growth in the operations account, you can
    expect it to continue. It will not be as marked as it has been
    in the past but it is still going to continue because you have
    such a high salary base there. If you give a 4 percent or 5
    percent pay increase on a salary base of, say, somebody who is
    getting $135,000, that is a lot more every year compounded than
    adding 5 percent every year on top of a salary base of $75,000
    or $80,000.
        Senator Shelby. It adds up.
        Mr. Mead. Yes, sir, it does.

                                MODERNIZING NAS

        Senator Shelby. The FAA has a poor track record of
    modernizing the National Airspace System. The GAO and
    Transportation Inspector General have published many reports on
    projects that are late, overbudget, and cannot deliver as
    promised. Madam Administrator, what are you doing to address
    this long-standing problem?
        Ms. Blakey. Well, I will tell you. As we have analyzed
    this, I think we need to take a very different approach and
    that is what our COO Russ Chew, and the entire group that is
    managing these accounts is committed to. What I think has been
    a really tremendous mistake in the past is the FAA took the
    approach that somehow you could predict the cost of systems
    that were going to be deployed over 10 years going where no one
    had gone before. It is one thing if you are asked to talk about
    a capital investment where you are pulling commercial off-the-
    shelf technology. You then would know how many, and know
    exactly where systems are going.
        That was not the case with the FAA. We are talking about
    what essentially were research programs, but the FAA committed
    to figures in the baseline that would go out as many as a dozen
    years. The question of how long it would take to get the
    fundamental technology down, then what it was going to cost in
    a prototype stage to actually build it and deploy it was not
    addressed. Where should it really go? All the while you have
    changing traffic patterns and a whole field operation out
    there.
        Here is what we are going to do. We are going to call
    research ``research''. We are going to chunk these projects, if
    you will, into much smaller stages where we commit to the
    initial R&D as much as possible under firm, fixed-price
    contracts. We will try our best to hold to that fixed price. We
    will also do it in stages. We will, therefore, be making the
    financial investments in stages so that we do not get in over
    our head. We can continue to analyze the benefits, and as
    circumstances change over 10 years, we are able to say ``wait a
    minute'', let us not put all the things in facilities that we
    had planned. We really can fine-tune modernization over time,
    and I think get much better value for taxpayer dollars.
        This is what we are doing with the STARS program, one of
    our major programs that we feel we have to take a very
    different approach.
        Senator Shelby. Mr. Mead.
        Mr. Mead. Yes, I think the most important thing in these
    contracts where we do not know where we are buying and some of
    these are concepts, to go into a 10-year contract and say the
    pricing mechanism will be just bill me whatever it takes, with
    no cap--we should not be doing that. It should scare this
    committee. It scares me.
        Senator Shelby. It does scare us. That is why I keep asking
    this line of questioning.
        Mr. Mead. Every one of the programs that is in trouble
    falls into that pattern where it has been that type of
    contract.
        Senator Shelby. How are we going to deal with it? You are
    the Inspector General; we are the appropriators. We are working
    with you and the Administrator to make sure this money is spent
    well for the right purpose.
        Mr. Mead. I think you should insist on more fixed-price
    contracts coming out of FAA. I think you would see some rapid
    improvements. That single move, I think, would change a lot.
    And what the Administrator says, too, about research and
    development should be called research and development.
        Senator Shelby. It should be called what it is, should it
    not?
        Mr. Mead. We should call it like it is, yes, sir.

                                  FIXED PRICE

        Ms. Blakey. Mr. Chairman, let me also add on the firm,
    fixed price, I think the Inspector General and I agree on this
    in concept. What I would say, though, is that we cannot expect
    a corporate entity of any sort to assume all the risk without
    dramatically increasing what they are willing to commit to on a
    firm, fixed price, which goes back to let us take it in small
    stages; let us go where we can all see what this is likely to
    cost. Do not ask them to commit to something where they are
    assuming enormous risk or where they are putting in huge costs.
        Senator Shelby. Well, you have to be specific in what you
    want. Or, if you do not know what you want or what you are
    trying to improve, how can you contract for it, other than
    learning as you go through a cost-plus acquisition. We cannot
    always afford that. I do not believe that is the way to operate
    the FAA, do you?
        Ms. Blakey. I do not, either. And one of the things that we
    have done in some of our capital programs is we have all
    accepted what we and our customers want. It is fine to say we
    want a system with certain capabilities but the question of how
    do you get the technology to do that--we have not always been
    realistic about how difficult that was going to be. And
    frankly, in some of the areas where we have cut back on the F&E
    programs, technology was the problem.
        Mr. Mead. I have noticed over the years they pretend that
    they know what they are buying and you will have the vendors
    come in and say yes, it is off the shelf; we are going to get
    it off-the-shelf; we know what you want. But then when you look
    down into the details of the contract, it is kind of open-
    ended; it is cost-plus. That is a sure give away nine times out
    of ten.
        Senator Shelby. That is suicide for the appropriators, too,
    because if we do not know what things are going to cost, how do
    we watch the money?
        Senator Murray.

                                      F&E

        Senator Murray. Thank you, Mr. Chairman.
        Ms. Blakey, the budget request for the FAA's Facilities and
    Equipment account is nearly $400 million below last year's
    level and represents the largest cut in the entire Department
    of Transportation budget. In fact, when you look at the Bush
    Administration's multi-year budget, it says that the funding
    for air traffic control modernization will be $2 billion lower
    than the amount authorized in the Vision-100 bill.
        When Secretary Mineta came before our subcommittee a couple
    of weeks ago, he explained those cuts by saying there was a
    need to reevaluate those programs from a priority perspective.
    Since your 2005 budget reduced by more than 50 percent programs
    that were designed to prevent runway incursions and improve
    air-to-ground communications, should we assume that those goals
    are no longer a priority for the FAA?

                              SAFETY AND CAPACITY

        Ms. Blakey. No, those goals are absolutely in place. We are
    going to work very hard to make certain that we address our
    overall safety goals and capacity. I would tell you that this
    budget supports our safety and capacity goals. It is something
    that we are going to as we move forward to make certain that we
    support core programs that are delivered in those areas. This
    budget does that.
        It is true we are not in expansive times. Looking at the
    Aviation Trust Fund and looking at other constraints, we are
    dealing with an industry that is not able to equip like we had
    at one point hoped and expected. Things have changed. But the
    commitments that we have made in our capital account go to
    capitalizing on those programs, which at this point, the
    research and development is done. We are at the implementation
    stage. We do need to move ahead with them. And those programs
    that really are R&D, they are not ready for implementation and
    the huge costs that go with implementation. That is what we
    have tried to recognize here.
        Senator Murray. Just last week the FAA's air traffic
    control infrastructure experienced a power outage in Los
    Angeles and a computer crash in Kansas. In Los Angeles, they
    said that it took nearly 3 hours to get all the communication
    systems back on line. Eighty flights were delayed. Two
    airplanes violated FAA's safety standards by flying too close
    together. And in Kansas, FAA technicians in the operations
    control center and the field were left unable to electronically
    communicate with each other for almost 12 hours. Can you assure
    us that this is not a preview of what we can expect to see with
    the $400 million cut to the air traffic control modernization
    budget?

                               NETWORK OF SYSTEMS

        Ms. Blakey. You know, the FAA does a remarkably good job at
    keeping on line a huge network of systems. So every now and
    then something occurs and the news media made a good bit out of
    something that actually was not as severe as the papers
    characterized it in terms of Los Angeles. It does catch
    people's attention.
        But I would have to tell you that our ongoing ability to
    maintain and support our existing systems and network is a very
    high priority, and it is something that you will continue to
    see reflected in our budget.
        Senator Murray. Mr. Mead, do you see any linkage between
    the overall funding level for modernization of the ATC system
    and the frequency of system crashes and other ATC outages like
    I just mentioned?
        Mr. Mead. No, I do not think I do. That is because if you
    look back about 3 or 4 years, these outages were much more
    frequent. We were reading about them almost every week and they
    were all over the country. Actually the trend line shows that
    they are getting better. But when they happen you wonder why
    did they happen and how can we get the recovery back as quickly
    as possible?

                             MAINTENANCE WORKFORCE

        I would say that the maintenance workforce at FAA and how
    you are going to provide maintenance, I think that is an area
    that bears watching because the way the operations account is
    structured, much of the growth in it is going to cover the air
    traffic controllers, not much will go to maintenance
    technicians. Your salaries in that area have a crowd-out
    influence on other elements of that account and the maintenance
    technicians are one other element of the account.
        Ms. Blakey. One thing I would say about this, and this
    really is a compliment to the vision of this committee and the
    Congress in general. The investments you have made in
    modernization have paid off in this area. We have seen a very
    significantly improved picture because the equipment is newer
    and much more reliable. It can be handled in many cases by
    remote maintenance, scheduled maintenance, which is obviously
    much more efficient than having to send folks out in the middle
    of the night on something that is a last-minute emergency. That
    really has made a very big difference, the fact that it is much
    more reliable, much more situationally situated where we can do
    it and do it well. So I think that we have to realize that the
    picture has changed. We are very committed to training our
    maintenance workforce not only for the challenges we have right
    now, but also to look at specific situations to make sure what
    happened here, what we are going to do to fix it to make sure
    it does not happen the next time. The second thing is we need
    to train people more for the upcoming systems, which are much
    more software-intensive, so that we have people who are well
    situated for the equipment of the future.
        Senator Murray. Well, let me ask about maintenance, because
    on March 1 a Federal arbitrator ruled that the FAA has not met
    the minimum staffing levels needed for the agency's air traffic
    control maintenance functions based on the agreement that was
    reached in fiscal year 2000 between the FAA and the union that
    represents the airway facilities technicians. The arbitrator
    ruled that the FAA must immediately take action to raise the
    total number of technical employees to a minimum staffing level
    of 6,100. How was this allowed to happen and when was the last
    time the FAA met that staffing level of 6,100?
        Senator Stevens. Who made that ruling?
        Senator Murray. A Federal arbitrator.
        Ms. Blakey. This has been a longstanding difference of view
    between ourselves and PASS, our union. So we really do see that
    figure differently. We believe we have been meeting that 6,100.
    It all goes to a question of how you count some of our
    personnel and centers, and we believe they should be counted in
    that figure. That said, we are looking at the situation now as
    to whether we should appeal this or whether we should take
    steps to increase the numbers there. This is a very recent
    ruling.
        Senator Murray. It was March 1. So can you give us a time
    line of when you expect to move forward on that?
        Ms. Blakey. I would be very happy to get back to you. I
    have not consulted with the folks who are actually working that
    arbitration, so let me find out and I will get back to you.
        [The information follows:]

        Timeline to move forward on the March 1 ruling on staffing for air
    traffic control maintenance functions based on the fiscal year 2000
    FAA/PASS agreement.--The FAA has appealed the arbitration award that
    interpreted an agreement between FAA and PASS on systems maintenance
    staffing levels. The primary issue in the dispute was what specific
    positions should be counted towards the agreed on staffing number. FAA
    believes that the award is inconsistent with the Federal Service Labor-
    Management Relations Statute that governs labor relations in the
    Federal Government. The appeal acts as a stay of the award until the
    Federal Labor Relations Authority (FLRA) issues a decision on the
    appeal. There is no fixed time for FLRA to issue a decision. The FAA
    will comply with whatever decision the FLRA issues. In the meantime,
    the FAA will continue to monitor maintenance staffing levels in
    accordance with resource constraints and operational needs.

                             CONTROLLER RETIREMENTS

        Senator Murray. The issue of controller retirements is not
    a new one. I was dismayed last year when our conference
    committee was required to accept the House's proposal to reject
    the FAA's request for 328 more controllers. While the
    conference report did not provide the requested funding to grow
    the existing number of controllers, it certainly assumed that
    there would be money to hire replacements for the usual number
    of controllers that leave or retire over the course of a year.
        Ms. Blakey, as I mentioned in my opening statement, the
    number of air traffic controllers at our 24 en route centers is
    747 controllers or 10 percent below the level called for under
    the FAA's own staffing standard. That shortfall has worsened by
    almost 100 controllers in just the last year. In fact, all but
    four of the FAA's en route centers are below the staffing
    standard and some are below by as much as 30 percent. Is your
    agency promptly hiring enough controllers to replace the ones
    that are retiring or leaving the system?
        Ms. Blakey. The picture on the number of controllers FAA
    has in terms of our staffing needs is complicated. It is
    important to know at the beginning that in point of fact, when
    you take our controller workforce as a whole, we are well above
    our staffing standard. Currently I can give you the figures. We
    have on board 15,428 controllers. The staffing standard calls
    for 15,136. The question is are they in the right places? We
    are talking about our centers. It is true that only one of our
    centers--and the way the staffing standard operates, it says
    that you should have a set number within plus or minus 10
    percent, so there is a fair latitude there and that is because
    it is hard--they differ a lot--to get it exact. We are looking
    at some of the centers where we believe we need to address
    that. Oakland is one, for example. Oakland, though, is
    complicated because it has historically been hard to staff. It
    is not where a lot of people have wanted to go for a variety of
    reasons. So some of these have issues that are not so much a
    question of resources; they are a question of trying to figure
    out how we bring people in who both want to be there and who
    qualify to be there. Now another indicator, besides these
    staffing standards, which are sort of mathematical formulas, if
    you will, about how many people we need----
        Senator Murray. So you do not think those are good
    standards?
        Ms. Blakey. They are a standard. Another way to look at it,
    though, is how is your overtime doing? Are you running
    excessive overtime? We are not running excessive overtime in
    our centers. So if you look at that as a measure you say well,
    they are obviously operating fairly well with the existing
    numbers of people they have on board.
        I met with our facility representatives for NATCA about a
    week ago in Redondo Beach with the leadership of all the
    centers from a union standpoint and asked, ``what do you see?''
    And one of the things they pointed out was let us take a look
    at the folks who are talking to air traffic, talking to
    airlines. We have a lot of folks in the centers who are doing
    other kinds of things. So we need to look at both right-sizing
    and duties. How are we doing? But I take your point that in
    some of our centers we should increase the staffing and we are
    working to do that.
        Senator Murray. Mr. Mead, do you care to comment on this?
        Mr. Mead. I think it is fair to say that FAA probably needs
    to start hiring some number of controllers in anticipation of
    this bubble, so I think you have a point there. At the same
    time, these staffing standards--Congress or FAA directed the
    National Academy of Sciences some years ago to take a look at
    the staffing standards and the National Academy of Sciences did
    not have a lot of favorable things to say about the application
    of these standards down to the facility level.
        So when you have a number of 15,000-odd controllers
    nationally, the real issue is where do you need them? Because
    you have 300 different places. We do not have one building
    where we send 15,000 controllers. That is why I think this is a
    problem that FAA shares with the controllers union. I think FAA
    needs to take a look at how long it is taking for their on-the-
    job training. I think they have to drill down to figure out
    where they think these vacancies are going to occur.
        I think the controllers union, for its part, needs to agree
    to participate in a labor distribution system so you can tell
    why do we have these disparities between similar facilities
    with comparable traffic levels? How many hours is it reasonable
    to expect the controllers to spend on scope? So I think it is
    kind of a community problem here and we need to get on with
    solving it.

                             CONTROLLER RETIREMENTS

        Ms. Blakey. Senator Murray, you had also mentioned the
    retirement bubble and your disappointment that we had not--and
    as you know, in last year's budget we asked for additional
    positions and the Congress as a whole said no, do some other
    things. Congress asked us to look at the age 56 retirement
    requirement, develop guidelines for waivers, and look at
    training. But a big part of the push was right-sizing our
    facilities, not having these significant shifts between
    overstaffing and understaffing. So we are trying to do that.
        The Inspector General mentioned the retirement bubble. We
    agree that this bubble is coming up. I did bring a chart with
    me that shows the FAA's predictions of retirements accompanied
    by what actually happened that year. You will see that so far
    we are spot on. I think that the Inspector General is correct
    in saying we would like to have a lot more granularity at
    each----
        Senator Murray. Spot on? I am a little worried at where
    that graph is going.
        Ms. Blakey. Well, as I say, there is no question about the
    fact that there is a significant retirement wave coming up.
    That said, we believe we are accurately predicting this wave.
    At this point we do think that one of the things we need, at
    the facility level, is to determine a more granular picture of
    who is retiring and when. But it is not easy to do, as you can
    appreciate.
        Senator Murray. What is the training time for those?
        Ms. Blakey. It differs. Two-and-a-half, in some cases up to
    about 5 years. It should not be running more than 5 years. But
    you also are able to bring in what we call developmental
    controllers, who can be productive and work much earlier than
    the 2\1/2\-year mark. That is for a fully certified controller
    on all the positions at the facility.
        Mr. Mead. The concern is that as those bars increase and
    you have more people in the system, more controllers that you
    just hire, if I hire a controller today, send him to school,
    gets out of school, that controller is not going to be
    controlling air traffic, so you are going to have a lot of
    trainees around the system. So the granularity point that the
    Administrator points to about these disparities between
    facilities cuts this way, too, that that granularity has to
    figure out how many can we afford to have in training because
    you cannot equally weight a trainee with a full performance
    level controller.
        Senator Murray. My time is up, Mr. Chairman. Thank you very
    much.
        Senator Shelby. Senator Stevens.
        Senator Stevens. Thank you very much. First let me thank
    you, Administrator, for working with us on the Adak runway. It
    really has been necessary to have a transition there with the
    State ownership and the operational capability of that area has
    been enhanced by your willingness to maintain the runway lights
    during the transition period. I do thank you for that.

                             LASER RUNWAY LIGHTING

        I would like to ask if you would ask your people to give us
    an update on the laser runway lighting proposal that is before
    you. I know it is still in some test phase but I do not know if
    most people understand that we have over 1,000 commercial
    runways, some that you have a function on and mostly State and
    just local support. But beyond that, we have a whole system of
    private runways, people landing on their homesteads or in terms
    of float planes, landing on lakes.
        We have an enormous landing problem. That laser designation
    for safe use is something that holds great promise to us to cut
    costs considerably with regard to those and I would urge you to
    see what we can do to accelerate the application of that.
        [The information follows:]

        A demonstration of the use of yellow lasers to highlight hold lines
    was conducted in November 2002 at Ted Stevens Anchorage International
    Airport. Using eye safe lasers, a single holding position line was
    illuminated for 2 weeks. Tilt switches prevented the laser projectors
    from projecting above the ground; no direct exposure was possible from
    the ground-based projection system.
        The second (longer term) demonstration is planned for September
    2004 in Fairbanks, Alaska. Improved solid-state yellow lasers will be
    used to illuminate a problem intersection on the Fairbanks Airport
    where snow and ice cover the painted hold line over half the year. The
    lasers that will be used in the Fairbanks demonstration have been
    viewed by the FAA Administrator in a demonstration during her August
    2003 trip to Alaska and have been reviewed by the FAA Radiological
    Officer in September 2003. Further review will include the Society of
    Automotive Engineers G-10T Committee that creates recommendations for
    limiting the use of lasers in airport environments.
        If the second demonstration proves operationally successful, the
    laser technology will need to meet the requirements of FAA regulations
    and Certification as well as FAA airports to ensure proper National
    Airspace integration and eligibility for Airport Improvement Program
    funding. Final review of physiological safety will be provided by the
    FAA Civil Aerospace Medical Institute. Their concurrence is a necessary
    element in the decision on suitability.

        Senator Stevens. Secondly, though, I want to congratulate
    the two of you, Mr. Mead and Ms. Blakey. I note that there's a
    little more indication of contemporaneous review and comment in
    your department. I have always believed that the staff of the
    Inspector General has a responsibility for preventing problems,
    as well as critiquing the results of problems, and you sound
    like you have a little bit more communication than you have had
    in the past and we applaud that. I do hope that it continues to
    develop because this is a good problem.

                            CAREER STAFFING PROBLEM

        I would like to show you sometime the chart for the Library
    of Congress. You think you have problems; this is a problem for
    the whole government and it comes about because of people
    deciding to make a career out of government. As the pay
    increased and as retirement benefits increased, as the health
    care increased, more people are staying in government now than
    ever before for longer periods of time. As a consequence, this
    is a national problem, not just yours.
        It requires some real help, Mr. Mead, from the inspector
    generals to start looking at how we can utilize some of the
    funds that are available.
        And Ms. Blakey, I do believe inspector generals can step
    out of the box a little bit. They do not have the long-term and
    political responsibility that you might have but they have the
    capability with their staffs to try to see around corners and
    see how collisions could be avoided. As I said, I applaud you.
    It seems like you are doing more of that, from the
    conversations I have heard.

                          TRAINING OF NEW CONTROLLERS

        I do want to ask you a little bit about this problem of
    dealing with the movement of new people into full controller
    status. It seems to me that that has got to be accelerated.
    Have you looked at that, Mr. Mead? How do you accelerate the
    time in which a person is really qualified to take the position
    of the well qualified controllers that are going to leave?
        Mr. Mead. We looked at this. You will remember, Senator
    Stevens, some years ago FAA's academy in Oklahoma City used to
    have--they say if you look to your left, look to your right,
    two of you will not be there; you will not pass. And FAA
    corrected that.
        Senator Stevens. That is what they said when I went to law
    school.
        Mr. Mead. Same here.
        Senator Stevens. They were right.
        Mr. Mead. I think we need to take a look at that. We are
    about to issue a report. FAA has it and I think you are quite
    right about the extent that we communicate but----
        Senator Stevens. We tried in Alaska to reach down into the
    university and have the universities start training these
    people and as they came through their college training, they
    were prepared to move in and be ahead of those who might have
    just walked off the street and said I would like to be an air
    traffic controller.
        I think we have a duty to reach down into the educational
    process across government and say we want some of these
    institutions to start training people more specifically for the
    work that they may be able to fulfill for the government. If we
    do not do something, you cannot train them post-college and
    meet the goals of that chart or the Library of Congress or, for
    that matter, take a look at the military departments. They
    probably have the worst one of all right now.
        Mr. Mead. FAA is using the university system. They used to
    never use it. I do think you are right on target. I do not
    recall whether you were in the room at the time of the
    statistic I mentioned. It takes an average of 3 years after
    they get out of school before they are at the full performance,
    fully certified level and we found some instances, Senator
    Stevens, where it took up to 7 years.
        Senator Stevens. I just read that. It is on page 7 of your
    report. I understand what you are saying but I do not think the
    solution is to critique it as it is happening. I think we have
    to find a solution in advance of the problem and it has to be--
    maybe we should create--right after World War II we created
    special schools. We authorized people to form special schools
    for training of our professions and various jobs for
    government. Have we got enough capability in the colleges to do
    this? Have you examined into that? How many colleges are
    willing to participate?
        Mr. Mead. No, we have not.
        Ms. Blakey. We have quite a few and certainly when I was in
    Anchorage I was very impressed by the university's simulation
    lab they had for air traffic controllers. I thought that was a
    great thing, that they are actually beginning training that is
    going to certainly feed into our system.
        Senator Stevens. Have you seen our interdisciplinary
    training, Mr. Mead, in Alaska? Have you seen what we are doing?
        Mr. Mead. No, I have not.
        Senator Stevens. We do not have taxis outside of the two or
    three major cities. We do not have buses. We do not have
    trains, only one train. We have fewer highways in the whole
    State of Alaska, which is one-fifth the size of the United
    States, than King County, Washington has. But we depend on
    airplanes and we are using our system as sort of an incubator
    for new ideas to deal with that need. We are always going to be
    dependent upon airplanes because the Congress in its wisdom
    withdrew a lot of Alaska this way and that way. We cannot have
    north and south roads. We cannot have east-west roads. We are
    linked to aviation forever. So I would urge you to come up. As
    a matter of fact, I might take you fishing if you want to come
    up.
        Mr. Mead. I will take you up on that.
        Senator Stevens. Ms. Blakey is a damn good fisherman. She
    finds occasion to come up at the right time of the year, which
    is a very intelligent use of the taxpayers' money as far as I
    am concerned.
        Mr. Mead. I will take you up on that, sir.
        Senator Stevens. Well, I congratulate you very much and I
    appreciate that this is a sea change, even for you. I remember
    sitting here when you were mostly critical. I like the fact
    that you are now mostly analytical--where we are going and what
    is causing the problems as we proceed along this path. That is
    a good partnership you have there, Ms. Blakey. You are part of
    it, too, and I congratulate you very much.
        Thank you, Mr. Chairman.

                        REVIEW OF BUSINESS CASE ANALYSIS

        Senator Shelby. Thank you, Chairman Stevens.
        Madam Administrator, as a major acquisition program
    experiences cost growth or schedule delays or capability
    reduction, does your agency review and update the business case
    analysis and how often?
        Ms. Blakey. We do. We have a variety of mechanisms in which
    we do a close analysis, in fact, of our major acquisition
    programs. I can tell you that----
        Senator Shelby. How do you validate the assumptions and
    conclusions in these analyses? What method do you use? Is the
    Inspector General aware of them?
        Ms. Blakey. I think he is aware of a lot of them. I will
    tell you, we have relied very significantly on some independent
    analysis that has certainly helped us out. For example, on our
    baselining of our STARS program and what we can expect there,
    we asked Mitre to take a look at all of the cost assumptions,
    to really go through the business case and to provide us with
    an independent analysis because we felt that was important. We
    are going to be doing more of that as time goes on because I
    think it does help to have someone who is not as connected with
    these programs and who has frankly more financial and economic
    horsepower to do it.
        But we do have a Joint Resources Council that meets and has
    to approve these. I am told when there is any significant
    variance off of the projected schedule, and the projected cost.
    We are monitoring that--it depends on what level you are
    talking about--on a weekly to monthly basis and anything that
    begins to deviate immediately throws up a major red flag. It
    does not always fix it when we see the red flag, but we know at
    that point we have a problem.
        Senator Shelby. Was the process you are referring to
    applied uniformly to determine whether to continue funding
    programs with major problems--that is, WAAS, STARS, ATOP, and
    so forth?
        Ms. Blakey. I cannot speak historically because, as you
    know, I have been at the FAA----
        Senator Shelby. Could you get back with us on that?
        Ms. Blakey. I would be happy to and I certainly will give
    you more detail on exactly how we are applying this for the
    current programs.
        [The information follows:]

        Yes. The FAA has incorporated a series of management control
    processes and tools to improve reporting and evaluation of costs,
    schedule, and technical performance for major acquisition programs.
    Internal processes used to monitor acquisition programs and inform
    senior management include:
        Monthly reporting by program offices of baseline status and
    variance using an automated desktop tool called Simplified Program
    Information Reporting and Evaluation (SPIRE).
        Monthly reporting to the Air Traffic Services Board on cost,
    schedule, requirements stability, and earned value status.
        Quarterly reporting to the Joint Resource Council (JRC) members on
    the status of all baselined programs.
        Administrator notification whenever variances to baseline
    parameters exceed 10 percent.
        Semi-annual acquisition reviews to examine programs progress and
    issues towards completion of acquisition goals including cost,
    schedule, and performance. May be held more or less frequently as
    needed.
        Public Law 104-264 gave the FAA Administrator the authority to
    terminate any acquisition program that breaches a baseline element by
    more that 50 percent. If the Administrator determines to continue the
    program, this determination must be provided to Congress. Public Law
    104-264 also authorized the FAA Administrator to consider terminating
    any acquisition program that breaches it cost, schedule, or performance
    baseline by more than 10 percent.

        Mr. Mead. A problem has developed here and I could use
    STARS as an example. It has been a fiction for some time,
    probably for nearly 3 years running, where the costs of this
    program were represented to be around $1.69 billion. People
    inside FAA knew that that figure was not realistic for what the
    program was supposed to do and time marched on. A big change
    from this time last year is that FAA is putting a can opener on
    all these major programs. I think STARS was one of the first
    because that is some decisions that need to be made on in the
    very near future. So it takes a while but I can assure you that
    there is a recognition inside FAA that this list of programs,
    that the baseline estimates need to be revisited and that
    process is ongoing. I am very encouraged.

                      OCEANIC AIR TRAFFIC CONTRACTOR COST

        Senator Shelby. Administrator Blakey, in 2001 the FAA
    awarded a fixed-price contract of $218 million to develop a
    replacement system to control oceanic air traffic. As a result
    of the contract, the contractors had to bear software
    development cost overruns. This has been touted as a new
    approach for managing contracts at the FAA.
        I have learned that FAA recently agreed to pay the
    contractor $11 million for work it was already contractually
    bound to perform and FAA agreed that taxpayers would bear all
    future cost overruns after February 2005. How do you justify
    this $11 million for work that the contractor was already
    obligated to perform?
        Ms. Blakey. Well, this is exactly the dilemma you get into
    with a fixed-price contract because the contractor in this
    regard, Lockheed-Martin, had sunk considerable costs for
    unanticipated problems in terms of software development and
    technology development. Again you are going where no one has
    gone, and they bore a lot of those costs. It is very critical
    that we field our oceanic technology in the very near future.
    In fact, we expect to see our system in Oakland go live in
    June.
        We could not let those schedules just go way out because
    the contractor was in the red and no longer making money and
    the schedules were slipping. It is in the taxpayers' best
    interest to address the issues and the problems. We felt it was
    equitable to go ahead and fund, in this case another $11
    million, on the contract to bring it in in a timely fashion and
    get service going.
        There are competing providers out there for oceanic air
    traffic. We believe we are doing an excellent job and have the
    best system, but we need to field that system.
        Mr. Mead. Mr. Chairman----
        Senator Shelby. Do you agree with that?
        Mr. Mead. Largely. If it stops at $10 million, that
    certainly is dwarfed by some of these $900 million increases in
    these other programs. So if it stops there, I think that is
    fairly modest and we could almost----
        Senator Shelby. It is still a lot of money to us.
        Mr. Mead. It is. The big date to watch is February 28
    because after February 28, 2005, FAA has basically agreed to
    pay for any problems that are identified. So they had better
    make sure they identify all the problems before February 28,
    2005 or that $11 million figure will go up.
        Senator Shelby. It could be a huge underwriting mistake.
        Mr. Mead. That is right.

                               LABOR DISTRIBUTION

        Senator Shelby. Regarding labor distribution, CRU-X was
    supposed to be a system that would allow FAA to accrue credible
    workforce data about controller staffing, overtime cost, and
    workload issues. Madam Administrator, why has not this system
    been employed as designed and why was the functionality of it
    limited?
        Ms. Blakey. The system initially was developed in a very
    collaborative fashion with our workforce and with NATCA. We do
    believe that the functionality that it has is going to be very
    useful to the FAA. There has been a dispute over the specific
    detail that the system collects in terms of the duties and
    hours that are being spent on them, and we have been in
    negotiations with NATCA over this. We would like to bring those
    negotiations to an end. We would like to fill all of the
    functionality of the system. We are working very hard to do it.
    This is a matter, though, that is subject to negotiation with
    our union, and we are working through it at this point.
        Senator Shelby. Mr. Mead.
        Mr. Mead. I have a suggestion for you. What the
    Administrator says is correct but these negotiations have
    dragged on and on and on. Senator Murray pointed out how
    important----
        Senator Shelby. Negotiations generally bring more costs, do
    they not?
        Mr. Mead. Yes, they do. Senator Murray pointed out the
    controller retirement bubble. This is the part that controllers
    need to help us with because this will give you a sense of
    where they need the people and why you have disparities between
    facilities that handle similarly complex levels of traffic.
        The suggestion I have is that we make any increases in
    staff to be done on the condition that we get a labor
    distribution system in place because that will be a central
    issue for us for the next 8 or 9 years. You are going to be
    facing increases in the controller workforce and you are going
    to want to know where and when they are needed and a system
    like this would help measurably in that task.

                                 ACCOUNTABILITY

        Senator Shelby. Bringing more accountability to FAA is a
    top priority of this committee--it has to be--and we are
    pleased to see that the FAA now has a chief operating officer
    whom you introduced, Mr. Russ Chew. The transition to a
    performance-based organization called the Air Traffic
    Organization, while it is not complete, may also be a step
    forward if implemented correctly. It has to be implemented
    correctly. What additional steps are you taking to bring more
    accountability to FAA? And how long will it take to change the
    agency's culture? First you, Ms. Blakey, and then Mr. Mead.
        Ms. Blakey. Well, I will tell you. I think that culture
    change is a multi-year activity. It will not happen overnight,
    but I am pleased to say that Russ Chew and his team are moving
    with remarkable speed. They have already worked to flatten our
    management layers so that we bring headquarters much closer to
    the field and have much fewer people in that interface of our
    management bureaucracy.
        They have also instituted an activity value analysis, which
    I think is going to be remarkably interesting. I look forward
    to sharing the results with this committee because essentially
    what we are doing is having Booz Allen Hamilton help us go out
    and analyze what exactly are the services we are producing at
    the individual levels of the organization and are they
    important? Are they being well done? Do our customers value
    them? And as a result of that, we will be able to determine
    much better what are the activities that we can do without,
    what are areas that we should be doing more of, and therefore
    have our resources, both personnel and others, devoted to where
    we are getting the value. So that process is ongoing. We expect
    to have the first results of it by June. We will certainly be
    looking at that as a way to make this work more efficiently.
        Senator Shelby. Mr. Mead.
        Mr. Mead. I think there are already some early signs that
    the direction is changing in making the ATO a performance-based
    organization. I think the proof will be in the pudding and it
    is probably 2 or 3 years down the road. I think at this time
    next year----
        Senator Shelby. Two or 3 years will be here before we know
    it, though.
        Mr. Mead. Yes, sir, it will be.
        Senator Shelby. I know from being on this committee.
        Mr. Mead. I think the big barometers right now are how we
    handle the workforce issues involving the air traffic
    controller retirements, STARS, getting our terminal
    modernization on the right track, and this big acquisition they
    are just starting called ERAM.
        Another big-ticket item, although compared to billion-
    dollar systems is not that big financially, is that oceanic air
    traffic control system. Some big dates are coming up this year
    on that in June. It is supposed to be in Oakland. That program
    is already late. I think they are paying a lot of attention to
    it. So it takes a while to turn around the ship. I will
    withhold judgment until I see the pudding.

                                 FLIGHT DELAYS

        Senator Shelby. You know, the summer months are coming on
    us fast here. The air traffic is probably going to rebound as
    people start traveling more; we hope so. What are the top three
    or four actions that you are taking that will help meet the
    growing demand for air travel and prevent gridlock during the
    busy summer travel season?
        Ms. Blakey. Well, certainly we have been looking at the
    question of what we can do very immediately to relieve
    congestion. The conference I mentioned in March really was a
    ground-breaking activity where we asked everyone to sit down in
    the same room and say now look, for the good of the system, not
    just a single airport or parochial interest of an airline, how
    can we make the system work more efficiently? And we came out
    with a number of procedural changes which we have already begun
    implementing in the way we are looking at the upper level air
    space and the way we are establishing express lanes.
        The agreement is that if we are experiencing 90 minutes or
    more in taxi-out and hold at airports, we can start flushing
    those airports and asking others to hold back. Let us get the
    delay out of wherever we have it so that it does not overwhelm,
    not only the passengers in those places that are congested, but
    also begin to ripple through the entire system.
        Just yesterday Secretary Mineta and I took specific steps
    to deal with O'Hare, which I do not have to tell this
    subcommittee O'Hare has a huge effect on the system. We had
    realized back in the fall that the scheduling at O'Hare was
    beyond the capacity of the airport. You know, 2 pounds in a 1-
    pound bag does not work. Therefore, we began in the winter,
    early part of this year to talk with the two airlines which are
    the primary airlines at O'Hare, American and United, about
    drawing down their schedule. They drew it down 5 percent in the
    critical hours between 1 p.m. and 8 p.m. We tried to see if
    that was going to be enough during the month of March. It
    proved that it was not enough. We still were experiencing
    significant delays at O'Hare and again this ripples through the
    whole system. You know, if O'Hare sneezes everybody gets a
    cold. So we then asked again that the airlines look at their
    schedules and yes, just yesterday the Secretary and I announced
    an agreement that each airline is going to take down their
    schedule further, American and United, another 2.5 percent at
    O'Hare.
        Now this is not something we like. We certainly would
    prefer that the market work and not have to put any
    constraints, but these are voluntary measures. We are very much
    looking at this to make sure that we are doing everything
    possible to address schedules and delays.
        Senator Shelby. Mr. Mead.
        Mr. Mead. We all remember the summer of 2000. Everybody
    talks about the summer of 2000. That is a reference to the
    worst gridlock year. I think we all remember that. Two big
    things are different, maybe three things are different now.
    There are more runways out there.
        In the summer of 2000 and the aftermath there was extreme
    reluctance for the regulatory authorities to put the brakes on
    airline scheduling practices. You remember we had all kinds of
    examples where you had more aircraft leaving at a specific time
    of day than could possibly leave and Chicago O'Hare was one of
    the poster children for that. I think that the Secretary and
    the Administrator have shown a willingness to tackle that
    issue.
        Secondly, one of the things that we learned from the summer
    of 2000 was the need for the airlines and FAA to talk to each
    other on a daily basis, in the morning, about what things were
    looking like that day from the standpoint of weather or flight
    patterns, and so forth. So that is different.
        Another fact that I think is a little bit scary that we
    have not had a lot of experience with is the regional jet
    growth, which carry less passengers. As traffic rebounds and--
    --
        Senator Shelby. Less traffic and fewer passengers.
        Mr. Mead. Yes, and I mentioned Dulles. I think we see some
    danger signs at Dulles for this summer. I mean it is a huge
    growth balloon if you believe the airlines about what is going
    to happen and I think right now is the time to start planning
    for that.
        Senator Shelby. Senator Murray, thanks for your patience.

                                     SAFETY

        Senator Murray. Thank you, Mr. Chairman.
        Mr. Mead, in the area of safety, a continuing concern is
    the fact that the aviation industry is out-sourcing an
    increasing percentage of their aircraft maintenance work. In
    fact, almost half of their maintenance costs were out-sourced
    in 2002. The US Airways Express crash in Charlotte last year I
    think is a tragic example of what happens when there are
    performance deficiencies on the part of third-party maintenance
    contractors.
        When your office looked into this issue last year you
    reported that the FAA's inspection efforts were primarily
    focused on in-house maintenance programs. The FAA agreed to
    develop a program to target inspector resources toward the out-
    sourced facilities. In your view how well is the FAA now
    targeting those facilities?
        Mr. Mead. We need to do a follow-up effort. Let me give you
    a good answer to that question. I can tell you what I have been
    told is that they are in the process of implementing our
    recommendations. For example, the problem you alluded to was
    where United Airlines' principal inspector would not know much
    about what was going on at the repair stations and there is all
    this maintenance being done at this repair station and the
    repair station person would not know what was going on inside
    of United Airlines, just to use the one airline as an example.
        FAA is piloting a process with one airline--I think it is
    Delta--where the principal maintenance inspector for Delta is
    expected to be on top of all of their maintenance. That is, I
    think, the essential design of their program. I think FAA is
    impressed with the results of that and wants to consider
    expanding it to the other carriers. I think that is the current
    status.
        On the foreign repair stations, FAA agreed that they needed
    to step up their oversight there. You will recall that the
    problem we identified there was FAA would certificate the
    repair station but not necessarily know--they would delegate a
    lot of the oversight responsibility. We have not followed up to
    check to see how that was implemented. Maybe the Administrator
    is more current than I am on that.
        Senator Murray. Ms. Blakey.
        Ms. Blakey. Well, certainly we have just instituted, in
    fact, new rules, new regulations governing repair stations
    across the board, both foreign and domestic. We have evened out
    much more so the requirements that we are placing on foreign
    repair stations are equivalent to those in the United States
    except that they must be recertificated every 1 to 2 years. So
    I think at this point from that standpoint we are working very
    hard to make sure that those requirements, for example for FAA-
    certified training, et cetera, will be carried through.
        The second thing is we are adapting our own oversight, just
    as the Inspector General pointed out, and we are working with
    the carriers so that they see the integration of oversight of
    repair work----
        Senator Murray. Can you give us any specific examples?
        Ms. Blakey. I can probably do that better in a written
    response to the committee if you would like, just to give you
    more detail on that.
        Senator Murray. All right.
        Ms. Blakey. But Mr. Mead is correct. We are very encouraged
    by the fact that the inspectors should look at this as a unit
    for a carrier, not as we look at these repair stations who are
    doing six carriers and over here we are only focusing on what
    Delta does in-house.
        Mr. Mead. I think just a footnote to this, I think the
    domestic situation is easier to fix than the foreign situation.
    In the foreign situation, we found cases where the FAA person
    that was supposed to certificate was presented with materials
    that were in a foreign language that he or she did not
    understand. So the problems in foreign repair stations and the
    FAA oversight I think are of a different type and maybe a bit
    deeper.
        Senator Murray. Well, if both of you could follow up with
    the committee in response to that, I would appreciate it. It
    remains a significant concern.
        [The information follows:]

        The FAA has taken numerous actions to address changes in repair
    station oversight. Many of these actions address concerns raised by the
    OIG in the Air Carriers Use of Repair Stations audit published in June
    2003.
        In October 2003, FAA formed working groups to respond specifically
    to the OIG report. This working group will:
      --Identify repair stations that perform safety critical repairs for
            air carriers;
      --Improve databases to capture results of foreign aviation authority
            inspections;
      --Develop new comprehensive repair station oversight organizations
            and concepts to oversee aviation article repairs from start to
            finish.
        FAA increased the sampling inspections performed by FAA inspectors
    for inspections performed by foreign aviation authorities on FAA
    requirements.
        Implemented the final Part 145 rule on Repair Stations (January
    2004).
        In collaboration with Duncan Aviation and TIMCO, the FAA is
    initiating a prototype program to develop new oversight systems and
    techniques to oversee large, complex repair stations. This system will:
      --Standardize FAA oversight of repair stations located in multiple
            FAA regions;
      --Increase the quality of surveillance by assigning a dedicated team
            of inspectors experienced and knowledgeable in the practices
            and procedure of the repair station;
      --Increase the quality of surveillance by allowing inspectors to
            retarget their oversight to areas of risk.
        On going efforts in changing foreign and domestic repair station
    oversight:
      --Enhance the FAA inspector repair station certification and
            surveillance course and give priority to inspectors assigned
            oversight responsibilities for repair stations. (Must be done
            to comply with the requirement of new rule).--June 2004.
      --Develop a repair station prototype program that incorporates a
            certificate management team structure to enhance oversight of
            large repair stations or companies that own multiple repair
            stations and satellite repair stations.--October 2004.
      --Develop and publish a notice of proposed rulemaking that revises
            the rating system, adds a quality assurance requirement, and
            further clarifies rule language.--October 2004.
      --Develop the 145 Surveillance and Evaluation Program by revising the
            Surveillance and Evaluation Assessment Tool to target
            identified risks and incorporates the system safety approach
            into repair station oversight.--October 2006.
        The fiscal year 2004 activities are focused on developing new
    processes and procedures to identify risks and target FAA inspector
    resources to resolve those risks. The completion of these activities
    and implementation of the new programs will not be accomplished until
    the fiscal year 2007 timeframe.

        Senator Murray. Ms. Blakey, as you will recall, the only
    reason the conference report on the FAA bill was allowed to
    pass the Senate and go to the President was because you
    provided a letter to the Senate Commerce Committee promising
    that you would not contract out any additional air traffic
    control functions to the private sector during fiscal year
    2004. This could very well become a contentious issue for our
    bill this year if we do not have a similar commitment from you
    for fiscal year 2005. Are you prepared to submit to this
    subcommittee at this time that the FAA will not be contracting
    out any current air traffic control jobs during 2005?
        Ms. Blakey. You know, the letter that you are referring to
    was one that was prompted, as you say, by what, to me, was a
    surprisingly intense debate over this issue of contracting out,
    out-sourcing, privatization, all sorts of things being batted
    about. And it did prove important to have the debate set aside
    and be able to get what was a very important 4-year
    reauthorization bill completed.
        I think it is a very different thing, though, if you are
    suggesting that on an annual basis the FAA Administrator should
    provide a guarantee that there would not be any kind of out-
    sourcing for the following year. Historically, since the FAA
    has been here, that has never been done. It has never been
    necessary, and I do not understand that there is a necessity
    for it now. And the reason I say that is I have already said
    and I have said repeatedly that on the issue of our contract
    towers that we have no intention of converting further towers
    any time in the foreseeable future. There are no plans on the
    table. I have no additional A-76 plans for studies right now.
    We do, however, have an important A-76 study under way, which
    this subcommittee is very well aware of, focusing on our flight
    service stations. As you know, we have the Inspector General's
    report and recommendation and that of others. We have looked at
    the question of can this be done by the private sector. And, in
    point of fact, everything points to the fact that this is an
    important area to have looked at from the standpoint of ``Can
    private or public sector accomplish this best?''
        No matter whether our own employees, who are bidding in
    this process, no matter whether they win or whether others win,
    we know that we will have very considerable cost savings to the
    taxpayers, about a half billion dollars over a 5-year period.
    We also know we will have better service at the end of this. So
    that is important and we expect to award that contract in
    fiscal year 2005.
        So I mention those things by way of saying that it would
    seem both unnecessary and an impediment to the kind of
    flexibility that may be important down the road if all of a
    sudden there becomes some annual expectation that guarantees
    have to be provided.

                                     SEATAC

        Senator Murray. I do know what the annual expectation is. I
    can just tell you it will be an issue this year.
        Let me turn to another topic. Ms. Blakey, your testimony
    does mention that last year was what you called a banner year
    for new runways. It will not surprise you when I tell you it
    was not a banner year for SeaTac International Airport's third
    runway project. Unfortunately, as you well know, SeaTac is kind
    of the poster child project for the need to streamline the
    environmental review process for new runways. And, as you know,
    we have been trying to complete construction of the third
    runway I think it is for my entire life but it has only been 16
    years.
        The added costs for complying with those environmental
    rules for the construction of that runway, as well as the
    associated cost of delays for a great deal of time now, have
    grown by almost $200 million just in the last 4 years. As you
    can well imagine, this has put an incredible amount of pressure
    on the ability of the airport authority to finance the
    completion of that project. The Port of Seattle, as you know,
    is currently pursuing an amendment to the airport's existing
    Federal commitment to ensure that there is adequate financing
    to meet all of those new environmental costs. Do you believe it
    is reasonable for us to pursue an additional Federal commitment
    for this project, given the fact that these added costs are
    associated with the need to comply with Federal environmental
    laws?
        Ms. Blakey. Although I have not been as long on this
    project as you have, I do share your frustration about it. We
    see the third runway at SeaTac as being a very important part
    of the national aviation system. So successful completion of
    that runway is a big goal for all of us. No question about it.
        What we are doing right now, because I think this is the
    most intelligent thing from our standpoint, is we have hired
    again an independent contractor to look at the financials that
    SeaTac has provided. As you know, they came in only a month or
    so ago, but we are trying to get through this very quickly. It
    is a very complicated analysis, but we need to understand a
    variety of the cost justification there, as well as things like
    what will that do for the cost per enplaned passenger, what
    will be the impact on the airlines, et cetera?
        What I can definitely tell you is that we are committed to
    working through that. We will be as supportive of SeaTac as is
    possible, with the understanding that this is an unprecedented
    request. A request of this magnitude and taking up the Federal
    share to the degree this would, it certainly raises policy
    issues as well as understanding the financial needs.
        Senator Murray. Well, I appreciate that very much and want
    to work with you on that. Do you have any sense of the time
    line that we will be getting a response back?
        Ms. Blakey. Boy, I would like this get this done by
    sometime in June. I will keep you posted, if I might.
        Senator Murray. Thank you very much.
        Ms. Blakey. And by the way, congratulations on the
    commissioning of the tower. I know that is coming up on the
    24th and cutting that ribbon will be great.
        [The information follows:]

        The FAA timeline to reach a decision on the SeaTac application to
    increase the LOI by $198.1 million follows:
        March 8, 2004.--Application received.
        May 19, 2004.--FAA receives the independent financial analysis from
    Reed & Associates, LLC.
        May 30, 2004.--Complete agency financial analysis and review of the
    application.
        Mid-June 2004.--Final agency decision on the application.

        Senator Murray. Good. One other question, Mr. Chairman, and
    I know we have a vote coming up.
        Ms. Blakey, in my opening statement I talked about how
    essential it is that the United States maintain its
    international leadership in aviation for the second century of
    flight. Part of my dismay over the proposal to cut $400 million
    from your procurement budget is that it will slow down our
    ability to modernize the current air traffic control system.
    Beyond just replacing the aging equipment that your agency is
    operating on today, we have to be thinking about the next
    generation of air traffic control equipment and begin planning
    for deployment of that system.

           GLOBAL COMMUNICATION, NAVIGATION, AND SURVEILLANCE SYSTEMS

        As you know, for the past couple of years, I have secured
    about $45 million for the Global Communication, Navigation and
    Surveillance Systems program and I am very pleased that the
    first phase of that contract was awarded to the Air Traffic
    Management division at Boeing. And I really want to commend you
    for extending their contract so they can stay on the job until
    you have awarded the phase two contract portion of that. What
    can you tell this committee about the accomplishments of that
    initiative to date?
        Ms. Blakey. Well, I think in terms of satellite navigation
    and the way we see our system developing over time, certainly
    the program has given us important information about how
    satellite navigation can function, particularly in areas like
    the Gulf where you really do not have radar control and you
    have therefore big challenges involved. It also points in the
    direction of what we will do from the standpoint of digital
    communications, what we will do from the standpoint of looking
    at investments internationally because we do see this as being
    the wave of the future. So we are still both analyzing the
    results and, of course, looking at what is proposed for the
    next stage as a part of a contract extension. I think the
    results so far have certainly been promising.
        Senator Murray. Is there any doubt in your mind that the
    next generation of air traffic control will be satellite-based?
        Ms. Blakey. No. It certainly will be heavily satellite-
    based; let me put it that way. And we are very much of the view
    that our standing internationally is going to depend on
    continuing U.S. leadership in that regard.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Murray. Well, we want to be there.
        Thank you very much, both of you, and thank you, Mr.
    Chairman.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
           Questions Submitted to the Federal Aviation Administration
                Questions Submitted by Senator Richard C. Shelby

                             FAA ACQUISITION POLICY

        Question. Earlier in the hearing, I asked if FAA reviews and
    updates accordingly the business case analysis if a major acquisition
    program experiences cost growth or schedule delays, or capacity
    reductions. How does the FAA validate the assumptions and conclusions
    in such analyses?
        Answer. Under the FAA's acquisition policy, the program office is
    responsible for preparing cost, schedule and performance estimates for
    review when these commitments change. Before approval by the Joint
    Resources Council, the Office of Operations Planning and Finance is
    responsible for business case analysis, and reviews the revised
    estimates. The reviews include an audit of the estimates and
    examination of the underlying ground rules, assumptions and models.
    Reviewers determine differences between revised estimates and previous
    estimates. The reviewers use historical results from similar FAA
    programs, other government programs, and industry to validate the
    estimates. In some instances, the reviewing division may develop their
    own estimates for comparison purposes. Risk assessments are usually
    performed. Together with program office analysts, the reviewers ensure
    that estimates are adjusted to account for risks, risk mitigation
    strategies and uncertainties. An opinion is made available for
    consideration during Joint Resources Council deliberations and
    decisions.
        Question. What process does the FAA use to determine whether to
    accelerate, maintain, decelerate or terminate an ongoing program?
        Answer. FAA acquisition policy requires cost, schedule and
    performance baselines for each major acquisition program at the time of
    initial program approval by the Joint Resources Council. If baselines
    are breeched, revised baselines are subject to review and approval by
    the Joint Resources Council, revisiting the rationale for continuing
    the program and the terms under which the program may proceed. The
    Administrator reviews programs that exceed their baseline by more than
    10 percent.
        Under the Air Traffic Organization (ATO), performance is defined in
    terms of service delivery targets and published in the FAA Flight Plan
    and upcoming ATO Business Plan. Decisions to accelerate, maintain,
    decelerate or terminate an ongoing program will be based on its
    contribution to meeting service delivery targets and business
    objectives, such as targets for reduced operating costs. The ATO
    reviews the costs and benefits of programs to ensure there is an
    economic return on the capital investment.

                  ADVANCED TECHNOLOGIES AND OCEANIC PROCEDURES

        Question. When and at what cost can we expect to have fully
    functional ATOP systems replace the obsolete technology in Anchorage,
    New York, and Oakland Centers?
        Answer. The approved acquisition program baseline for the Advanced
    Technologies and Oceanic Procedures (ATOP) system calls for Build 1 to
    achieve Initial Operational Capability (IOC) at Oakland Center in June
    2004 (which occurred on June 30), at New York Center in March 2005, and
    Build 2 IOC at Anchorage Center in March 2006, with the final ATOP
    system IOC in 2008. The FAA is working toward a more aggressive
    schedule with contract incentives to deliver Build 1 IOC at New York
    Center in December 2004 and Build 2 at Anchorage Center in May 2005.
    Build 1 delivers a fully operational ATOP system with integrated
    decision making tools, enabling ``off-the-glass'' operations and
    providing the flexibility needed to entertain more requests for in-
    flight altitude changes. Build 2 delivers integrated radar data
    processing functionality and the enhanced conflict probe required to
    reduce aircraft separation from 100 nautical miles to 30 nautical
    miles. The total Facilities and Equipment cost of the program is $548.2
    million.

                STANDARD TERMINAL AUTOMATION REPLACEMENT SYSTEM

        Question. It seems as if the Standard Terminal Automated
    Replacement System (STARS) procurement is through the most difficult
    phase of the procurement cycle and your testimony indicates that the
    anticipated resources for this program will decline in the coming
    years. How do you compare the relative risk remaining in the program
    compared to other major FAA programs such as WAAS, ASR-11, or ERAM?
        Answer. The STARS program has completed core baseline development
    and is well into the production, deployment, and sustainment phase. As
    of May 26, 2004, 21 STARS sites are fully operational in the National
    Airspace System, along with 15 separately funded systems operating at
    DOD military (Air Force, Army, and Navy) installations worldwide. All
    operational STARS systems have exceeded their requirements for system
    reliability and availability.
        The remaining STARS risks are primarily programmatic and budgetary.
    The FAA Joint Resources Council (JRC) recently approved STARS for full
    production and deployment to the remaining 31 of its 50 most critical
    terminal locations as part of Phase I of the Terminal Automation
    Modernization Program.
        When compared to Wide Area Augmentation System (WAAS), Airport
    Surveillance Radar--Model 11 (ASR-11), and En Route Automation
    Modernization (ERAM), STARS is in the lower risk phase of the standard
    program life cycle. The life cycle starts with high risk during the
    development phase, decreases through deployment, is at lowest risk
    during the years of sustainment, and eventually increases during the
    end of life phase prior to replacement. STARS is deploying full
    production configuration systems and sustaining those systems. ERAM is
    in the higher risk area of development while WAAS and ASR-11 are
    nearing the end of development.

                           GLOBAL POSITIONING SYSTEM

        Question. It is my understanding that the Department of Defense
    appears to be increasing their requirement for Global Positioning
    System (GPS) IIF satellites. I am told that L5 signal coverage is on
    the horizon and that GPS accuracy will get even better than it already
    is. Given the difficulty that everyone anticipates for WAAS equipage,
    the accuracy improvement of the GPS system, and the success that GPS
    already enjoys in the general aviation and commercial fleets, I'm
    wondering what benefits we derive from continuing to pour more
    resources into WAAS when most, if not all, of the capability that WAAS
    offers is likely to be offered by this next generation of GPS
    satellites. Would we be better off focusing on how to leverage GPS in
    our Required Navigation Performance, or RNP, efforts and by taking
    advantage of the installed base of GPS receivers?
        Answer. The Department of Defense is adding an additional civil
    frequency called L5 to the next generation of GPS satellites. This
    frequency will provide additional capability for all users of GPS and
    will enhance accuracy. WAAS presently achieves an accuracy of 1.5 to 2
    meters.
        WAAS receivers for aviation use are currently available by a
    limited number of manufacturers and we expect that over the next year
    this number will grow significantly. GPS provides significant benefits
    for pilots, and today many are taking advantage of the capabilities of
    GPS. However, GPS alone, even with the L5 signal, does not meet all the
    needs for our customers. Specifically, GPS alone does not meet aviation
    safety requirements to virtually never fail to warn pilots of
    misleading information and to be available all the time. Meeting these
    requirements improves safety while enhancing capacity within the
    National Airspace System (NAS). For this to occur, capability beyond
    GPS alone is needed, and WAAS meets this need. The WAAS will utilize
    the GPS L1 and L5 frequency to enable pilots to fly precision
    approaches to Category I levels. Precision approach utilizing WAAS will
    be fully compatible with the FAA Required Navigation Performance. The
    WAAS program has recently undergone program re-planning to leverage the
    investment the Department of Defense is making to modernize GPS when it
    adds the L5 frequency.
        There are three issues regarding the modernization of GPS by adding
    L5 that need to be addressed. The first is the schedule of when L5 will
    be available. Although the first L5 satellite is scheduled for launch
    in 2006, it will not begin broadcasting the L5 signal until 2009. In
    addition, in order to utilize the capability of the GPS constellation,
    many satellites with L5 must be operating. Based on the current
    schedule, it is possible that L5, with acceptable availability of its
    signal, will not be available until 2015 or later. WAAS is providing
    service to customers now. With the additional L5 frequency provided by
    GPS, WAAS capabilities will improve. The second issue is that even when
    modernization is completed, there may not be a sufficient number of
    satellites available to provide precision approach capability to all
    users, at all locations in the NAS. Analysis shows that the modernized
    GPS will still need to be augmented to provide service to all users, at
    all needed locations, at all times. The third issue is that current GPS
    receivers are not capable of receiving and processing the L5 signal.
    New equipment or upgrades to existing equipment will be necessary to
    receive and process the L5 signals.
        FAA is committed to working with our customers to enable RNP
    capability. WAAS allows more aircraft to achieve the most stringent RNP
    by providing high capability RNP-capable receivers at modest costs
    available to all users. GPS alone cannot meet the most stringent RNP
    capabilities.

                             CONTROLLER RETIREMENTS

        Question. How the controller workforce changes over the next
    several years will be a critical issue for the FAA. FAA has reduced
    staffing levels for air traffic controllers from 15,613 in fiscal year
    2003 to 15,333 in fiscal years 2004 and 2005. And, FAA is not
    requesting additional controllers in fiscal year 2005. What is your
    plan for addressing the retirement surge?
        Answer. Controller retirements are a critical issue for FAA. We are
    in the process of developing a plan to prepare the agency. We are also
    developing a plan to address controller retirements, as required by
    Vision-100, which will be submitted to Congress at the end of calendar
    year 2004.

                             CONTROLLERS-IN-CHARGE

        Question. What are you doing about the practice of air traffic
    controllers acting as controllers-in-charge and the rising number of
    operational errors occurring under their watch?
        Answer. To date we have not identified any direct correlation
    between the use of air traffic controllers acting as controllers-in-
    charge (CIC) and the number of operational errors. Following any
    operational error, the FAA conducts a detailed review of the
    circumstances surrounding the error to identify causal factors. The
    current data indicates that approximately 23 percent of the errors
    reported for fiscal year 2004 occurred while CIC's were on duty in
    comparison to approximately 21 percent during fiscal year 2003.
        The agency is moving forward with plans to bring the supervisory
    level up to 1,726 by the end of fiscal year 2004.

                                CONTRACT TOWERS

        Question. The subcommittee supports the FAA contract tower program
    as a way to provide cost-effective ATC services in a proven and safe
    manner at over 200 smaller airports across the country. Without this
    program, many of these smaller communities would lose the significant
    safety benefits a tower provides. Can you tell us the plans to spend
    the $80.3 million provided by Congress in fiscal year 2004 for the
    baseline program and your projections for funding the program in fiscal
    year 2005?
        Answer. In fiscal year 2004, the FAA will maintain 219 contract
    towers and provide funding for 10 new starts. For fiscal year 2005,
    $79.2 million is included in the President's budget request to run
    contract towers.

                             BALANCING INVESTMENTS

        Question. FAA modernization plans have suffered from a number of
    redirections over the past several years. The U.S. aerospace industry
    continues to make early investments in the technologies supporting
    these plans with returns on these investments delayed or eliminated
    when the FAA's plans change. What is the FAA doing to ensure that
    future modernization plans are clearly defined, achievable, and
    supported by the aviation community?
        Answer. Modernization efforts with links to avionics investments
    are heavily dependent on high levels of equipage to achieve customer
    benefits. When the benefits are overwhelming, such as with domestic
    reduced vertical separation minima (DRVSM), a rule can be made and a
    date certain for implementation set. When the modernization effort
    depends on voluntary equipage, the economic ability for a predominate
    portion of the fleet to equip to achieve additional flight efficiencies
    or economies is a major factor in achieving the modernization benefit.
    Since investments that include voluntary equipage are more uncertain,
    the FAA continually works with the aviation community through its
    Federal advisory committees (in particular, RTCA) to coordinate FAA and
    community investments, and to identify initial applications and target
    locations for which the benefit is overwhelming and the investment
    clear.
        Question. As the airline industry and the economy recover from the
    September 11 terrorist attacks, airspace and airport capacity will once
    again become a significant concern. While it's reasonable to expect
    that some of the recent and pending system improvements will support
    the demand for the next couple of years, more significant technology
    insertion will be needed to ensure unconstrained aviation growth for
    the future. Near term spending on key technologies like LAAS, CPDLC,
    and ADS-B appears insufficient to ensure these technologies will be
    ready to deploy when they're needed. How are you balancing your
    investments between near-term, mid-term, and long-term modernization
    initiatives?
        Answer. Balancing near-term, mid-term and long-term modernization
    initiatives is based on providing services that have the greatest value
    for our customers according to schedules that are mutually compatible.
    As an example, the Operational Evolution Plan includes modernization
    investments that produce significant value for our customers over the
    next several years.
        Longer-term investments will provide a higher capacity, flexible
    infrastructure to accommodate new operational concepts that will be
    needed to meet future traffic growth. In many cases, longer-term
    services may require significant development before new concepts and
    systems can be implemented.
        In today's business environment, aircraft equipage schedules have
    been delayed or canceled due to the number of cash-limited airlines.
    Also, practical limits exist in the rate and number of major changes
    that can be accommodated in operational facilities.
        Finally, modernization investments need to be balanced against
    investments needed to safely and reliably provide existing services.
        All of these factors are considered in consultation with our
    customers as our investments are balanced and reflected in the National
    Airspace System Architecture and our Capital Investment Plan.

             HARMONIZATION OF U.S. AND EUROPEAN MODERNIZATION PLANS

        Question. The United States has long been regarded as the global
    leader in aviation. Close cooperation between U.S. industry and the FAA
    has resulted in the aircraft and ATC technologies that shaped the first
    century of flight. In recent years, Europe has focused their efforts to
    modernize their aviation infrastructure. Projects like Galileo and the
    Single European Sky are positioning Europe to define the technologies
    that will shape the next century. What steps are you taking to
    harmonize U.S. and European modernization plans, ensuring U.S.
    interests are appropriately represented in future aviation solutions?
        Answer. FAA continues to engage in bilateral, regional, and
    multilateral support activities to promote the improvement of safety
    worldwide, including the implementation of U.S. safety technologies,
    system safety concepts, and air traffic management procedures and
    practices as the foundation for global aviation safety standards. FAA
    international leadership is one of the four main goals included in the
    FAA Flight Plan for 2004-2008, and as such, will continue to be a top
    FAA priority.
        FAA accomplishes this mainly through its participation in, and
    support of the International Civil Aviation Organization (ICAO) and its
    numerous technical panels, regional implementation groups, and higher-
    level policy meetings. Within these activities, FAA works very
    diligently to develop and obtain approval of global standards and
    recommended practices (SARPs), and guidance materials based primarily
    on U.S. systems and solutions to ensure that new globally adopted
    procedures and technologies will not be detrimental to the collective
    interests of the U.S. civil and military government, industry, and user
    communities.
        Within the global aviation community, the United States and Europe,
    from the service provider perspective, are viewed as the two major air
    navigation service providers in the world that can ultimately determine
    the success or ineffectiveness of new technology, procedures and air
    traffic concepts. As such, cooperation between the FAA and its European
    counterparts has been viewed as imperative to the creation of truly
    seamless air transportation system. The FAA and EUROCONTROL have been
    cooperating for years through a Memorandum of Cooperation (MOC) and
    related technical annex agreements that outline our joint cooperation
    on air traffic management (ATM) research on new technologies and
    concepts, strategic ATM system analysis, harmonization of ATM
    enhancement programs and plans, ATM development and operation, and
    safety management and regulation. Between our respective support to
    ICAO global programs and our bilateral cooperative projects under the
    stated MOC, the FAA and EUROCONTROL continue to successfully harmonize
    and align related programs, to the extent practicable to ensure
    interoperability of air transportation systems and procedures between
    the United States, Europe, and neighboring airspace.
        Through our ongoing cooperative relationships with the EUROCONTROL
    and European States, FAA is keeping abreast of the new Single European
    Sky Initiative (SESI) to be able to assess any aspects of the program
    that may be detrimental to United States policies or initiatives.
        One of the most visible areas of U.S. and European cooperation is
    in satellite navigation system implementation. Since the release in
    1996 of the United States Presidential Decision Directive (PDD)
    promoting the proliferation and use of the U.S. GPS and its civil wide
    and local area augmentations, the FAA has been encouraging its
    international counterparts, as individual States and as regional
    communities, to approve the use of the basic GPS signal for use in
    certain oceanic, en route, and non-precision approach operations. As a
    result, we have seen the number of States approving the operational use
    of GPS double since 1998.
        For the last couple of years, the FAA has supported the U.S.
    Department of State's ongoing negotiations with the European Commission
    (EC) on overall operating principles of the planned European Galileo
    satellite constellation and its full interoperability with the already
    established and globally accepted U.S. GPS. As a result of this U.S.
    initiative, a joint statement was signed on February 25, 2004 between
    the EC and the United States stating that both parties were able to
    reach agreement on most of the overall principles of GPS/Galileo
    cooperation, and both parties will continue to work diligently to
    resolve the few remaining outstanding issues which concern primarily
    some legal and procedural aspects. This cooperation should minimize the
    negative implications to United States GPS interests worldwide (civil
    government, military, industry, and user community) as a result of the
    potential future implementation of the European Galileo satellite
    system.
        On a more technical level, FAA has been managing a satellite based
    augmentation system (SBAS) technical interoperability working group
    since 1996 with participation by Europe and Japan to collectively
    ensure that technical interoperability issues are solved prior to the
    operational implementation of the United States (WAAS), European
    (EGNOS), or Japanese (MSAS) systems. FAA is also providing support to
    regional projects in South America and Southeast Asia to implement GPS
    augmentation system prototype capabilities. Successful results from
    these projects will influence the adoption of U.S. GPS and augmentation
    systems that will ultimately increase international flight safety for
    the U.S. aviation community.

                                  GLASS BEADS

        Question. On March 6, 2001, the Engineering and Specifications
    Division, FAA, requested the Office of Aviation Research to analyze
    glass beads ``to determine if the new Visibead or Megalux bead are a
    viable alternative to the 1.9 or 1.5 IOR glass beads.'' (Project Number
    2000-589.) The FAA issued a Final Report in early 2003 that found the
    Visibead and Megalux bead to be acceptable. Given the cost savings
    associated with the use of these glass beads, why has the FAA waited
    over 12 months to certify the use of these glass beads as required for
    airport managers/engineers to use Visibead and Megalux beads on airport
    runways?
        Answer. The referenced study confirmed the acceptability of
    existing reflective glass beads and the newer Visibead and Megalux
    reflective glass beads, as well as newer formulations of water-borne
    paints. A draft change to the FAA paint specification has been
    initiated. In the meantime, an airport may ask for FAA approval on a
    project basis. The revised specification will contain generic language
    that both manufacturers of the newer glass beads can meet along with
    paint application rates specific to these newer beads. With the
    addition of these beads, three reflective media options will be
    available to an airport. In order of increasing initial cost, they are:
        1. Type I beads, commonly referred to as ``highway-grade'' beads.
        2. Type IV beads, the nomenclature used to refer to the Visibead
    and Megalux beads.
        3. Type III beads, commonly referred as ``airport-grade'' beads.
        Question. Can you assure the subcommittee that the FAA will certify
    the use of these glass beads on airport runways before the end of the
    current fiscal year?
        Answer. A new paint specification will be issued prior to the end
    of the fiscal year. It contains generic language that will allow
    contractors to use Visibead and Megalux reflective glass beads.

                           RELIABLE COST INFORMATION

        Question. There has been much discussion about the transition to
    the air traffic organization and the need to get good, reliable cost
    information. It is my understanding, however, that this information is
    not available, and it will take some time to do so. How long will it
    take to get this information?
        Answer. Since the FAA switched to the new Department of
    Transportation financial system (DELPHI) in November 2003, we have been
    working on reconciling and cleaning up the financial information for
    all organizations, including the ATO. In addition, we have been working
    to interface this new financial information into our Cost Accounting
    System (CAS). We plan to re-establish the CAS interface and begin
    producing cost reports with the first 8 months of fiscal year 2004 data
    in August 2004 and all fiscal year 2004 data in October 2004. We expect
    to get back to routine monthly CAS reporting in November 2004 with
    fiscal year 2005 data.
        Question. What stands in your way?
        Answer. This fiscal year, the FAA implemented new financial
    (DELPHI) and procurement (PRISM) systems. These systems were necessary
    for the FAA to address long-standing weaknesses in these areas.
    Improving these systems is the foundation on which we can implement a
    more business-like approach to running the agency. As with any major
    system changes, there were backlogs and interface problems that have
    taken several months to resolve. One of the interface problems we
    experienced is between DELPHI and the existing Cost Accounting System.
        Our first priority was to ensure that DELPHI provides accurate and
    timely financial information. DELPHI data must be accurate for cost
    accounting data to be accurate. We dedicated significant resources to
    clearing up DELPHI and PRISM backlogs through June 2004. In July 2004,
    we changed our focus to cleaning up some remaining issues with DELPHI
    data in support of the clean audit effort and to improving financial
    and acquisition business processes.
        Our second priority is to complete the DELPHI interface that
    supports the Cost Accounting System. We completed testing the interface
    in March 2004 and will complete the processing of the first 9 months of
    fiscal year 2004 cost accounting data in early September 2004. All
    fiscal year 2004 cost data will be processed by late October 2004. In
    fiscal year 2005, we plan to return to monthly processing of the cost
    accounting data. We also continue to improve our labor distribution
    reporting for our Air Traffic Organization.
                                     ______

                  Questions Submitted by Senator Sam Brownback

                      CENTER WEATHER SERVICE UNITS (CWSU)

        Question. I understand you are in the process of modernizing the
    FAA's air traffic operations and that updating and improving the Center
    Weather Service Units (CWSU) is part of that plan. I see many positive
    things in this plan that will enhance safety such as improved training,
    standardization among units, and instituting 24-hour operations.
    However, some of my constituents who are members of the National
    Weather Service (NWS) Employees Organization are concerned that a
    portion of this plan would no longer require a CWSU meteorologist at
    each of the 21 Air Route Traffic Control Centers (ARTCC). Would this
    plan leave some air traffic controller and management personnel without
    immediate, on-site meteorologist assistance? If so, how would this
    impact safety?
        Answer. There are several different configurations for
    restructuring the CWSU under consideration. The FAA and the NWS are
    collaborating to come up with a configuration and placement of
    personnel that will improve safety. Further, we intend to take full
    advantage of revolutionary improvements in communications technology
    that have been developed since the CWSUs were first put in place more
    than 25 years ago (1978).
        We recognize the concept of ``on-site meteorological assistance''
    as essential for the safe, efficient management of air traffic.
    Frankly, that is why the NTSB has also been concerned that weather
    support be available at TRACON facilities and airport traffic control
    towers--as well as at the CWSUs--at all times when significant weather
    is forecast.
        Partly in response to these NTSB recommendations, we intend to
    design a system where all FAA field facilities get on-site weather
    assistance on a 24-hour basis, 7 days a week. The foundation of modern
    weather services is electronic and automated, rather than human. We
    recognize the impossibility of putting a meteorologist into every field
    facility of the FAA: air route traffic control centers (ARTCC),
    TRACONs, ATCTs and flight watch facilities of the automated flight
    service stations.
        Thus, I can assure you that the improvements that we are planning
    for the CWSU will not leave air traffic controller and management
    personnel without immediate, on-site meteorological assistance. As an
    example, the service they now receive from the on-site meteorologist
    will improve immediately by 50 percent simply by operating 24 hours a
    day, rather than the present two shifts a day. However, this does imply
    the assistance that all facilities receive (including the ARTCCs) will
    be electronic and automated. This design is not only economical, but
    will be a great improvement in services compared with current level of
    operations.
        Of course we are planning several sites where human weather support
    is always available 24 hours a day in case human intervention or
    consulting on critical weather problems is needed. However, their
    support will cover a regional domain, rather than just meeting local
    needs. This is the most economical use of trained meteorologists.
    Further, the NWS has proposed to train and reward these forecasters
    consistent with their larger responsibilities.
        We recognize the employees union of the NWS, the National Weather
    Service Employees Organization, is concerned about changes. The NWS is
    a full partner in these plans.

                                GENERAL AVIATION

        Question. General aviation is very important to Kansas, given the
    presence of airplane manufacturers, avionics manufacturers, and the
    6,000 pilots across the State. What steps are being taken to ensure
    that general aviation pilots have access to the latest technology?
        Answer. The FAA has worked in partnership with the general aviation
    (GA) industry to promulgate standards and guidance material to ensure
    that GA pilots have access to the latest technology.
        The FAA recently published Technical Standard Order (TSO) C-145 and
    C-146 for WAAS for the Global Positioning System (GPS). This TSO allows
    avionics companies, such as Garmin and Honeywell, to self-certify WAAS
    equipment for installation in the GA fleet.
        The FAA's Wichita Aircraft Certification Office has recently
    approved several new technology projects for use in the GA fleet. Both
    projects are navigation equipment and flight deck weather display
    applications.
        The FAA has also published guidance material in the form of an
    Advisory Circular (AC) that considerably simplifies the requirements
    for GPS equipment installation. Due to the wealth of experience gained
    by FAA and industry in installing GPS equipment, this AC removes many
    of the burdensome requirements formerly associated with a GPS
    installation. The FAA has worked with avionics companies to streamline
    installation requirements for many GA operators.
        Question. For example, the President's budget calls for GPS landing
    systems nationwide--a move that would greatly improve the safety of
    flying in difficult weather conditions. With precision satellite
    signals now available, how is the implementation of this system
    progressing?
        Answer. The FAA commissioned WAAS in 2003. The WAAS system provides
    greatly improved accuracy, integrity and continuity for aircraft during
    precision approach operations.
        The FAA published TSO C-145 and C-146 as minimum design standards
    for WAAS avionics. The FAA evaluated the potential of the new GPS L5
    signals and has approved a new WAAS acquisition program baseline that
    exploits these signals to improve the reliability of operations in the
    presence of interference and severe atmospheric conditions. It
    introduces a new Category I precision approach capability.
        The FAA has also chartered the Required Navigation Performance
    (RNP) program. The program is a combined effort of Air Traffic, Flight
    Standards, and Aircraft Certification. The RNP program exploits the
    navigation capability of present aircraft to use precision approaches
    at many airports.
                                     ______

                  Questions Submitted by Senator Patty Murray

                  ADVANCED TECHNOLOGIES AND OCEANIC PROCEDURES

        Question. Ms. Blakey, the Inspector General's status report points
    out that the FAA's operating cost estimates for Advanced Technologies
    and Oceanic Procedures (ATOP) are almost 3 years old and that there are
    remaining challenges associated with controller and technician training
    and acceptance of the technology. Do you agree with the Inspector
    General's assessment of the cost and schedule of the ATOP program?
        Answer. The Inspector General's status report points out that the
    FAA's operating cost estimates for ATOP are almost 3 years old and that
    there are remaining challenges associated with controller and
    technician training and acceptance of the technology. The FAA is
    currently revalidating its operating cost estimates. Both controllers
    and maintenance technicians have also been involved in numerous
    validation and testing activities, and have been deeply involved in the
    development and review of the vendor's training materials. ATOP
    training is ongoing and to this point has received positive feedback
    from the user community.
        Question. What can you tell us about the comfort level of the
    controller workforce in using this system?
        Answer. Controller and maintenance personnel were members of the
    ATOP evaluation team prior to contract award and have been heavily
    involved in the program for the last 4 years, from design to on-site
    operations. The site product teams have also been involved in numerous
    validation and testing activities.
        The ATOP Build 1 system test program successfully used a systematic
    approach to evaluate the ATOP system under a range of simulated and
    live operational conditions that were representative of those found at
    the Oceanic facilities. System test was conducted through a semi-
    structured exercise that permitted field participants to perform
    typical and non-typical assessments and evaluations to determine the
    operational suitability of the ATOP system.
        The field believes that the ATOP system is operationally suitable
    contingent on the resolution of the issues documented. All issues are
    tagged according to their specified completion timeframes (e.g., by
    Site Acceptance Test (SAT), Field Familiarization (FF), First Course
    Conduct (FCC), and Initial Operating Capability (IOC). The ATOP team
    continues to verify software fixes, conduct regression testing, and
    monitor system changes and the resulting impacts to operational
    suitability. Any issues that may emerge or re-emerge in subsequent
    testing or validation activities will be evaluated for their
    operational impact.
        Question. As for training, have the training materials been fully
    developed and will you have to expedite the training process to meet
    the June deployment date in Oakland?
        Answer. Training materials have been fully developed for both
    controllers and maintenance technicians. Both groups' personnel have
    been deeply involved in the development and review of all training
    materials. The first training course is now underway for maintenance
    technicians and has received positive feedback. ATOP went live in
    Oakland on June 30, 2004.

                               REVENUE DIVERSION

        Question. The Inspector General's office has put a spotlight on the
    issue of airport revenue diversion with your recent report on San
    Francisco International Airport and your current review of potential
    revenue diversion at Los Angeles International Airport. Mr. Mead's
    testimony suggests that the FAA is not exercising adequate oversight in
    this area. Ms. Blakey, what additional steps is the FAA taking to make
    sure that airport revenues are not being diverted to other activities?
        Answer. Unlawful revenue diversion generally occurs when an airport
    sponsor, usually a city or county, overcharges its airport for
    services, thereby diverting revenue from airport use. Revenue diversion
    is more likely to be a problem at larger airports and at city- or
    county-owned airports rather than independent airport authorities.
        FAA has a number of different ways to detect unlawful revenue
    diversion. First, the agency reviews the annual financial reports that
    all commercial use airports are required to file with the FAA as a
    result of the 1994 FAA Reauthorization Act. Second, we review the
    findings of audits of airport revenue under the Single Audit Act, and
    have issued new guidance to the field offices to ensure they correctly
    analyze those findings. Third, FAA receives complaints of revenue
    diversion filed by companies and individuals doing business with an
    airport. Fourth, when the Office of the Inspector General (OIG) reports
    audit findings of unlawful revenue diversion by an airport operator,
    the agency investigates and requires corrective action to resolve the
    findings.
        When we identify a potential unlawful revenue diversion, we contact
    the airport and require an explanation. When we conclude that airport
    revenue has been improperly used, we require the diverted revenue to be
    refunded to the airport with interest.
        Recently, in coordination with the OIG, we have taken the
    additional steps of identifying airports at higher risk of revenue
    diversion and focusing spot checks on financial transactions at those
    airports.

                       BASELINE REVIEW OF WAAS AND STARS

        Question. Ms. Blakey, last year, Chairman Shelby asked you to name
    the three modernization projects that were most important to the future
    of the aviation system. Two of the programs you named, STARS and WAAS,
    are being rebaselined. When can we expect to see the details of your
    request for STARS and WAAS?
        Answer. STARS--FAA has modified its strategy for Terminal
    Automation Modernization into a three-phased approach, starting with
    the most critical Terminal Radar Approach Controls (TRACONs.) This
    approach breaks large, complex terminal modernization acquisitions into
    phases that mitigate Government, vendor, and deployment costs and
    risks. This three-phased acquisition approach allows FAA to select a
    ``best value'' system and pace the automation system replacements and
    upgrades to fit within the FAA's capital investment program and meet
    critical National Airspace System requirements.
        Terminal Automation Modernization was re-baselined on April 20,
    2004. We have just recently provided the details for fiscal year 2005
    to the subcommittees. In the re-baseline, Terminal Automation is
    requesting $113.9 million for Facilities and Equipment in fiscal year
    2005 for Phase 1 of the modernization program.
        The terminal automation baseline, approved by the Joint Resource
    Council (JRC), is for the Full Production and Deployment to the
    remaining 31 of its 50 most critical Terminal locations (Phase 1). In
    accordance with Congressional direction, the option to Phase 1
    (Chicago's Common ARTS IIIE and the two Common ARTS IIEs) will only be
    implemented after the Department of Transportation (DOT) Inspector
    General (IG) reviews and validates the life cycle costs and performs
    other relevant analysis. Phases 2 and 3 will be priced and presented
    separately at JRCs in future years. For the follow-on phases, FAA is
    developing a business case considering STARS and all other viable
    terminal modernization alternatives and will provide comparative cost/
    benefit data to the DOT IG for their review before awarding a contract
    for Phase 2 or 3.
        Since FAA is the acquisition lead for the joint DOT and DOD STARS
    program, in accordance with Title 31, USC 1535, the Economy Act of
    1932, rebaselining the FAA portion of the STARS program directly
    affects deployment of STARS at DOD sites within the Continental United
    States (CONUS) and outside the CONUS. The goal of the agreement is to
    avoid Departmental duplications of independent acquisitions, life
    cycles, and system-unique training of air traffic controllers and
    technicians. A joint DOT and DOD platform avoids duplicate civil and
    military development and sustainment expenditures.
        WAAS was re-baselined on May 3, 2004. We recently provided the
    details of the request for fiscal year 2005 to the subcommittees. In
    the re-baseline, WAAS is requesting $100.03 million for Facilities and
    Equipment in fiscal year 2005.
        Question. How, if any, have the plans and capabilities of these two
    systems changed from last year?
        Answer. STARS--The Terminal Automation Modernization plan has
    changed to a multiple-phased approach, starting with the most critical
    TRACONs. This reflects the FAA's changing processes and philosophies to
    demonstrate a consistent and continuous business approach. A key
    element of this approach breaks large, complex modernization
    acquisitions (i.e., STARS) into phases that mitigate Government,
    vendor, and deployment costs and risks. This three-phased acquisition
    approach allows the FAA to select a ``best value'' system and will also
    use mostly fixed-price arrangements as opposed to cost-plus contracts.
    The FAA Joint Resources Council approved STARS for full production and
    deployment to its 50 most critical terminal locations (Phase 1) on
    April 20, 2004.
        The STARS national baseline continues to evolve to meet National
    Airspace System requirements. Additional functionalities have been
    added to incorporate site-specific local patches, NTSB and Homeland
    Security enhancements, mirror Common ARTS developments, and satisfy DOD
    requirements for their worldwide operation. For all follow on phases
    and systems (Common ARTS IIIE and STARS), additional capabilities will
    be added for in later phases. Each phase will be priced and presented
    separately at future JRCs.
        WAAS will provide full Category One precision approach capability
    when it is completed. It will do this by using the new capabilities of
    the GPS satellite constellation when they become available. WAAS is now
    providing a near Category One capability over most of the United
    States. WAAS will be incrementally improved between now and 2008 to add
    additional ground hardware and system software to provide this near
    Category One capability over the entire continental United States and
    Alaska at all times. When the modernized GPS provides sufficient
    numbers of new satellites with the L5 signal capability, WAAS ground
    receivers and system software will be modified to use it. WAAS will
    then provide full Category One capability.

                              THE NEW SEATAC TOWER

        Question. Ms. Blakey, as you are aware, we are about to commission
    a brand new air traffic control tower at Seattle-Tacoma International
    Airport. Certain offices of the FAA are now maintaining that your
    agency located this tower in the wrong location. How was it that the
    FAA built a brand new air traffic control tower, but put it in a less-
    than-ideal location?
        Answer. The Seattle Air Traffic Control Tower (ATCT) siting study
    was completed in April 1997. The final location and height
    recommendation was based on meeting the FAA's existing siting criteria
    standards. These include providing a clear and unobstructed view of all
    controlled aircraft movement surfaces, adequate depth perception and
    perspective, and minimum desired look down angle to provide a clear
    line of site to furthest operational areas. In addition, an analysis
    was performed to understand the impact of applying Terminal Instrument
    Approach Procedures (TERPS) that were current at the time to determine
    any impacts to the IFR capabilities of the airport. The potential
    impact created by the height of the new ATCT on Runway 16L during
    periods of poor weather (CAT II/III operations) was raised during the
    siting process. When the TERPS analysis indicated that the decision
    height (DH) for CAT I operations on runway 16L would be raised, a
    determination was made by the FAA that the criteria at the time allowed
    for CAT II/III operations with a CAT I Decision Height in excess of the
    standard.
        The new ATCT was designed and sited at the preferred location at
    the lowest optimum height. After construction on the new ATCT was
    substantially complete (end of 2002), the FAA revised its procedures
    and no longer permitted CAT II/III operations when the landing minimums
    for CAT I approach have been raised.
        Because the new ATCT was almost complete, we established a cross-
    organizational working group to determine mitigation strategies. The
    team has been working on developing strategies that will provide the
    safe operation of the CAT I approach procedures while meeting the
    planned capacity of the airport. These potential strategies include
    radar-monitored final approach aid, redirecting slower speed category
    aircraft, advanced avionics, policy changes, special procedures and
    improved radar surveillance systems. FAA is currently conducting
    modeling and analysis to evaluate the feasibility and determine the
    full impact of implementing the preferred mitigation strategy. The
    analysis was completed in June 2004. A report of the study's outcomes
    will be published in August.
        Question. The Port of Seattle is still waiting to hear how the FAA
    plans to address this concern about the location of the tower. Is there
    any risk that the FAA's remedy for this situation could result in there
    being a diminished number of takeoffs or landings allowed by any types
    of aircraft at SeaTac International?
        Answer. In August 2003, the FAA Northwest Mountain Regional
    Management Team chartered a cross-organizational regional working group
    to develop a proposal that mitigates the ATCT height, ensures an
    equivalent level of safety, and meets the planned capacity at SeaTac.
        The working group evaluated eleven potential mitigation strategies
    and ranked them with regard to the potential of ensuring an equivalent
    level of safety, maintaining current and planned capacity at SeaTac,
    and the feasibility of effecting the strategy. The strategies include
    radar-monitored final approach aid, redirecting slower speed category
    aircraft, advanced avionics, policy changes, special procedures, and
    improved radar surveillance systems.
        The FAA Flight Technologies and Procedures Division is conducting
    modeling and analysis to evaluate the feasibility and to determine the
    full impact of implementing the mitigation proposals. This analysis is
    expected to be completed this month, and should allow for
    implementation of a strategy well in advance of the September 2006 date
    when Runway 16L is scheduled to become an ``all weather'' runway.

                     JOINT PLANNING AND DEVELOPMENT OFFICE

        Question. I believe that the subcommittee is now prepared to
    approve your reprogramming request to launch the Joint Planning and
    Development Office (JPDO). I support this initiative and the
    interagency efforts that are supposed to be brought together by DOD,
    NASA, the White House and the Departments of Commerce, Defense and
    Homeland Security. Are you at all concerned that you will not gain the
    level of cooperation from the other Federal agencies that you need in
    order for the JPDO to fulfill its mandate?
        Answer. The subject of our Air Transportation System is no longer
    solely an FAA interest. All six members of the JPDO recognize the need
    for close cooperation in this area. We have formed the JPDO and have
    representatives and principals, from all six members actively engaged
    in JPDO activities and working to develop the first edition of the
    national plan. This year's plan will provide the foundation for the
    following years' plans. We are also developing an MOU that will further
    define responsibilities and resources necessary to make the JPDO
    successful.
        Question. I understand your budget is allocating only $5 million a
    year to this initiative. Do you think that level of funding will
    demonstrate a strong enough commitment on the part of the FAA to bring
    all of the other agencies to the table in a meaningful way to develop
    the next generation of our aviation infrastructure?
        Answer. Basic financial support for the JPDO in fiscal year 2004
    came from both FAA and NASA. The FAA contribution was $4.4 million and
    NASA's was $5.38 million. Other members of the office contributed
    employees and some contractors. The fiscal year 2005 FAA budget will
    allow the office to hire 3 FTE and expand our work to begin limited
    integration. The office will rely on NASA to support the needed
    research for the program. Several interested groups, including our own
    Executive Advisory Committee, have recommended that we rapidly expand
    our systems integration activity. We are now studying this
    recommendation. If we decide that it is necessary to move more quickly
    in the systems integration area, it will cause us to modify our
    request.
        The FAA continues to strongly support the formulation of a national
    plan for the next generation air transportation system. The $5 million
    is for the support of the JPDO office itself. The national plan will
    encompass significant resources throughout the participating
    organizations of the Department of Transportation (FAA), Defense,
    Homeland Security, Commerce, and NASA.

                 TERMINATION OF LONG-TERM PROCUREMENT PROJECTS

        Question. Ms. Blakey, when you look at the projects that you have
    shelved because of the need to cut $400 million out of your procurement
    budget, they appear to be those projects that were scheduled for
    deployment in the more distant future. However, they also represent
    some of the most critical projects necessary for taking the technology
    of our air traffic control system to the next level. For example, your
    agency is pulling the plug on its so-called Data Link Communications
    System, where aircraft sends a stream of data to air traffic
    controllers so that all that information does not need to be
    communicated by voice. This subcommittee has made significant
    investments in your Free Flight initiative and, by your agency's own
    admission, the full deployment of data link is essential to getting the
    maximum utility out of your Free Flight initiative. Part of the
    rationale that you have given as to why we can set these projects aside
    is because the financially strapped airlines are not yet in a position
    to equip their aircraft with this most up-to-date equipment. Isn't it
    true, however, that the FAA has not customarily waited to modernize the
    system until the airlines are ready, willing and enthusiastic about
    deploying new equipment?
        Answer. The FAA has always considered our partners in the airlines
    when making major investment decisions, particularly those that require
    reciprocal equipage on their part in order to achieve real operational
    improvements. When there is a commitment to equip on their part, the
    FAA has moved out smartly to invest in the ground infrastructure and
    procedure development side. A case in point is Domestic Reduced
    Vertical Separation Minimum (DRVSM). Alternatively, when an equipage
    commitment from the airlines is less firm, the FAA has adopted a
    rational ``go slow'' approach wherein the FAA has developed the
    technology and fielded it in a limited number of locations. In cases
    where the airlines need to defer investments, it is prudent for FAA to
    do the same. Two cases in point are Controller-Pilot Data Link
    Communications (CPDLC) and the Local Area Augmentation System (LAAS).
        Question. Is not there a real risk that we will dramatically slow
    the advancements that we make in modernizing our air traffic control
    system if we wait and wait and wait until the airlines say that they
    are ready to make the investment?
        Answer. Capital investments that do not achieve improvements in
    operational efficiency due to airline non-equipage simply increase the
    FAA's costs without improving performance. In business terms, there is
    no return on the investment. Such investments should be eliminated. On
    the other hand, investments that modernize our system, but do not
    require airline equipage (e.g., ERAM and Terminal Modernization) will
    continue because they will achieve operational efficiencies and
    performance.

                              RULEMAKING AUTHORITY

        Question. Your agency has the authority to require safety
    improvements to aircraft when you believe that they are beneficial for
    safety and the most efficient use of the air space. Have you given up
    on using that tool to advance improvements in our aviation system?
        Answer. The FAA has rulemaking authority. The FAA ranks each
    proposed rule in terms of its safety effect. The FAA then does a cost-
    benefit analysis to make sure the proposed rule is worth its cost,
    which is ultimately borne by the flying public.
        A recent example of the FAA's use of rulemaking authority to
    require safety improvements to the aircraft is the insulation
    flammability rule which was issued on July 14, 2003, which is designed
    to reduce the flammability of aircraft insulation (and thereby prevent
    the spread of fire). This rule requires manufacturers of new airplanes
    that enter service after a phase-in period to equip them with
    insulation that passes improved flammability test and requires air
    carriers, operating under Part 121, to use insulation meeting the new
    flame propagation requirements when they replace insulation.

                         SECURITY AT THE AUBURN TRACON

        Question. In the age of heightened security, it has become even
    more important that we make sure that our air traffic control
    facilities have sufficient security measures in place. It was reported
    a few weeks ago that the TRACON facility in Auburn, Washington that is
    about to be completed would not be provided security guards even though
    the FAA built a guardhouse at the facility. Ms. Blakey, can you explain
    to us why you decided to forego security at this particular air traffic
    facility in Auburn?
        Answer. FAA considers a number of factors when determining security
    requirements for its facilities. These include employee population,
    physical size, and the criticality of the facility to the National
    Airspace System. When developing security requirements for an
    individual facility, these factors plus an evaluation of local area
    risk and geography are used.
        When the Seattle Terminal Radar Approach Control (TRACON) facility
    was designed and built, guards were required by FAA policy. Since then,
    FAA has migrated away from using guards at this type of facility. The
    main reason is our analysis of the security risks to these facilities,
    as well as the maturing of other aspects of FAA's Facility Security
    Management Program. In short, FAA determined that sufficient safeguards
    exist at facilities of this type, making a guard force unnecessary.
    Existing security measures at the Seattle facility include an extensive
    camera system that monitors key areas, and a secure access system for
    the property and building. In addition, the facility meets the
    security-required setbacks and has security fencing.
        The policy change that removed the requirement for guards was put
    into effect in August 2003. We now reserve guard use at TRACON
    facilities that are significantly larger than the Seattle TRACON.
        Even though the national policy shifted, with designs completed and
    construction underway, it was prudent to continue with the planned
    security measures. The guardhouse will provide us with future
    flexibility without incurring additional cost. We will provide guard
    services if the TRACON meets the established criteria for such measures
    in the future.
                                     ______

                    Questions Submitted by Senator Herb Kohl

                                     LORAN

        Question. In recent years, this subcommittee has provided nearly
    $120 million to the FAA and the Coast Guard to modernize the LORAN
    infrastructure through an existing Memorandum of Agreement between the
    agencies and DOT that was last updated in 2003. This work continues to
    be one of my important priorities. Repeated technical and economic
    studies by government, academics, industry and others provide
    convincing evidence of the need for and benefits of LORAN as a cost-
    effective national asset to back up satellite navigation technology.
    Numerous infrastructure safety and efficiency improvement projects have
    already been completed and many other projects necessary to complete
    the modernization effort are already underway. LORAN is United States
    technology that is among the most widely used radio navigation systems
    worldwide and, aside from satellite technology, it is the only other
    multi-modal navigation system available to meet our national
    transportation system safety and security objectives. Over the past
    several years, DOT has promised to formulate a policy dealing with the
    long-term future of LORAN. What is the status of such a policy?
        Answer. The FAA, in conjunction with Coast Guard, academic, and
    industry team members, delivered a technical report to DOT on March 31,
    2004. This report evaluated whether LORAN could satisfy the current
    non-precision approach (NPA), harbor entrance approach (HEA), and
    timing and frequency requirements, and its capability to mitigate the
    impact of GPS outage on GPS position, navigation, and time
    applications. Similarly, the Volpe National Transportation System
    Center delivered their independent LORAN Benefit/Cost analysis to DOT
    on the same date. The administration will make a policy decision on
    LORAN following review of these reports.
        Question. What is the FAA doing to ensure the continuation of a
    modern and secure LORAN system?
        Answer. The FAA has utilized the funding provided by the
    subcommittee to significantly modernize the LORAN system
    infrastructure. Working closely with the United States Coast Guard, the
    three aging tube transmitters have been replaced with modern, state-of-
    the-art solid state transmitters, new timing and frequency equipment
    has been installed, and each LORAN station has been supplied with three
    new cesium clocks. LORAN stations have also installed uninterruptible
    power supplies to preclude even momentary outages during power outages.
    The FAA has also conducted significant research in modern LORAN
    receiver technology and has developed prototypes for aviation and
    maritime users and for other potential markets. It should be noted that
    the administration does not support funding for LORAN in DOT. Funding
    for LORAN should be provided to the Coast Guard since it is primarily a
    maritime system.

                       FAA POLICY ON AIRSPACE VIOLATIONS

        Question. On January 15, a pilot of a small Cherokee airplane took
    a 4-hour flight that took him through the approach path of Philadelphia
    International Airport, buzzed commercial airliners and the Philadelphia
    Naval Shipyard, and came within a quarter-mile of the cooling towers of
    the Limerick nuclear power plant. When the small plane finally landed,
    the pilot's blood alcohol level measured 0.15. While the pilot could
    face charges of risking a catastrophe and reckless endangerment, the
    incident also highlighted an important deficiency in the FAA's ability
    to deal with such situations. While air traffic controllers and
    supervisors followed required protocol, it's clear that the current
    system is lacking in terms of both prevention and enforcement of
    airspace violations. What is the FAA policy on dealing with airspace
    violations?
        Answer. The FAA's policy is to administer enforcement action on
    airspace violations. The FAA takes seriously the willful violation of
    Federal Aviation regulations. The range of enforcement sanctions can
    include warning letters, fines or certificate action, such as
    revocation. In the case mentioned, the pilot's license was revoked
    within 7 days of the incident.
        Question. What would the FAA need in order to develop a quicker
    response system, one that could account for any such airspace
    violations in the future?
        Answer. Aircraft that are flying in Visual Flight Rules (VFR) mode
    are required to display a beacon code of ``1200,'' however, aircraft
    flying outside of controlled airspace (i.e., outside the Philadelphia
    International Airport Class B), have no requirement for the pilot to
    talk to air traffic controllers or file a flight plan. This VFR mode
    allows pilots a great deal of freedom in operating their aircraft,
    while reducing the burden on the National Airspace System of
    identifying and talking to every aircraft. On a clear weather day, VFR
    aircraft can be counted in the hundreds, especially in large
    metropolitan areas of the country. It would be an overwhelming burden
    on air traffic controllers to identify and separate these aircraft from
    one another.
        When the identity of an aircraft is known and the air traffic
    controller has the ability to talk to that aircraft, the pilot is given
    instructions to avoid a restricted area. When a violation has occurred,
    the pilot is advised of the error and instructed to call the
    appropriate FAA facility for a briefing and follow-up with the Flight
    Standards District Office (FSDO), which can take place immediately or
    several hours after the incident.
        In the January incident, air traffic controllers were able to
    observe the aircraft's target on the radar scope for a portion of its
    flight, but never communicated with the pilot; many attempts to contact
    the pilot on ``Guard frequency 121.5'' were unsuccessful. To prevent
    situations like this, it would be necessary to change the rules for
    flying in VFR conditions by requiring two-way communications with air
    traffic controllers, discrete beacon code assignment, and mandatory
    filing of flight plans. The NAS is not capable of handling these
    capabilities at this time.
        Question. Would you agree that we should strengthen Federal law as
    it applies to airspace violations?
        Answer. The FAA does not believe that any changes to Federal law
    are necessary to address airspace violations. The current sanctions
    that we have available, i.e., suspending or revoking pilot certificates
    and imposing civil penalties, have proven to be sufficient. The agency
    rarely sees reckless violations of the sort committed by the pilot in
    Philadelphia. That pilot's certificate was revoked on an emergency
    basis. In addition, he was charged with State criminal violations for
    his conduct.
                                     ______

                Questions Submitted by Senator Richard J. Durbin

                      CHICAGO O'HARE INTERNATIONAL AIRPORT

        Question. How do you expect to proceed on addressing aviation
    congestion and flight delays at Chicago O'Hare International Airport in
    addition to the temporary, voluntary flight reductions during peak
    hours? When will data on the flight reductions be available?
        Answer. In Vision-100, Congress gave the FAA a number of new tools
    to use when demand exceeds capacity at an airport. Under Section 422,
    the FAA can schedule delay reduction meetings, under Section 423, we
    can engage in collaborative decision making.
        United Airlines, Inc. (UAL) and American Airlines, Inc. (AAL),
    agreed to an order cutting peak hour operations by 7.5 percent--5
    percent in March and 2.5 percent starting in June. The Department of
    Transportation and the FAA deferred convening a schedule-reduction
    meeting under Section 422, in order to allow the operational limits to
    take effect and assess the impact on congestion and delay. The orders
    currently expire on October 31, 2004.
        To augment these reductions, on June 13, 2004, FAA adopted new air
    traffic procedures for use under certain runway combinations at O'Hare
    that increases capacity and efficiency, especially for departing
    flights, by several operations each hour when conditions permit. The
    FAA is currently monitoring the results of the recent changes in
    schedules and procedures. We will analyze the operation under various
    weather conditions over the coming weeks before determining whether
    additional action is required.
        The total daily flight reduction as a result of the 7.5 percent
    reduction by UAL and AAL has been 91 total flights during the most
    congested hours of 12 noon until 8 p.m. Many of these flights have been
    shifted to other hours. These are all short-term methods, with the
    long-term goal of addressing congestion by gaining additional capacity
    at the airport and throughout the National Airspace System. This
    administration is committed to addressing aviation congestion in both
    the short and long term and working with the carriers and local
    authorities.
        Question. Can you explain the time line, including the EIS, for the
    O'Hare modernization project?
        Answer. The City of Chicago is proposing a substantial
    reconfiguration of O'Hare International Airport under an initiative
    called the O'Hare Modernization Program (OMP). The city submitted a
    draft Airport Layout Plan (ALP) depicting the OMP proposal to FAA in
    December 2002 and a Master Plan document in February 2004. FAA comments
    on the ALP were provided to the city in mid-2003. Based on those
    comments, the city presented a revised ALP to FAA in October 2003. The
    FAA is also reviewing the Master Plan and preparing an Environmental
    Impact Statement (EIS) regarding the OMP proposal. Ultimately, the FAA
    must issue a favorable EIS Record of Decision and subsequently approve
    the ALP before the City of Chicago can begin construction.
        The ALP and Master Plan review are ongoing at this time, and the
    EIS process is underway. On April 15, 2004, the FAA issued a letter to
    the City of Chicago outlining FAA's projected EIS schedule. The
    projected schedule reflects availability of a Draft EIS in February
    2005 and an EIS Record of Decision in September 2005.
        The EIS schedule was developed after extensive coordination between
    the FAA, its EIS contractor, and all involved subcontractors. The FAA
    sees the projected EIS schedule as an aggressive but achievable
    schedule, with significant effort having been devoted to streamlining
    the EIS process while simultaneously assuring the thoroughness and
    integrity of the process. FAA's efforts in regard to process
    streamlining include the development of written agreements with other
    involved government agencies that will yield efficiencies in our
    collective effort to complete an environmental assessment of the OMP
    proposal.
        The City of Chicago projects the commissioning of its first new
    runway approximately 30 months after receipt of FAA approval.
    Approximately 2 years thereafter, the city projects the commissioning
    of its second new runway as well as the extension of one of O'Hare's
    existing runways. In total, the city projects a 10-year time frame for
    full implementation of the OMP. Throughout this period, substantial FAA
    work will be required to support the numerous National Airspace System
    changes necessitated by the OMP. The FAA is currently engaged in
    planning work associated with these NAS changes so as to be prepared
    for implementing the changes should the OMP be approved.

                       CHICAGO MIDWAY AND O'HARE AIRPORTS

        Question. I would like to ask you to look into two Chicago Airport
    System projects that were included in the fiscal year 2004 Omnibus
    Appropriations conference report (Transportation-Treasury title), at my
    request. First, $4 million for various improvements at Midway Airport
    related to capacity expansion. And second $1.5 million for CAT II/III
    instrumentation for Runway 27L and Runway 27R at O'Hare. It is my
    understanding that the FAA has not yet released funding. Please explain
    any outstanding issues within the FAA related to these projects and
    give me an estimate as to when the funding will be released?
        Answer. Regarding the $4 million for airport improvements at
    Midway, the airport originally desired to use the Airport Improvement
    Program discretionary funds to help finance expansion of passenger
    screening capacity in the terminal. Terminal work of this kind cannot
    be funded with discretionary funding. Working with the airport, FAA has
    identified other projects of high priority for the airport and FAA that
    can be financed with discretionary funds. We are in the process of
    increasing the airport's existing Letter of Intent by $4 million to
    include these items. We expect to notify Congress of our intention to
    issue the grant for these funds within 30 calendar days following
    completion of all environmental documentation.
        The upgrade of Runway 27L and Runway 27R at Chicago O'Hare is an
    on-going FAA project with $4 million of fiscal year 2003 funding
    already obligated on the National Construction Contract to do the work.
    The FAA is currently conducting the environmental assessment and
    engineering design. The ILSs and ALSF-2s have been purchased. The $1.5
    million in fiscal year 2004 funding completes the estimated $5.5
    million project. FAA plans to obligate the remaining funds by October
    2004 to start construction activities.
                                     ______

           Questions Submitted to the Office of the Inspector General
                Questions Submitted by Senator Richard C. Shelby

        Question. What do you believe is the most significant safety
    concern facing FAA?
        Answer. As air traffic operations increase and the demand for air
    travel rebounds, there are two safety indicators to watch--runway
    incursions (potential collisions on the ground) and operational errors
    (when air traffic controllers allow planes to come too close together
    in the air). Runway incursions and operational errors pose a
    significant safety risk. We have seen some progress on runway
    incursions, with the number of incidents decreasing in fiscal year 2003
    and continuing to decline during the first 8 months of fiscal year
    2004; however, the most serious runway incursions increased. In
    addition, operational errors increased in fiscal year 2003 with an
    average of three operational errors each day and one serious error
    (those rated as high risk) every 7 days. Although operational errors
    decreased marginally during the first 8 months of fiscal year 2004,
    they are still much too high.
        In addition, while FAA and U.S. air carriers have maintained a
    remarkable safety record, a significant emerging issue for FAA will be
    to adjust its safety oversight to changing trends in the aviation
    industry. For example, in response to record-breaking monetary losses,
    major air carriers are making unprecedented changes, such as
    outsourcing more of their aircraft maintenance. While major air
    carriers outsourced 37 percent of their aircraft maintenance expense in
    1996, the amount spent on outsourced maintenance increased to 50
    percent in 2003.
        Another trend FAA will need to monitor is the growth of low-cost
    and regional air carriers. While network air carriers have been losing
    money and restructuring their operations, low-cost air carriers have
    experienced phenomenal growth and have increased their market share of
    passengers from 17 to 22 percent. This trend is projected to continue
    with FAA forecasting that low-cost and regional air carriers will
    account for more than 50 percent of the passenger market share in 2015.
        Question. What progress is the FAA making on addressing the long-
    standing problems in its procurement process? Has procurement authority
    that Congress gave the FAA improved or hindered the FAA's ability to
    deliver capital programs?
        Answer. First, with respect to acquisition reform, Congress gave
    FAA two powerful tools in 1996 by granting relief from Federal
    personnel and procurement rules, both of which the agency believed were
    hindering its ability to modernize the National Airspace System. FAA
    has not taken full advantage of this flexibility. Our work shows
    procurement reform at FAA has produced mixed results. While contracts
    are awarded faster, there has been little bottom line impact on cost
    and schedule problems with major acquisitions. For example, last year
    we analyzed 20 major acquisitions and found that 14 of these projects
    experienced cost growth of over $4.3 billion, which represents
    considerably more than 1 years' annual appropriation for modernizing
    the National Airspace System.
        Administrator Blakey and her team are well aware of the problems
    with major acquisitions, such as entering into long-term cost plus
    contracts before requirements are understood, unreliable cost and
    schedule baselines, and poor contract management, that have led to
    significant cost growth and schedule slips. FAA now has a chief
    operating officer and is transitioning to a performance-based
    organization for air traffic, and plans to change how the agency
    procures new air traffic control equipment. The key will be follow-
    through.
        Question. When and at what cost do you expect the FAA to have fully
    functional ATOP systems replace the obsolete technology in Anchorage,
    New York, and Oakland Centers?
        Answer. FAA's schedule calls for completing the installation of the
    last ATOP facility, Anchorage, in March, 2006. FAA's cost estimate to
    develop and field ATOP is $548 million (from the Facilities and
    Equipment Account) with an additional $1.06 billion to maintain and
    operate the system over its useful life (which is paid for through the
    Operations Account).
        ATOP is approaching a key milestone at the end of June 2004--
    completing site testing at Oakland. If FAA can successfully complete
    site tests, necessary training, and satisfy any last minute needs of
    Oakland users, agency officials believe that the program will probably
    move forward within its cost and schedule goals and deploy ATOP as
    planned to New York (March 2005) and Anchorage (March 2006). However,
    if Oakland experiences significant delays to the current schedule, or
    unforeseen defects are uncovered, the entire ATOP program will be
    vulnerable to additional cost growth and schedule delays.
        Question. It seems as if the STARS procurement is through the most
    difficult phase of the procurement cycle and your testimony indicates
    that the anticipated resources for this program will decline in the
    coming years.
        How do you compare the relative risk remaining in the program
    compared to other major FAA programs such as WAAS, ASR-11, or ERAM?
        Answer. Unfortunately, STARS is not past the point where
    procurement no longer presents difficult issues, and it is unclear what
    budgetary resources FAA will need to finish terminal modernization.
    Questions continue to persist about how much STARS will cost to
    complete and what capability it will actually provide. As described
    below, all four of these programs contain significant risk with respect
    to cost, schedule, and performance.
        FAA has changed its terminal modernization strategy significantly.
    As a result, the cost assumptions that drove STARS are no longer valid.
    For example, the STARS 1996 baseline estimated a cost of $940 million
    for 172 sites with a completion date of 2005. Due to cost and schedule
    concerns, FAA recently limited approval to 50 sites at a cost of $1.45
    billion. However, the total cost and timeframe for completing the
    entire terminal modernization program remains uncertain. Beyond 50
    sites, FAA estimates STARS funding (assuming a full STARS solution)
    will peak at $270 million in 2008. This funding estimate is only a
    placeholder until FAA decides in 2005 how it will complete terminal
    modernization and how much it will cost overall.
        WAAS, like STARS, has experienced considerable cost growth and
    schedule slips and was pursued under a cost-plus contract. FAA believes
    much of the developmental risk is behind WAAS but, unlike STARS,
    airspace users must equip with new avionics to obtain benefits. Now,
    the risks for WAAS focus on (1) effectively managing a contract for
    obtaining geostationary satellites (to broadcast the WAAS signal), (2)
    how quickly airspace users will equip with WAAS avionics, and (3)
    developing and publishing procedures for pilots to use WAAS approaches
    to airports.
        Since we testified before the subcommittee, we learned that FAA
    intends to pursue Category I performance for WAAS in the 2007 timeframe
    to take advantage of the Department of Defense's plan to modernize the
    GPS constellation (with a second civil frequency). This presents a
    number of issues that must be resolved. For example, there is a great
    deal of uncertainty about how quickly the Department of Defense will
    modernize GPS and what will happen with the Local Area Augmentation
    System (a precision landing system for Category I, II, and III that
    recently slipped back into development). Unresolved issues also focus
    on concerns about user equipage and procedure development. As a result,
    consideration should be given to withholding funds for the pursuit of
    Category I until these issues have been resolved.
        In comparison to STARS, the ASR-11 program faces lower performance
    and cost risks. This is because the ASR-11 needs little additional
    development work to deploy to its remaining sites. However, the program
    does face cost risks in two areas. Because development was delayed,
    procurements have been pushed into the future. This has caused prior
    cost estimates to grow. Also, the contract, which is administered by
    the Department of Defense, will expire before FAA will finish procuring
    all of the needed sites. If the Department of Defense terminates the
    contract or does not extend the production timeframe, FAA will not have
    a contract in place to complete the program. In either case, new, and
    probably higher, costs will have to be negotiated with Raytheon.
        At this time, it is difficult to compare the relative risks of
    STARS to the $2.1 billion ERAM effort because it is too early to
    determine if FAA can manage ERAM risks. In contrast to STARS, which has
    been underway for 8 years, ERAM is just getting started, and major
    design and development issues are not settled. FAA is less than 18
    months into an ERAM program that will span over 7 years. FAA plans to
    rely on a phased approach to deliver hardware and software with reduced
    risk. Cost control will be essential because ERAM is being purchased
    through a cost-plus contract but the contract (currently worth $1.2
    billion) is not fully definitized. We plan to issue a report on ERAM
    this year.
        Question. Do you believe that FAA is prepared to address a
    potential retirement surge of air traffic controllers in 2007?
        Answer. FAA is just beginning to address a likely surge in
    controller retirements over the next several years. In our opinion,
    there are three key issues the Agency needs to focus on in order to
    effectively address the expected increases in attrition. Those are:
      --developing better attrition estimates by location;
      --assessing newly hired controllers' abilities before they are placed
            at facilities; and
      --determining ways to reduce the time and costs associated with
            controller on-the-job training while still achieving results.
        FAA has agreed with the recommendations in our June 2004 report and
    is taking steps to address them; the key now will be follow-through. An
    important milestone is December 2004 when FAA plans to release a
    detailed human capital plan for addressing controller retirements as
    required under FAA's Reauthorization--Vision-100.
        Question. The subcommittee remains concerned over the use of air
    traffic controllers acting as controllers-in-charge and the rising
    number of operational errors under their watch. Mr. Mead, you testified
    last year that there is a statistical correlation between operational
    errors and the controller-in-charge program.
        What conclusions can you draw from the data a year later?
        Answer. Since we testified in 2003, the number of operational
    errors that occurred while a controller-in-charge (CIC) was supervising
    an area has continued to increase. In fiscal year 2003, operational
    errors that occurred while a CIC was supervising an area increased 43
    percent to 248 from about 174 in fiscal year 2002. Further, during the
    first 8 months of fiscal year 2004, preliminary data indicates that
    operational errors that occurred while a CIC was supervising an area
    increased slightly to 161 compared to 155 during the same period in
    fiscal year 2003. In our April 2003 report we recommended that FAA
    conduct detailed evaluations of those facilities that have significant
    increases in operational errors while CICs are on duty to determine the
    cause of the increases. FAA agreed with our recommendation and
    committed to conduct detailed reviews of operational errors to identify
    causal factors. This analysis will include monitoring the impact the
    expanded CIC program has on operational errors. FAA stated that if the
    CIC actions result in an operational error, steps will be taken to
    ensure that only qualified controllers are performing CIC duties. We
    will continue to monitor this important matter.

                    IS THE FAA'S OCEANIC PROGRAM IN TROUBLE?

        Question. Mr. Mead, at the end of March, your office released a
    status report on your agency's ongoing review of the FAA's Advanced
    Technologies and Oceanic Procedures (ATOP) program. Your review
    uncovered serious software problems with ATOP and noted that the FAA
    may have shifted some of the risk of additional cost growth from the
    contractor to the government. This was one project where the FAA seemed
    to have had costs under control because they had a firm fixed contract.
        Why in your view, did the FAA add $11 million to this contract if
    the government had the contractor under a firm fixed contract?
        Answer. Facing growing risks that ATOP would not meet its June
    schedule for starting operations at Oakland Center, FAA decided to add
    $11 million to the fixed-price contract to meet ATOP's schedule. This
    allowed the contractor to focus additional resources to fix software
    development problems at the government's expense. The contractor had
    staff working on a later and more advanced software version of ATOP
    even though the first software version was experiencing problems. In
    essence, the modification allowed FAA to shift resources to help get
    the basic ATOP system to Oakland as planned.
        Question. Mr. Mead, are you concerned that the FAA will continue to
    expose the government to higher costs in this program even though this
    project is under a firm fixed contract?
        Answer. Although the increase of $11 million is modest when
    compared to increases we have seen with other programs, we are
    concerned FAA has shifted the risk of additional cost growth from the
    contractor to the government. The critical issue is what happens with
    ATOP between now and February 2005. This timeframe is important because
    the recent contract modification limits the contractor's responsibility
    for paying to fix software problems FAA finds in ATOP after February
    28, 2005. According to FAA, after work on the initial version of ATOP
    software (required for Oakland) is completed, the Agency will test the
    more advanced version at its Atlantic City Technical Center by the end
    of this year. After February 2005, FAA must pay to fix software
    problems that are found. Given the change in the contract and the tight
    timeframe, it will be critical for FAA to identify all software
    problems before that date.
        Question. Given the problems to date, how confident are you that
    this program will continue to stay on schedule and within budget?
        Answer. FAA built additional time into the ATOP schedule to handle
    unanticipated problems, but most of this schedule reserve was consumed
    resolving problems discovered during factory acceptance testing
    (completed in July 2003), which took much longer than anticipated. FAA
    is fast approaching another key program milestone for ATOP that will
    determine if it will stay on track. If ATOP can successfully pass site
    acceptance tests at Oakland in June 2004, FAA's ability to stay within
    schedule and budget will be strengthened.
        Question. Mr. Mead, do you have any concerns that the FAA might
    rush to deploy the Oakland system before the FAA workforce is fully
    prepared to operate and maintain the system?
        Answer. While we do not believe that FAA will deploy an air traffic
    control system to Oakland that the workforce could not safely operate
    and maintain, we are concerned that the ATOP program has become
    schedule driven. As we saw with STARS, as the pressure builds to meet
    the scheduled milestone, FAA might defer needed work just to stay on
    schedule. For example, FAA said it would install the nationally
    deployable version of STARS at Philadelphia in November 2002, but the
    agency made a number of trade-offs to meet the schedule. FAA estimates
    now show that 2 more years and $59 million are needed to complete the
    development of a STARS system that can be deployed nationally. After
    FAA deploys ATOP to Oakland, and once the system is fully operational,
    the agency needs to communicate to the Congress and other key
    stakeholders any trade-offs or deferments made to maintain schedule.

                           AIRPORT REVENUE DIVERSION

        Question. Mr. Mead, your office has put a spotlight on the issue of
    airport revenue diversion with your recent report on San Francisco
    International Airport and your current review of potential revenue
    diversion at Los Angeles International Airport. Your testimony suggests
    that the FAA is not exercising adequate oversight in this area.
        How rampant is the problem of airport revenue diversion?
        Answer. The problem of airport revenue diversion has been
    extensive. Between 1991 and 2000, our audits disclosed over $344
    million in diverted revenue. The problem, however, has not subsided.
    Last year, we reported on revenue diversions at five large airports,
    including one airport whose sponsor, a local government agency,
    diverted about $40 million to other projects not related to the
    airport. We also just completed an audit at San Francisco International
    last month which disclosed about $12 million in diverted revenue.
        Our work shows that FAA's oversight of revenue diversions is
    limited. In the past, FAA has maintained that it did not have the
    resources to devote to this issue. We met with the Associate
    Administrator for Airports and members of her staff in May 2004 to
    discuss FAA's specific plans to increase the agency's oversight of
    revenue diversions. FAA is currently working on a plan that is designed
    to identify airports with the highest risk of diverting revenue. We
    recently provided the agency with our methodology for determining
    whether or not airport revenues have been diverted. We will continue to
    monitor this issue and work with FAA.

                 EXPLANATION FOR INCREASE IN OPERATIONAL ERRORS

        Question. Mr. Mead, according to your testimony, in fiscal year
    2003 the number of operational errors increased 12 percent.
        To what extent do you believe this spike in operational errors is
    attributable to the vacant positions that the FAA has at many of its
    air traffic control facilities?
        Answer. We have not performed work to determine if there is a
    correlation between air traffic control staffing and operational
    errors. However, it is important to note that although fairly accurate
    at the national level, FAA's staffing standards for each field location
    are not precise. The National Academy of Sciences reviewed FAA's
    staffing standards in 1997 and found that they cannot be used to
    provide highly accurate estimates of requirements for individual
    facilities. We have seen, however, indications that staffing workload
    can increase operational errors. Our analysis found that as air traffic
    operations decreased nationwide, operational errors decreased.
    Conversely, as operations increase nationwide, more opportunities
    existed for operational errors to occur.
        Question. A small part of the pay raise that would be granted to
    air traffic controllers is dependent on a reduction in operational
    errors and yet operational errors have increased.
        Mr. Mead, what are the reasons that you believe that operational
    errors have increased, and what is your assessment of FAA's efforts to
    reduce them?
        Answer. As we noted in our April 2003 report there are a number of
    factors that contribute to the cause of operational errors and whether
    FAA is successful at reducing these incidents. Specifically, we found
    that (1) FAA needed to provide stronger national oversight of regions
    and facilities that were not making progress in reducing operational
    errors, (2) FAA procedures did not require training when controllers
    had multiple operational errors or for controllers who had errors that
    posed a moderate or high safety risk, and (3) FAA's expanded
    controller-in-charge program may have had a negative impact on
    operational errors. While FAA has made some progress in reducing these
    incidents during the first 8 months of fiscal year 2004, operational
    errors are still too high with three operational errors occurring each
    day and one severe error every 9 days.
        In response to our report, FAA established a permanent national
    program manager for quality assurance responsible for the overseeing
    regional and facility efforts to reduce operational errors. Under FAA's
    new Air Traffic Organization structure, this manager (Director of
    Safety Evaluations) reports directly to FAA's Vice-President for
    Safety. This group plans to conduct 161 air traffic facility safety
    evaluations during fiscal year 2004, including no-notice reviews.
        FAA also revised its training requirement so that controllers with
    multiple operational errors can be trained. However, FAA did not
    mandate that controllers who make operational errors that posed a
    moderate or high safety risk receive training. Finally, FAA agreed with
    our recommendation to monitor the impact of the CIC Program at the
    national level.

                IS THERE ADEQUATE SECURITY AT THE AUBURN TRACON?

        Question. In this age of heightened security, it has become even
    more important that we make sure that our air traffic control
    facilities have sufficient security measures in place. It was reported
    a few weeks ago that the TRACON facility in Auburn, Washington that is
    about to be completed will not be provided security guards even though
    the FAA built a guardhouse at the facility.
        Mr. Mead, do you have any views on the overall security of the air
    traffic control facilities?
        Answer. Security is important for all DOT personnel and equipment;
    this is especially true for critical facilities such as FAA air traffic
    control facilities. We are aware of reports that air traffic
    controllers moving into the new TRACON in Washington will not have
    armed security guards, because there will not be a sufficient number of
    employees at the facility to justify security guards based on FAA
    regulations. The new TRACON contains a guardhouse specifically built so
    two guards could monitor the 16 remote-controlled cameras and other
    security equipment. We plan to begin an audit this fall, which will
    assess FAA's Internal Security Program and whether FAA is ensuring
    adequate protection of FAA property, personnel, and operations against
    criminal and terrorist acts.

                             CONCLUSION OF HEARINGS

        Senator Shelby. I want to thank both of you on behalf of
    the subcommittee for the work you are putting in and we hope
    you are going to continue down that right road that you are
    going. Thank you.
        The subcommittee is recessed.
        [Whereupon, at 11:45 a.m., Thursday, April 22, the hearings
    were concluded, and the subcommittee was recessed, to reconvene
    subject to the call of the Chair.]

      DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND
              RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2005

                                  ----------

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.

        MATERIAL SUBMITTED BY AGENCIES NOT APPEARING FOR FORMAL HEARINGS

        [Clerk's Note.--The following agencies of the Subcommittee
    on Departments of Transportation, Treasury and General
    Government, and Related Agencies did not appear before the
    subcommittee this year. Chairman Shelby requested these
    agencies to submit testimony in support of their fiscal year
    2005 budget request. Those statements submitted by the chairman
    follow:]

                 SAINT LAWRENCE SEAWAY DEVELOPMENT CORPORATION

             Prepared Statement of Albert S. Jacquez, Administrator
        The U.S. Saint Lawrence Seaway Development Corporation (SLSDC or
    Corporation), a wholly owned government corporation and an operating
    administration of the U.S. Department of Transportation (DOT), is
    responsible for the operations and maintenance of the U.S. portion of
    the St. Lawrence Seaway between Montreal and Lake Erie. This
    responsibility includes maintaining and operating the two U.S. Seaway
    locks located in Massena, NY, and vessel traffic control in areas of
    the St. Lawrence River and Lake Ontario. In addition, the SLSDC
    performs trade development functions designed to enhance Great Lakes
    St. Lawrence Seaway System utilization.
        Since its opening in 1959, the binational St. Lawrence Seaway has
    been a vital transportation corridor for the international movement of
    bulk commodities such as steel, iron ore, grain, and coal, serving a
    North American region that makes up one quarter of the U.S. population
    and nearly half of the Canadian population. The binational waterway
    serves as a deep draft waterborne link between major U.S. and Canadian
    agricultural, manufacturing, and industrial cities, including Chicago,
    Detroit, Toronto, Cleveland, Duluth, Toledo, Milwaukee, Montreal, and
    Green Bay, and European, South American, and North African markets.
        The SLSDC coordinates its activities with its Canadian counterpart,
    The St. Lawrence Seaway Management Corporation (SLSMC), particularly
    with respect to rules and regulations, overall day-to-day operations,
    traffic management, navigation aids, safety, environmental programs,
    security, operating dates, and trade development programs. The unique
    binational nature of the Seaway System requires 24-hour, year-round
    coordination between the two Seaway entities.
        The SLSDC's principal performance goal is to provide a safe,
    secure, reliable, and efficient U.S. portion of the St. Lawrence Seaway
    to its commercial users. Since its opening in 1959, more than 2.3
    billion metric tons of cargo has been transported through the combined
    sections of the St. Lawrence Seaway (Montreal-Lake Ontario and Welland
    Canal) with an estimated value of more than $400 billion.
        The navigation season typically runs from late March to late
    December. During the 2003 navigation season, the availability of the
    U.S. sectors of the Seaway, including the two U.S. locks maintained and
    operated by the SLSDC, was 98.9 percent; the annual goal is 99 percent.
    Weather and vessel incidents were the causes for all delays in 2003. Of
    the remaining factors that cause lockage shutdowns, the one that the
    SLSDC has the most control over is the proper functioning of lock
    equipment. During the 2003 navigation season, there were no system
    delays due to malfunctioning lock equipment.

                        FISCAL YEAR 2005 BUDGET ESTIMATE

        The SLSDC's fiscal year 2005 budget request provides the agency
    with the funding necessary to provide a safe, secure, reliable, and
    efficient waterway system for the movement of commercial goods to and
    from the Great Lakes region of North America.
        The SLSDC fiscal year 2005 proposed level of $16,800,000, includes
    an appropriation request from the Harbor Maintenance Trust Fund of
    $15,900,000 and an estimated non-appropriated $900,000 in non-Federal
    revenues. This proposed level will allow the agency to fund its 157
    Full-Time Equivalent (FTE) staff and continue the day-to-day
    operational and maintenance programs for the U.S. portion of the St.
    Lawrence Seaway between Montreal and Lake Erie. These programs include
    managing vessel traffic control in areas of the St. Lawrence River and
    Lake Ontario, maintaining and operating the two U.S. Seaway locks, and
    continuing increased security-related activities that were initiated as
    a result of the terrorist-related events of September 11, 2001. In
    addition, the SLSDC performs trade development activities designed to
    enhance Great Lakes St. Lawrence Seaway System awareness and
    utilization.
        The request also directly supports four of the five President's
    Management Agenda (PMA) initiatives (budget and performance
    integration, strategic management of human capital, financial
    performance improvement, and electronic government expansion; the SLSDC
    is exempt from competitive sourcing as a government corporation), the
    Department's strategic goals of Global Connectivity (efficient cargo
    movement) and Security (transportation system recovery), as well as the
    SLSDC's internal strategic goals. These agency goals include: safety,
    security, and the environment; reliability and availability; trade
    development; and management accountability. The request, separated by
    Departmental strategic goals and performance measures, includes
    $15,650,000 in appropriated funds directed at maritime navigation
    programs and personnel, and $250,000 towards the SLSDC's security and
    infrastructure protection activities.
        The SLSDC's budget request also includes funding for the Seaway
    Automatic Identification System (AIS) and the agency's financial
    management system, both of which support the PMA. The AIS system, which
    serves as one of the agency's ``Expanding E-Government'' PMA
    initiatives, utilizes Global Positioning System (GPS) to allow the
    SLSDC to more efficiently manage vessel traffic control and vessel
    transits at the U.S. Seaway locks. Implemented at the start of the 2003
    navigation season, the Seaway became the first inland waterway in the
    western hemisphere to implement an operational AIS vessel traffic
    services system.
        The SLSDC's financial management system supports the President's
    ``Improving Financial Management'' initiative and includes nine
    subsystems that allow Corporation officials to track all financial-
    related information and meet all independent auditor reporting
    requirements. The SLSDC has received 40 consecutive unqualified or
    ``clean'' financial audits since its first audit in 1955, a major
    achievement under the PMA initiative of financial performance
    improvement. The AIS system and the financial management system
    represent $70,000 of the fiscal year 2005 budget estimate. This amount
    is consistent with the fiscal year 2004 request for operating and
    maintaining these two programs.

                          CONCRETE REPLACEMENT PROJECT

        The fiscal year 2005 appropriation request is $1.627 million above
    the fiscal year 2004 enacted level and is principally attributable to
    the planned start of a $6 million concrete replacement project at the
    two U.S. Seaway locks ($1.5 million each year in fiscal years 2005-
    2008). The Eisenhower Lock has a history of concrete problems, caused
    by the use of natural cement in the mix composition during the
    construction of the lock. Due to the amount of concrete in need of
    replacement, the difficulties associated with accessing these areas of
    deteriorated concrete, and the need for in-house maintenance crews to
    focus on other essential non-concrete lock maintenance projects, it is
    more efficient and cost effective for outside contractors to complete
    this project. The SLSDC's Office of Engineering has researched other
    solutions to the concrete deterioration problem and found that there
    are no other substances as effective as concrete in protecting the
    structural integrity of the lock chambers.
        The concrete replacement work to take place in fiscal years 2005-
    2008 includes areas identified by the U.S. Army Corps of Engineers
    (Corps) in its 1991 lock survey and evaluation of the two U.S. Seaway
    locks (Corps Technical Report ITL-91-4, November 1991). The report
    concluded, ``It is important for the SLSDC to maintain an aggressive
    maintenance program of replacing deteriorated concrete. In the near
    future, attention should be given to the repair of deteriorated
    concrete near the bottom of the lock walls at Eisenhower Lock.''
        Since 1991, the SLSDC has made in-house repairs to the most
    critical areas identified by the Corps, but further deterioration and
    harsh winter conditions have caused additional damage to the lock walls
    at Eisenhower Lock and newly-identified problems at the Snell Lock have
    also been targeted for replacement. In addition to concrete
    deteriorating along the lower portions of the lock walls, freeze-thaw
    damage is significant in the lock walls at high and low pool levels at
    both locks. As it deteriorates, pieces of concrete become dislodged and
    fall into the lock chambers. This poses a risk to people on the decks
    of commercial vessels and pleasure boats.
        Due to the amount of concrete in need of replacement, the
    difficulties associated with accessing these areas of deteriorated
    concrete, and the need for in-house maintenance crews to focus on other
    non-concrete lock maintenance projects, it is more efficient and cost
    effective for outside contractors to complete the project than in-house
    personnel.
        Between 1959 and 2003, the SLSDC expended more than $25 million on
    concrete replacement at the two locks during the off-season winter
    months, with the majority of work taking place at the Eisenhower Lock.
    Most of the work over that time was completed with in-house labor. The
    last major concrete replacement projects that utilized contractors were
    completed in fiscal years 1986 and 1987, at a total cost of $4.3
    million. The Seaway is a single-lock system, consisting of 15
    individual U.S. and Canadian locks; a delay/shutdown to any one of the
    locks would cause a delay/shutdown of the entire waterway. Although the
    SLSDC has never experienced a major lock failure, the Canadian Seaway
    agency suffered a lock failure at the Welland Canal in 1985, which
    trapped 53 vessels above the Canal for 24 days at a cost to the
    carriers of $24 million.

                       ENHANCED SEAWAY INSPECTION PROGRAM

        The SLSDC and the U.S. Coast Guard (USCG), in conjunction with
    Transport Canada and the SLSMC, signed a Memorandum of Understanding in
    March 1997 to develop a program of coordinated vessel inspection and
    enforcement activities to expedite the safe transit of shipping through
    the Great Lakes Seaway System. The principal goal of the Enhanced
    Seaway Inspection (ESI) program is to inspect all ocean vessels for
    safety and environmental protection in Montreal, Quebec, before they
    enter U.S. waters. Starting in 2002, security-related risk assessment
    inspections have been conducted concurrent with the ESI, further
    improving transit times for Seaway users. In 2003, the SLSDC continued
    this program and met its internal performance goal of inspecting 100
    percent of all ocean vessels in Montreal (208 total inspections).
        The ballast water exchange program continues to be an important
    function of the ship inspection program. These inspections are carried
    out concurrently with the ESIs, by Corporation personnel in Montreal.
    In 2003, 56 ballast water examinations were conducted in Montreal on
    ocean vessels transiting the Seaway. The SLSDC performed 31 ballast
    water examinations for subsequent trip vessels and eight follow-up
    examinations in Massena.
        Prior to the inception of the ESI program, foreign flag vessels
    experienced numerous delays at the U.S. locks to accommodate USCG-
    required safety-related inspections, as well as ballast water
    management activities. Inspection in Montreal eliminates duplicative
    inspections, allows for a seamless and efficient transit of the Seaway,
    and provides a better location for repair resources, if required. This
    improved inspection regime has saved each vessel, on average, 4 hours
    per transit and ensured that any safety or environmental issues are
    addressed prior to entering U.S. waters. As a result, ocean carriers
    using the Seaway saved more than $500,000 in operating costs during the
    2003 season. Seaway customers have responded favorably to the ESI
    program through annual customer surveys.

            CRITICAL INFRASTRUCTURE AND NAVIGATION SECURITY MEASURES

        The SLSDC has been proactive in implementing increased security
    measures following the events of September 11, 2001. Within days of the
    terrorist attacks, risk assessment inspections of all foreign flagged
    vessels were conducted in Montreal, prior to their entry into U.S.
    waters. This protocol was developed with the full cooperation of the
    Canadian SLSMC, as well as U.S. and Canadian law enforcement and Coast
    Guard personnel. The protocol was further refined in March 2002 when
    the risk assessment inspection was combined with the existing Enhanced
    Seaway Inspection (ESI) program. By combining the two inspections into
    a single process, foreign-flag vessels are not unnecessarily delayed
    for security screenings, unless the initial risk assessment compels an
    additional examination. During the 2003 navigation season, SLSDC
    inspectors completed 216 risk assessment inspections in Montreal.
        Security procedures, both maritime and internal, were developed to
    ensure that security was enhanced while minimizing any impacts on the
    efficiency of Seaway operations. In late 2001, SLSDC inspection
    personnel logged substantially more staff hours in carrying out the
    risk assessment protocol than normally projected. However, when the
    protocol was refined in 2002 and merged with the existing ESI program,
    this impact was ameliorated.
        Another major security milestone for the SLSDC was the expansion of
    the U.S. and Canadian Seaway mandatory Notice of Arrival requirement
    for all foreign commercial vessels. With the start of the 2002
    navigation season, all foreign ships entering the St. Lawrence Seaway
    are required to give 96-hour advance notification of arrival in
    Montreal, Quebec. Ships failing to give complete notice are prohibited
    from entering the Seaway.
        The notification requirement on the St. Lawrence Seaway is unique
    because it mandates 96 hours notice prior to arrival in Montreal, as
    opposed to all other U.S. waterways which require the notice prior to
    reaching the first U.S. port of call. This modified requirement was
    needed due to the geography of the key U.S. ports on the Great Lakes
    Seaway System, which are several hundred miles into U.S. waters and, in
    many cases, require transit of all 15 Seaway locks before reaching the
    port. The Seaway's 96-hour notification requirement provides SLSDC
    officials, as well as law enforcement and intelligence agencies, even
    more advance notice (approximately 10 additional hours) to review
    vessel crew lists and manifests before the vessel enters U.S. waters.
    The SLSDC immediately sends the pre-entry information it receives to
    the USCG, which in turn submits the information to its National Vessel
    Movement Center for screening through various law enforcement
    databases.
        Other U.S. and Canadian agencies involved in the development of
    both the risk assessment inspection program and 96-hour notification
    requirement included Transport Canada, Citizenship and Immigration
    Canada, Canadian Navy, Royal Canadian Mounted Police, U.S. Customs,
    U.S. Immigration and Naturalization Service, and the U.S. Consul
    General's Office in Montreal.
        In February 2002, the SLSDC contracted for services to assess the
    physical security for SLSDC infrastructure and workplace assets in
    Massena. This assessment was intended to supplement and enhance an
    initial security assessment that was conducted immediately following
    September 11. The assessment focused on the two U.S. Seaway locks, the
    Eisenhower Lock Visitors' Center, and the SLSDC's marine base/
    maintenance facility. In addition, another contractor conducted a
    detailed blast analysis of the highway tunnel under the Eisenhower
    Lock. Based on the contractor's recommendations, the SLSDC has made and
    continues to make several security enhancements and improvements to the
    lock infrastructure and other workplace assets. It is estimated that
    the SLSDC will expend more than $2.2 million in other-than-personnel
    security enhancements and improvements during fiscal years 2002 through
    2005.
        Significant security-related enhancements and improvements made to
    date include:
      --Installation of approximately 4,400 feet of additional 8-foot-high,
            chain-link fencing and various slide and swing gates. Gate
            controllers will not be installed until the fiber optic system
            is installed.
      --Purchase of a Nasatka portable vehicle barrier to shut down or
            control access, as needed, to our facilities, particularly the
            Eisenhower Lock highway tunnel. This vehicle barrier has been
            deployed during elevated threat level conditions.
      --Construction of approximately 61 concrete ``jersey barriers''
            topped with a 4-foot-high section of chain-link fence to keep
            vehicles and pedestrians in the Visitors' Center parking lot
            from approaching too close to the lock structure. These
            barriers, built at a considerable cost savings with in-house
            labor, will also be used in conjunction with the Nasatka
            portable vehicle barrier to shut down or control vehicular
            traffic.
      --Completion of several improvements at the Eisenhower Lock Visitors'
            Center, including (a) fencing of both ends and the lock side of
            the lower and upper observation decks, (b) closure of some
            ground level observation area to visitors, (c) movement of
            visitor parking areas further away from the lock chamber, and
            (d) setup of a security checkpoint at the Center entrance with
            a security guard on duty during operating hours.
        In fiscal year 2003, the SLSDC contracted with the firm of Edwards
    and Kelsey to conduct an engineering plan for the implementation of
    other security-related enhancements recommended in the previous
    assessments. At the end of fiscal year 2003, the SLSDC finalized plans
    to install a fiber optic network necessary for the electronic-based
    security enhancements. In fiscal year 2004, the fiber network will be
    installed and the purchase and installation of video cameras and smart
    card/EZ pass systems for access to gates and buildings will be
    finalized. The SLSDC will contract with an ``8-a, small business'' firm
    for the installation of the security enhancements. In fiscal year 2005,
    the SLSDC will continue to aggressively pursue the objectives of its
    security program, which includes greater protection of SLSDC
    facilities, new and improved measures for employee and visitor entry
    into facilities, and planned contingencies for facilities/
    infrastructure in the event of a heightened security alert.
        The SLSDC fully participated in the U.S. Department of
    Transportation's role in the TOPOFF 2 weapons of mass destruction
    response exercise mandated by the U.S. Congress and conducted in May
    2003. The agency is currently participating in several preparatory
    exercises that will culminate in ``Exercise Forward Challenge '04''--
    the government-wide continuity of operations exercise that is scheduled
    for May 12-13, 2004.
        In addition, the SLSDC will continue to work cooperatively with
    security and intelligence officials at both the Departments of
    Transportation and Homeland Security to ensure that the St. Lawrence
    Seaway, and its navigation assets, is protected to the maximum extent
    possible. This relationship was highlighted by the General Accounting
    Office's Top Fiscal Year 2004 Management Challenges for the Department
    of Transportation (Establishing and Managing an Ongoing DOT/Department
    of Homeland Security (DHS) Programmatic Relationship).
        The SLSDC has worked closely with DHS and the Transportation
    Security Administration (TSA) since their inception. In February 2002,
    the Corporation contacted officials in the TSA Explosives Unit to
    request its consultation on security concerns regarding the Eisenhower
    Lock highway tunnel. Additionally, SLSDC security and emergency staff
    have also conducted a series of informational meetings with TSA
    officials from its Office of Maritime and Land Security to educate them
    on those same issues. To date, SLSDC/TSA interactions have proven to be
    informative, constructive, and useful.

                         TRADE DEVELOPMENT INITIATIVES

        Since 1985, the SLSDC has performed trade development and
    promotional activities geared at generating trade to and from North
    America via the Great Lakes Seaway System. Program-wide activities
    include hosting overseas trade missions that promote the entire Seaway
    System at maritime and trade-related exhibitions, developing commodity-
    specific marketing plans, and working directly with ports, carriers,
    terminal operators, labor, and importers/exporters in the development
    of promotional materials and initiatives. Overseas trade missions,
    which include U.S. and Canadian maritime, government, industry, and
    labor delegates, have led to the development of new international cargo
    movements into the System. Since 1985, the SLSDC has sponsored 26 trade
    missions to 56 cities in 37 countries. In October 2003, the SLSDC led a
    23-member delegation of U.S. and Canadian Great Lakes executives to
    Belgium and The Netherlands, two of the Seaway's largest trading
    partners.
        In addition to overseas trade missions, the SLSDC is working with
    various Great Lakes Seaway System port authorities, the Great Lakes
    Cruising Coalition, the Great Lakes Waterways Management Forum, State
    and local governments, and tourism associations, to attract cruise
    vessels into the Great Lakes. Also, the SLSDC is working on joint trade
    development initiatives with the Canadian SLSMC to maximize the use of
    waterborne transportation as North American highways become more
    congested, including the examination of the Seaway System for short sea
    shipping movements and niche container trade as well as exploring
    partnerships with other inter-modal connections in an effort to
    generate new business for the Seaway System.
        In an effort to provide its global customers with a single portal
    for news and information related to the Great Lakes Seaway System
    commercial navigation, the SLSMC and SLSDC developed and launched a
    binational Internet web site (www.greatlakes-seaway.com) in 2001 that
    has been extremely well received domestically and internationally from
    the maritime and trade communities. In 2003, average monthly site page
    hits grew from 70,000 in 2002 to more than 120,000 hits. The site
    recorded an all-time high in December 2003 with 153,000 page hits, and
    received more than 1.4 million hits for the year from viewers in more
    than 110 countries.

      U.S. ARMY CORPS OF ENGINEERS' GREAT LAKES ST. LAWRENCE SEAWAY STUDY

        The Water Resources Development Act of 1999 directed the Corps, in
    consultation with DOT (through the SLSDC), to undertake the Great Lakes
    St. Lawrence Seaway Study (Study) to examine improvements to the
    commercial navigation infrastructure of the Great Lakes St. Lawrence
    Seaway System. Since January 2001, the Corps has partnered closely with
    DOT/SLSDC to carry out the Study's reconnaissance phase.
        The Corps completed a 2-year reconnaissance study in February 2003
    and concluded that more analysis was needed to determine if a Federal
    interest exists to improve the commercial navigation infrastructure on
    the Great Lakes and Seaway. The current scope of the Study is to
    establish a 50-year baseline for the current infrastructure to analyze
    the engineering, economic, and environmental consequences of
    maintaining, and not maintaining that infrastructure at its current
    level of reliability. The Study is primarily a commercial navigation
    study, but as evidenced by the composition of the Steering Committee,
    it will include environmental considerations.
        On May 1, 2003, the U.S. Department of Transportation and Transport
    Canada signed a Memorandum of Cooperation that established the intent
    of each agency to work together to ensure the future viability of the
    Great Lakes Seaway System as a commercial navigation waterway.
    Memorializing this intent in the MOC document cleared the way for
    Canada to work together with the Corps and DOT on the Study.
        Currently, all projects related to the revised scope of the Study
    are underway (engineering, economics, and environmental), along with
    meetings of the Study Steering Committee. The Steering Committee is
    made up of the senior level officials from Corps, DOT, Transport
    Canada, SLSDC, Canadian SLSMC, as well as representatives from the U.S.
    Fish and Wildlife Service and Environment Canada.

                             SEAWAY AIS/GPS PROJECT

        Since 1992, the SLSDC has worked with the U.S. Department of
    Transportation's Volpe National Transportation System Center and
    Canadian partners to design and implement state-of-the-art AIS/GPS
    navigation technology.
        On March 31, 2003, with the start of the navigation season, the
    U.S. and Canadian Seaway agencies began enforcing mandatory AIS use on
    commercial vessels entering the waterway in North America to employ
    this technology as a requirement for transit. The AIS/GPS project
    represents a major step forward in marine navigation technology. In
    fact, the Seaway is currently the world leader in developing shore-side
    applications for AIS/GPS.
        AIS technology uses data from ship-to-ship, ship-to-shore, and
    shore-to-ship, thereby enabling a constant two-way communication
    between mariners and the three Seaway vessel traffic control centers.
    Originally developed primarily for safety reasons, AIS has become
    increasingly of interest to maritime security officials in the post-9/
    11 environment as it offers the ability for them to track any vessel
    carrying a transponder with great precision.
        In the near future, permanent installation of AIS equipment will be
    required onboard commercial vessels in the entire Great Lakes St.
    Lawrence Seaway System from the Lakehead in Duluth, MN, to traffic
    entering the Gulf of St. Lawrence on the Atlantic. Adoption of the
    technology, which has been approved by the International Maritime
    Organization, was embraced early on by the Canadian Shipowners
    Association and the Shipping Federation of Canada, both of which
    provided technical and financial assistance. The Department's Volpe
    National Transportation Systems Center served as technical contractor
    for development of the AIS project, which began almost a decade ago.
    AIS will soon be required internationally on commercial vessels and
    will be mandatory throughout the Great Lakes Seaway System by December
    2004.

                        2003 NAVIGATION SEASON OVERVIEW

        The estimated tonnage for the combined sections of the St. Lawrence
    Seaway in 2003 was 40.9 million metric tons. This was 500,000 metric
    tons or 1 percent below the 2002 total (a decrease of 1 percent). The
    decrease can be attributed, in large part, to higher global freight
    rates, weaker U.S. dollar valuation, the continuation of grain export
    reductions (7 percent decrease) due to lower European grain imports,
    and significant reductions to general cargoes, including iron and steel
    products (38 percent reduction). The reduction of import steel also had
    a secondary effect on export grain. It is estimated that approximately
    20-30 percent of ocean-going vessels exporting grain from the Great
    Lakes Seaway System enter the waterway carrying steel. The final weeks
    of the navigation season did result in high levels of grain movements
    on Canadian lakers as the Canadian Wheat Board began moving more grain
    exports via the St. Lawrence Seaway. In addition to cargo movements,
    estimated total commercial transits through the St. Lawrence Seaway
    were on par with 2002 levels at 3,886 transits.
        Several commodities posted increases in 2003: iron ore (up 10.5
    percent to 10.7 metric tons); coal (up 33 percent to 4.1 million metric
    tons); petroleum products (up 2 percent to 1.8 million metric tons);
    salt (up 17 percent to 2.3 million metric tons); stone (up 8 percent to
    800,000 metric tons); potash (up 48 percent to 144,000 metric tons);
    ores and concentrates (up 68 percent to 357,000 metric tons); and
    gypsum (up 25 percent to 652,000 metric tons).

                                   CONCLUSION

        The SLSDC's fiscal year 2005 budget request reflects the agency's
    ongoing commitment of providing a safe, secure, reliable, and efficient
    waterway and lock transportation system for the movement of commercial
    goods to and from the Great Lakes region of North America. Maritime
    commerce on the Great Lakes Seaway System is vitally important to the
    Great Lakes regional economy, annually supports more than 150,000 U.S.
    jobs, $4.3 billion in personal income, $3.4 billion in transportation-
    related business revenue, and $1.3 billion in Federal, State, and local
    taxes.
        Since 1959, the SLSDC has played a significant role in not only the
    operations and maintenance of the U.S. Seaway assets, but also in the
    promotion and development of new business for the waterway in concert
    with its North American stakeholders. As the St. Lawrence Seaway nears
    its 50th year of operation, the SLSDC remains committed to working with
    its customers and stakeholders to ensure the waterway's reliability and
    competitiveness for its next 50 years.
                                     ______

                         MERIT SYSTEMS PROTECTION BOARD

       Prepared Statement of Neil Anthony Gordon McPhie, Acting Chairman
        Chairman Shelby, Ranking Member Murray and members of the
    subcommittee, thank you for the opportunity to submit this statement
    for the record on the fiscal year 2005 appropriations request for the
    U.S. Merit Systems Protection Board (MSPB or ``the Board''). This year
    is particularly significant for the Board, as 2004 marks the agency's
    Silver Anniversary. Over the course of the Board's 25-year history, its
    Chairmen, Board members and staff have held steadfast and true to the
    agency's mission: to serve as guardian of Federal merit systems. In
    those 25 years, the Board has issued decisions in over 239,000 cases.
    The Board has issued over 80 reports of studies of the Federal merit
    systems and the degree to which employees are managed free from
    prohibited personnel practices. In addition, the Board has conducted
    outreach activities on its findings on appeals and studies to promote
    the improved application of merit principles. I am pleased to take this
    opportunity to explain to the subcommittee the basis for the
    President's appropriations request on behalf of the Board and its
    importance in enabling the Board to continue to fulfill its statutory
    missions during fiscal year 2005.

                            OVERVIEW OF THE REQUEST

        The President is requesting $35,303,000 in appropriated funds to
    support the operations of the Merit Systems Protection Board. This
    request represents a $1,800,000 increase over the fiscal year 2004
    appropriations request. This increase covers the $1,501,000 in
    additional expenses resulting from the January 2004 and 2005 pay raises
    that were included in the President's budget. However, because Congress
    approved a higher pay raise for fiscal year 2004 than the President
    recommended, MSPB needs an additional $375,000 to cover the difference
    between the President's recommended raise and the amount that was
    ultimately approved by Congress. This request also covers the increase
    in commercial rent charges for fiscal year 2004 ($183,000), the $78,000
    necessary to provide for inflationary costs increases in other non-
    personnel costs and the $38,000 necessary to cover the cost of Workers
    Compensation Programs in fiscal year 2005.
        At the request of the Office of Management and Budget (OMB), the
    Merit Systems Protection Board is not requesting that funds be
    transferred from the Civil Service Retirement and Disability Trust Fund
    for fiscal year 2005. Instead, at OMB's request, the funding previously
    supplied from the Trust Fund for adjudication of Civil Service
    Retirement appeals is being requested as part of the regular
    appropriation total of $37,303,000.
    fiscal year 2003 and fiscal year 2004 accomplishments with fiscal year

                       2005 OUTLOOK (BY BUDGET ACTIVITY)
                                  ADJUDICATION

        The bulk of the Board's resources are dedicated to processing our
    appellate workload; 192 FTE--or 84 percent of the 228 FTE estimated for
    fiscal year 2004 and fiscal year 2005--will be used for adjudication.
    During the last several years, we have maintained an average processing
    time of approximately 3 months for appeals and other cases processed in
    our regional and field offices. However, the average case processing
    time at headquarters increased slightly because the Board functioned
    with only one member for approximately 6 weeks in fiscal year 2003.
        We estimate that in each of the next 2 years the administrative
    judges will process approximately 7,300 appeals and other cases in our
    regional and field offices, and the Board members will adjudicate
    approximately 1,300 cases at headquarters. In fiscal year 2003, the
    Board decided 8,416 cases: 7,227 in the regional and field offices and
    1,189 in the headquarters office. The average processing times were 94
    days in the regional and field offices and 295 days for headquarters.
    Of the Board's final decisions that were appealed to the U.S. Court of
    Appeals for the Federal Circuit, the Court left 94 percent of the
    Board's decisions unchanged.
        This case workload is determined by factors beyond our control, as
    it results from the number of appealable actions taken by Federal
    agencies, the number of employees who decide to challenge those
    actions, and from legislative changes that affect our jurisdiction. Two
    such changes are enactment of the Homeland Security Act of 2002 and the
    National Defense Reauthorization Act of 2004. Under these statutes, the
    Department of Homeland Security (DHS) and the Department of Defense
    (DOD), respectively, were granted authority to establish their own
    appeals process.
        The Department of Homeland Security has decided to retain MSPB
    appeal rights for its employees at the regional and headquarters
    levels. DHS issued proposed regulations establishing an expedited
    appeals processing system which requires the Board to process employee
    appeals using shorter timeframes at the headquarters level. As required
    by statute, DHS officials consulted with MSPB prior to issuing those
    regulations.
        These expedited procedures might well require an increase in our
    adjudication staff in the headquarters office. Further, while DOD
    employees' MSPB appeals rights are currently limited by statute to the
    petition for review (PFR) level, it is still possible that DOD will
    also decide to provide first-level MSPB appeals rights for its civilian
    employees by regulation. If DOD does not provide first-level MSPB
    appeal rights for its employees, we expect the number of PFR's to
    increase, as this avenue of appeal will present DOD employees with
    their first opportunity for an independent review of the agency's
    employment action. This increase in PFR's will likely require
    additional Board staff to review the PFR's at MSPB headquarters.
        Notwithstanding the new DHS appeals procedures or the changes to
    DOD's appeals procedures, the Board will still hear DOD and DHS appeals
    under the Whistleblower Protection Act, the Uniformed Services
    Employment and Reemployment Rights Act, and the Veterans Employment
    Opportunities Act. Thus, the Board is seeking the level of funding
    reflected in its fiscal year 2005 budget request because we do not
    anticipate a decrease in the Board's caseload or staffing needs.
        It is important to note that even a small increase in workload per
    administrative judge could cause a significant increase in processing
    times. MSPB needs the requested funds in order to maintain the
    adjudication staff and to continue technological improvements that will
    facilitate case processing and avoid escalation of costs to the
    government as a whole.
        Achievement of the Board's performance goals related to the
    adjudication of cases at headquarters depends on having a quorum of
    Board members. When the Board has a full complement of three members,
    cases at headquarters are closed by a unanimous vote or a majority vote
    of the Board. When the Board has only two members, there is a quorum,
    but no majority is possible unless both members agree. If the two
    members cannot agree, the Board's regulations permit the issuance of a
    ``split-vote'' order, which makes the initial decision under review
    final but not precedential. When the Board has only one member, as it
    did for almost 2 months during fiscal year 2003, no decisions can be
    issued.
        I am serving under the recess appointment I received from the
    President in April 2003. On December 10, 2003, the President designated
    me as Vice Chairman of the Board. Because the position of Board
    Chairman was vacant, I became the Board's Acting Chairman pursuant to
    the Board's operating statute, 5 U.S.C.  1203(b). Unless confirmed, my
    appointment to the Board will end when Congress adjourns sine die at
    the end of the 108th Congress. The term of the current Board member,
    Susanne T. Marshall, ended on March 1, 2004. However, Ms. Marshall has
    exercised her option to continue to serve in this position for up to 1
    additional year if no successor is named. While the President has
    recently submitted a nominee to the Senate for confirmation to fill the
    one remaining vacancy on the Board, this position has been vacant since
    December 2001. The Board has not had its full complement of three
    members since then.
        During fiscal 2003 MSPB implemented an electronic appeals process
    (e-Appeal) that allows appellants to file an initial appeal using the
    Internet.
        The Board's new alternative dispute resolution pilot program,
    called the Mediation Appeals Program (MAP), became fully functional in
    fiscal year 2003 with the completion of mediation training by 15 Board
    employees. As part of the training, these employees completed three to
    five co-mediations with dispute resolution experts. Fifty percent of
    the completed co-mediations resulted in settlements of pending appeals.

                      MERIT SYSTEMS STUDIES AND OVERSIGHT

        The MSPB has the statutory responsibility to conduct studies of the
    civil service and other merit systems in the Executive Branch. Our goal
    is to support strong and viable merit systems that ensure the public's
    interest in a high quality, professional workforce managed under the
    merit principles and free from prohibited personnel practices. In
    fiscal year 2005, the MSPB will increase its program of in-depth,
    timely analysis of major merit and human capital management issues. In
    fiscal year 2005 we expect to issue at least six reports and a
    quarterly newsletter, ``Issues of Merit.'' This function will use
    approximately 13 FTE, or about 4 percent of the approximately 228 FTE
    the Board is projected to use in fiscal year 2005.
        The Board makes reports of our studies available to a wide
    audience, including the President, members of Congress, Federal policy
    officials, managers, employee groups, academicians and others with an
    interest in the merit systems and Federal human resources management.
    Reports address policy issues as well as issues that affect the
    operation and practice of merit in the workplace. In fiscal year 2005,
    we will continue our efforts to work with organizations such as the
    Federal Executive Boards, the Senior Executive Association, and the
    Federal Managers' Association.
        The President's Management Agenda item on Human Capital Management
    and GAO's rating of human capital management as high risk influence our
    report topics. Alternative systems, such as those authorized by the
    Homeland Security Act of 2002 and the National Defense Reauthorization
    Act of 2004, are covering larger and larger portions of the workforce.
    Our charter to examine the policies and implementation of traditional
    and alternative personnel systems and their impact on merit principles
    and prohibited personnel practices is more important than ever.
        We are working closely with other research groups from the General
    Accounting Office, the Office of Personnel Management, the National
    Academy of Public Administration, and the Partnership for Public
    Service to include a sharing of research agendas and an expansion of
    peer reviews of our respective work products. These other groups have
    either a constituency group funding them or are direct agents of the
    administration. Accordingly, their clients' interests shape the views
    they express on an issue. MSPB is distinct in its statutory mission to
    provide an independent, unbiased perspective. Our clients are the
    American people and our responsibility to them is to protect the
    public's interest in a viable, merit-based system.
        In fiscal year 2003, the MSPB released three major studies and
    three editions of the newsletter. The major studies were, The Federal
    Selection Interview: Unrealized Potential, which makes recommendations
    to improve this important part of the selection process, Help Wanted: A
    Review of the Federal Vacancy Announcements, which makes
    recommendations to make vacancy announcements more useful in the
    recruitment process, and The Federal Workforce for the 21st Century:
    Results of the Merit Principles Survey 2000, which addresses employees'
    concerns before September 11, 2001. We are also planning our largest
    Merit Principle Survey ever using electronic web-based methodology.
    This electronic survey capability will be a centerpiece of our research
    agenda.

                               MANAGEMENT SUPPORT

        The management support function, which uses approximately 26 FTE,
    or 11 percent of the 228 estimate in fiscal year 2004 and fiscal year
    2005, provides the necessary management support for information
    resources management, human resources management, budget, finance,
    procurement, equal employment opportunity, travel, space and property
    management. The management support function, which uses approximately
    26 FTE, or 11 percent of the 228 estimate in fiscal year 2004 and
    fiscal year 2005, provides the necessary management support for
    information resources management, budget, finance, procurement, equal
    employment opportunity, travel, space, and property management.
        Fiscal year 2003 was the first year that we were required to have a
    financial audit pursuant to the Accountability of Tax Dollars Act of
    2002. We received a clean audit opinion. An additional important
    administrative accomplishment was the development and implementation of
    the Continuity of Operations Plan.
        The Board determined that a restructuring of its regional and field
    office configuration was necessary in order to consolidate resources
    and to allow for the most efficient management of case processing.
    After evaluating workload shifts, costs, economies of scale, changes in
    the Federal workforce, and the flexibility needed to adjust to civil
    service reform, Board management determined that it was necessary to
    close two of these offices to enable the Board to further its mission
    more efficiently and effectively.
        Effective March 31, 2004, the Board closed its field offices in
    Seattle, Washington and Boston, Massachusetts. This action affected a
    total of 12 employees in these two offices (four in the Boston office
    and eight in the Seattle office). The Board received authority to grant
    voluntary early retirement and voluntary separation incentive payments
    to affected employees. The Board will continue to operate five regional
    offices (Philadelphia, Washington, Atlanta, Chicago, and San Francisco)
    and three field offices (New York, Dallas and Denver).
        The restructuring was accomplished without a reduction in force.
    Every employee in the affected offices was offered a reassignment to an
    equivalent position within the Board. These reassignments were made
    without loss of pay or grade for the affected employees. Additionally,
    the Board will pay all required and most optional relocation expenses
    for employees who are reassigned. Eligible employees who declined the
    reassignment were offered the option of taking voluntary early
    retirement or the voluntary separation incentive payments. Under these
    arrangements, only five employees are separating from the Board; three
    are retiring and receiving voluntary separation incentive payments, one
    employee transferred to another Federal agency and one employee is
    serving in a temporary assignment, while seeking other employment.
        We believe that the restructuring will have a neutral budgetary
    impact. The annual rent on the Seattle field office is approximately
    $150,000 and the rent on the Boston field office is approximately
    $100,000 annually. As of April 1, 2004, the Board will cease to pay
    rent on the Seattle office. We are tied to a lease agreement that will
    obligate the Board to pay some amount for the Boston property through
    the end of the lease term, which is February 14, 2005. However, we are
    currently negotiating with the management company in an effort to pay a
    lesser amount from April 1, 2004, through the end of the lease period.
    We anticipate that any savings in rent expenses will be offset by an
    increase in expenses associated with the additional staff needed to
    meet the challenges presented by the new Department of Homeland
    Security and Department of Defense appeals systems.
        In fiscal year 2004, the Board implemented a new case management
    system. This system replaces a 13-year-old case management system,
    whose major components had long become obsolete. Two of the features of
    this new system that will improve the overall efficiency of the
    adjudicatory process include: (1) interfaces between the Board's Case
    Management System, Document Management System, and Document Assembly
    System to reduce duplicative data entry and to automate the use of data
    from CMS to produce standard case documents; and (2) use of off-the-
    shelf software as the basis of the system, which will allow more
    frequent upgrading of other software.
        Additionally, in fiscal year 2004, the Board expects to replace all
    of the agency's personal computers (PC's) in accordance with our policy
    of replacing PC's every 4 years. As part of that upgrade, we will
    update word processing and other desktop software, and we will
    investigate the feasibility of installing a wireless network within our
    building.
        Finally, the Board's information resource management office will
    continue to enhance information technology security for the Board's IT
    systems. These enhancements will follow up on the recommendations of
    the independent auditor which were included in the agency's fiscal year
    2003 Federal Information Security Management Act report.
        In fiscal year 2005, we will implement a pilot program to evaluate
    the cost and feasibility of scanning case documents received from the
    parties. This is another phase of the e-Filing initiative which would
    permit documents that we do not produce or receive in electronic form
    through e-Appeal to be made part of the electronic case file
    nonetheless.

                                   CONCLUSION

        I am honored to serve as Acting Chairman of the Merit Systems
    Protection Board. The Board and its staff continue to work diligently
    to maintain the reputation for efficiency, effectiveness and fairness
    it has earned over its 25-year history. I have enjoyed serving the
    Board as a member and now as Acting Chairman. I welcome the opportunity
    to lead the organization as it builds upon its legacy of excellence for
    service in the public interest.
                                     ______

                               U.S. ACCESS BOARD

          Prepared Statement of Lawrence W. Roffee, Executive Director

                                  INTRODUCTION

        The Access Board is requesting a total budget authority of
    $5,686,000 for fiscal year 2005. The proposed budget is a 5.3 percent
    increase over the amount appropriated for fiscal year 2004. The Board
    is not planning new costly initiatives in fiscal year 2005 but will
    continue with the programs started in fiscal year 2004, and has
    followed the directives issued by the Office of Management and Budget
    for the preparation of the fiscal year 2005 budget.

         GOVERNMENT PERFORMANCE AND RESULTS ACT ANNUAL PERFORMANCE PLAN

        Following the Government Performance and Results Act (GPRA), the
    Board has established long-range goals and annual objectives that
    describe the strategies it will implement to achieve the long-range
    goals. The objectives are described in terms that permit future
    assessment regarding whether the objectives were achieved. To satisfy
    the requirements for an annual performance plan and review, this budget
    justification presents information under each of the Board's program
    areas regarding the long-range goals, reports on the results of the
    fiscal year 2003 activities, reviews the planned fiscal year 2004
    activities, and presents the fiscal year 2005 objectives.
        The Board was established by section 502 of the Rehabilitation Act
    and is the only Federal agency whose primary mission is accessibility
    for people with disabilities. The Board is responsible for developing
    guidelines under the Americans with Disabilities Act, the Architectural
    Barriers Act, and the Telecommunications Act for ensuring that
    buildings and facilities, transportation vehicles, and
    telecommunications equipment covered by these laws are readily
    accessible to and usable by people with disabilities. The Board is also
    responsible for developing standards under section 508 of the
    Rehabilitation Act for accessible electronic and information technology
    used by Federal agencies, and for providing training under the
    Assistive Technology Act to Federal and State employees on obligations
    related to section 508 of the Rehabilitation Act.
        In 2002, the Board was given new responsibilities under the Help
    America Vote Act to serve on the Board of Advisors and the Technical
    Guidelines Development Committee that will assist the new Election
    Assistance Commission in developing voluntary guidelines and guidance
    for voting systems, including accessibility for people with
    disabilities.
        The Board also enforces the Architectural Barriers Act and provides
    training and technical assistance on each of its guidelines and
    standards, and on a variety of other accessibility issues.
    Additionally, the Board maintains a small research program that
    develops technical assistance materials and provides information needed
    for rulemaking.
        The Board has adopted this mission statement to guide its programs:
    The Board is the catalyst for achieving an accessible America. The
    statement recognizes that achieving an accessible America requires
    bringing together public and private sectors. The Board has established
    three long-range goals for its programs:
      --Take a leadership role in the development of codes and standards
            for accessibility;
      --Work in partnership with agencies and others to make the Federal
            Government a model of compliance with accessibility standards;
            and
      --Be known as the leading source of information about accessibility
            and disseminate that information to customers in effective
            ways.
        In developing objectives and strategies for achieving the long-
    range goals, the Board seeks to work together with its stakeholders
    toward common objectives. The Board's plan is simple: work with its
    stakeholders to establish consensus-based guidelines and standards that
    are fair, reasonable, and acceptable to all interests; where the Board
    has enforcement responsibilities over Federal agencies, assist those
    agencies to achieve full compliance; and involve its stakeholders in
    developing and disseminating materials and manuals that will help them
    understand and comply with our guidelines and standards.
        The Board's programs will result in accessible buildings and
    facilities, transportation vehicles, telecommunications equipment, and
    electronic and information technology across our country and,
    ultimately, the full economic and social integration of people with
    disabilities into our society. Achieving these results will depend not
    only on the Board's activities, but also on the level of commitment and
    action taken by other Federal agencies, State and local governments,
    and businesses who are required to comply with or enforce the various
    laws that guarantee the civil rights of people with disabilities.

                     ACCESSIBILITY GUIDELINES AND STANDARDS

        The Board will continue to develop and update accessibility
    guidelines and standards and to work cooperatively with organizations
    which develop codes and standards affecting accessibility through
    fiscal year 2005 and beyond. The status of current guidelines and
    standards efforts is presented below.
    ADA and ABA Accessibility Guidelines
        This rule will revise the accessibility guidelines for the
    Americans with Disabilities Act (ADA) and the Architectural Barriers
    Act (ABA), and include new guidelines for accessible housing covered by
    both of these laws. Through this rulemaking, the Board will ensure
    consistency and coordination in the development of guidelines
    applicable to the public and private sector, as well as the Federal
    Government. A notice of proposed rulemaking (NPRM) was published for
    public comment in November 1999. The NPRM consisted of separate scoping
    parts for each law. The ADA scoping part was based on the
    recommendations of the Board's ADAAG Review Advisory Committee and
    covers private facilities, such as places of public accommodation and
    commercial facilities, and State and local government facilities. The
    ABA scoping part applies to Federally financed facilities and is based
    on the ADA scoping part, with a few changes due to differences in the
    coverage of the two laws. For example, the ABA scoping part covers
    facilities leased by Federal agencies. The NPRM contained a single set
    of updated technical requirements based on the recommendations of the
    ADAAG Review Advisory Committee. Both the ADA and ABA scoping parts
    reference these common technical requirements. The comment period for
    the proposed rule closed in May 2000 and over 2,500 comments were
    received. The Board held two public hearings on the proposed rule. The
    Board also held informational meetings in Washington, DC in October
    2000 to hear from industry associations and disability groups on issues
    regarding automated teller machines, reach ranges, and captioning
    equipment for movie theaters. The Board required further information on
    these issues before deciding how to address them in the final rule.
        In April 2002, the Board placed in the docket for public review a
    draft of the final guidelines to promote harmonization of the Board's
    guidelines with the International Code Council (ICC)/American National
    Standards Institute (ANSI) A117.1 Standard on Accessible and Usable
    Buildings and Facilities and the International Building Code. The ICC/
    ANSI A117 Committee and the ICC were in the process of revising the
    private sector codes and standards. This provided another opportunity
    to harmonize the Board's guidelines with those of the private sector.
    The Board's final rule will be published in fiscal year 2004.
    Outdoor Developed Areas
        The Board's Outdoor Developed Areas Regulatory Negotiation
    Committee presented its report to the Board in September 1999. This
    committee developed new sections for parks, trails, and camping and
    picnic areas. In October 2001 the Board sponsored an information
    meeting on the final report of the Outdoor Developed Areas Regulatory
    Negotiation Committee. The meeting was attended by about 50 individuals
    and was held in Denver, CO during the annual meeting of the National
    Recreation and Park Association. The meeting was informal and provided
    an opportunity for a dialogue with Board members about the report.
        In September 2003, the Board decided to develop an NPRM on Outdoor
    Developed Areas using only its rulemaking authority under the
    Architectural Barriers Act. Taking this approach will help move this
    rulemaking forward and allow the Federal Government to take the
    initiative of addressing accessibility in this area before applying
    requirements to State and local governments or private entities. Future
    rulemaking under the ADA would be enhanced by the experience of
    implementing accessibility guidelines at Federal facilities. The
    Federal Government would gain experience in implementing the guidelines
    and this experience should prove important before applying them to
    other entities. A proposed rule will be published for public comment in
    fiscal year 2004.
    Passenger Vessels
        In September 1998, the Board convened a 21-member Passenger Vessel
    Access Advisory Committee to develop accessibility guidelines for
    cruise ships, ferries, excursion boats, and other vessels covered by
    the Americans with Disabilities Act. The committee presented its report
    with recommendations to the Board in November 2000. The Board created
    an ad hoc committee of Board members to begin developing a proposed
    rule on access to passenger vessels.
        Standard means of boarding passenger vessels and the interaction
    between vessels and shoreside facilities present unique challenges to
    accessibility. It is a major issue the Board will address in guidelines
    it is developing for passenger vessels. The Board held public meetings
    in New Orleans (August 2003) and Seattle (September 2003) to gather
    information and input on viable access solutions that will allow
    persons with disabilities independent access onto and off of large
    vessels such as cruise ships, dinner boats, ferries, and gaming boats.
    Over 150 vessel designers and operators, pier operators, persons with
    disabilities, and others attended the meetings. A notice of
    availability (or draft rule) is expected to be published in fiscal year
    2004.
    Public Rights-of-Way
        In October 1999, the Board created a 32-member Public Rights-of-Way
    Access Advisory Committee to assist it in developing new guidelines for
    access to sidewalks, street crossings, and related pedestrian
    facilities. The committee presented its report with recommendations to
    the Board in January 2001. The committee is continuing to meet to
    develop recommendations for a technical assistance manual for agencies
    and practitioners to support implementation of the future guidelines.
    In June 2002, the Board released draft guidelines on accessible public
    rights-of-way for public comment. The draft guidelines were made
    available for public review and comment prior to issuing a notice of
    proposed rulemaking. Written comments were accepted until October 28,
    2002; we received approximately 1,400 comments--all of which are
    available on our website.
        A public meeting on the draft guidelines was held in Portland, OR
    on October 8, 2002. The meeting provided an opportunity for industry
    groups, persons with disabilities, civil engineers, local governments,
    and other interested parties to comment on the published draft. Over
    100 people attended the meeting, and approximately 40 people provided
    testimony. Comments focused on the impact of various provisions in the
    guidelines. A proposed rule is expected to be published in fiscal year
    2004.
    Fiscal Year 2003 Results--Rulemaking
        In fiscal year 2003, we did not issue any guidelines.
    Fiscal Year 2003 Results--Codes and Standards
        Our long-range goal is to take a leadership role in the development
    of codes and standards for accessibility. The Board works with model
    code organizations and voluntary consensus standards groups that
    develop and periodically revise codes and standards affecting
    accessibility. We have voting membership in several codes and standards
    organizations, and monitor or are actively involved in the development
    or revision of dozens of other codes and standards affecting
    accessibility.
        We believe this goal enhances the Board's credibility as a
    knowledgeable source of information regarding technical aspects of
    accessibility. Additionally, by working cooperatively with codes and
    standards-setting bodies, Federal and private codes and standards will
    be more similar, or harmonized, and the Board will be more alert to
    non-Federal influences affecting its constituencies. Harmonization
    between Federal and private requirements will make it more likely that
    buildings and facilities will be accessible, thus reducing the
    necessity for complaints and litigation. Some highlights of
    accomplishments in fiscal year 2003 include:
      --The parent of a child with a hearing loss petitioned the Board to
            include new provisions in ADAAG for acoustical accessibility
            for individuals who are hard of hearing because the acoustical
            environments found in many schools today are barriers to
            communication and therefore to learning for children with
            hearing impairments. Rather than initiating rulemaking, the
            Board collaborated with an existing Acoustical Society of
            America (ASA)/American National Standards Institute (ANSI)
            Working Group on Classroom Acoustics to develop private sector
            technical and scoping standards. The standard was recently
            adopted by ANSI. The approved standard, Acoustical Performance
            Criteria, Design Requirements, and Guidelines for Schools (ANSI
            S12.60-2002), sets specific criteria for maximum background
            noise and reverberation.
      --Currently, the Board is finalizing revisions to the ADA and ABA
            accessibility guidelines. A key goal of this revision is to
            make the guidelines more consistent with model building codes
            and industry standards, particularly those issued by the ICC/
            ANSI A117 Committee. The ICC/ANSI A117.1 standard is referenced
            by the International Building Code and various State codes,
            among others. While the Board's guidelines derive from earlier
            versions of the ICC/ANSI A117 standard, significant differences
            between the documents have remained. From the outset of its
            rulemaking to update the ADA and ABA guidelines, the Board has
            sought to reconcile these differences. The ICC/ANSI A117
            Committee is in the process of updating the A117.1 standard and
            is working to harmonize the new edition with the Board's
            upcoming guidelines. In April 2002, the Board released a draft
            of the final ADA and ABA guidelines to facilitate this effort.
            Later, the ICC/ANSI A117 Committee completed a series of
            hearings on changes to the standard to make it more consistent
            with the Board's draft final guidelines.
    Fiscal Year 2004 Plans--Rulemaking
        In fiscal year 2004, we will issue one final guideline and three
    proposed guidelines:
      --Final rule on revisions to the ADA and ABA accessibility guidelines
      --NPRM on outdoor developed areas
      --Notice of availability (draft rule) on access to passenger vessels
      --NPRM on access to public rights-of-ways
    Fiscal Year 2004 Plans--Codes and Standards
        The Board will be assisting the new Election Assistance Commission
    in the development of voluntary voting system guidelines under the Help
    America Vote Act. Among other things, the legislation requires the new
    Election Assistance Commission to develop voluntary voting system
    guidelines, including accessibility for people with disabilities. The
    voting system guidelines are to be developed with the assistance and
    input of a Technical Guidelines Development Committee and Board of
    Advisors. The legislation requires that the Access Board be represented
    on both groups.
        As a result of the September 11, 2001 attacks on the World Trade
    Center, code provisions for emergency egress from tall buildings are
    being re-examined. There is renewed interest in the use of elevators
    for both occupant egress and fire fighters access. Therefore, a
    workshop on the Use of Elevators in Fires and Other Emergencies will be
    held on March 2-4, 2004, in Atlanta, GA. This workshop is being co-
    sponsored by the Access Board, the American Society of Mechanical
    Engineers, National Institute of Standards and Technology,
    International Code Council, National Fire Protection Association, and
    the International Association of Fire Fighters.
    Fiscal Year 2005 Objectives--Rulemaking
        In fiscal year 2005, we will issue three final guidelines:
      --Final rule on outdoor developed areas
      --NPRM on access to passenger vessels
      --Final rule on access to public rights-of-ways
    Fiscal Year 2005 Objectives--Codes and Standards
        In fiscal year 2005, the Board will continue efforts to harmonize
    its guidelines with model codes and standards, including the ICC/ANSI
    A117.1 Standard for Accessible and Usable Buildings and Facilities.

                              TECHNICAL ASSISTANCE

        The Board provides technical assistance to a wide variety of people
    regarding the accessibility guidelines and standards it issues. The
    Board's customers include architects, builders, designers,
    manufacturers, people with disabilities, State and local governments,
    and Federal agencies. The Board's technical assistance program has four
    components:
      --Responding to customer inquiries. The Board responds to about
            13,000 customer inquiries each year. We have four toll-free
            telephone lines for customers to call with questions. Customers
            also e-mail and fax us questions. Many literally are sitting at
            a drawing table with a design problem. They want accurate,
            reliable, and timely advice. Our customers value being able to
            discuss their questions directly with our accessibility
            specialists who developed the guidelines and standards.
      --Developing and disseminating bulletins, manuals, and other
            publications. The Board maintains about 30 publications on
            accessibility issues. These range from short bulletins
            responding to frequently asked questions about specific issues
            such as accessible parking, to manuals on the Board's
            guidelines and standards. We send out about 12,000 publications
            each year in print and alternate formats.
      --Providing training. The Board conducts about 100 training sessions
            each year. Training usually is provided at conferences and
            seminars sponsored by other organizations. Training sponsors
            generally reimburse us for travel expenses.
      --Maintaining the Board's website. The Board's website (http://
            www.access-board.gov) has become a very effective way to
            distribute information to the public. Customers can download
            many of our publications and view our accessibility guidelines
            and standards from our website. We received over 12 million
            ``hits'' on our website in fiscal year 2003.
        The Board also has established partnerships with other
    organizations such as the American Institute of Architects, the
    National Association of ADA Coordinators, the Disability and Business
    Technical Assistance Centers, and the Information Technology Technical
    Assistance and Training Center (ITTATC) to disseminate information
    about the Board's programs. The ITTATC, which is funded by the National
    Institute on Disability and Rehabilitation Research, collaborates with
    stakeholders to improve the awareness and availability of accessible
    electronic and information technology and telecommunication products
    and services and disseminates information, training, and technical
    assistance. Many of the Board's guidelines and publications are
    available through these organizations' on-line networks. The Board also
    provides training for these organizations. The Board's long-range goal
    is to be known as the leading source of information about accessibility
    and to disseminate information to our customers in effective ways. As
    we revise the guidelines for the Americans with Disabilities Act and
    the Architectural Barriers Act and develop guidelines for new areas
    such as outdoor developed areas, passenger vessels, and public rights-
    of-ways, there will be increased demands for technical assistance from
    existing and new customer groups. There also will be opportunities to
    use existing partnerships and establish new partnerships with customer
    groups to disseminate information about the Board's guidelines and
    standards.
    Fiscal Year 2003 Results--Leading Source of Information
        As a result of our expertise in accessibility issues, many
    government agencies and private organizations ask for our assistance in
    ensuring access at their facilities. During fiscal year 2003, we met
    with staff from the General Services Administration (GSA) on the design
    of a new courthouse annex in Washington, DC and plans for a new
    courthouse in Eugene, OR and we visited an existing courthouse in Upper
    Marlboro, MD with GSA staff. We also reviewed accessibility issues for
    the planned new Department of Transportation headquarters building.
        Many foreign government agencies also ask for our assistance in
    promoting access in their countries. In fiscal year 2003, we met with
    the Chairman of the Disability Rights Commission from the United
    Kingdom. The Disability Rights Commission helps implement the
    Disability Discrimination Act of 1995. We also met with a researcher
    from Sweden regarding accessible design and provided information on
    model building codes and met with Japanese researchers regarding
    Japanese initiatives on ``talking signs'' and detectable warnings. We
    also met with an Australian company representative to provide feedback
    on a new pocket Braille writer and with staff from the Royal National
    Institute for the Blind (England) to discuss United States and European
    cooperation on accessibility standards for information technology. We
    also hosted an architect from Portugal who is in the United States
    through the Fulbright Visiting Scholar Program. Recognizing the
    international interest in access to information technology, we recently
    posted translations of the section 508 standards in Spanish and
    Japanese on our website.
        Each year the Board meets outside of Washington, DC to encourage a
    more direct and open dialogue with members of the public about
    accessibility and the work of the Board. These visits outside the
    Washington beltway substitute for one of the Board's regular meetings,
    which are held every other month in the Washington, DC area. In
    September 2003, the Board held a meeting in Seattle, WA. During its
    stay in Seattle, the Board explored accessibility as it pertains to
    information technology and outdoor environments such as parks and
    trails. In a visit to Microsoft headquarters, the Board was briefed by
    representatives from Microsoft, Hewlett Packard, Cingular Wireless, and
    NCR Corporation on industry efforts to improve access to information
    technology. Presentations included information on how accessibility is
    mainstreamed into operating systems, other software, hardware and
    telecommunications products and services. The Board also toured several
    area parks to learn more about ways of providing access to campgrounds,
    picnic areas, trails, and other outdoor sites.
        The Board also held public meetings in Seattle and New Orleans to
    gather information and input on viable access solutions that will allow
    persons with disabilities independent access onto and off of large
    vessels such as cruise ships, dinner boats, ferries, and gaming boats.
    Over 150 vessel designers and operators, pier operators, persons with
    disabilities, and others attended the meeting. In advance of the
    meetings, the Board toured vessels and boarding facilities at area
    ports.
        Digital wireless phones present significant compatibility and
    interference problems for people who use hearing aids and cochlear
    implants. The Board assumed a lead role in organizing a conference on
    the subject held in September 2003 at Gallaudet University in
    Washington, DC. Sponsored by the Interagency Committee on Disability
    Research (ICDR), the ``Summit on Interference to Hearing Technologies
    by Digital Wireless Telephones'' explored compatibility issues and
    potential solutions. Digital wireless phones, unlike analog wireless
    phones, can emit interference caused by radio frequency from the
    antenna and magnetic interference from the battery leads and other
    electronic components. Noises resulting from such interference, which
    were simulated at the conference, make them virtually unusable by
    people who use hearing technologies. Participants included
    representatives from the digital wireless phone and hearing
    technologies industries, disability organizations, research centers,
    and Federal agencies such as the Federal Communications Commission
    (FCC) and the Food and Drug Administration (FDA).
        In fiscal year 2003, the Board responded to 12,193 customer
    inquiries; distributed 1,673 information packets; and conducted 90
    training sessions which were attended by 8,414 people. An information
    packet usually contains several publications. Since we do not collect
    data on publications disseminated through partner organizations, the
    actual number of publications disseminated to our customers is greater
    than our current data indicate. Technical assistance, research, and
    training projects funded in fiscal year 2003 include:
      --Recreation Technical Assistance with the Marina Operators
            Association of America. This project will develop technical
            assistance and training materials and conduct training sessions
            for marina operators on the requirements of the new guidelines
            for marinas and boating facilities.
      --Maintenance and Weatherability of Detectable Warnings with the
            Transportation Research Board. The Board has contributed to a
            larger project funded by several transportation industry
            organizations to collect and report on detectable warnings
            testing undertaken by several State departments of
            transportation. The Board will be a member of the project
            advisory committee.
      --Curb Ramp Directionality Workshop with the Institute of
            Transportation Engineers. This project will bring together
            highway engineers, orientation and mobility specialists, and
            consumers in a 2-day workshop to consider possible changes to
            roadway design that can facilitate wayfinding.
      --Passenger Vessels Coaming Research with the Volpe Transportation
            Research Center. This project will investigate current and
            possible approaches to shipboard coaming treatments for
            accessibility.
        We use existing partnerships with organizations and will be
    establishing new partnerships to develop training and technical
    assistance materials. We have used our website to provide copies of the
    Board's guidelines and answers to frequently asked questions about the
    guidelines so that more customers can get the information they need.
    The number of user sessions on our website continues to grow. There
    were approximately 1,423,465 user sessions in fiscal year 2003, nearly
    200,000 more than the previous year. Due to the increasing use of the
    Board's website, we are focusing on web-based dissemination of
    information since this allows a variety of options for speedy
    distribution at a low cost to the Board. We also published and
    distributed six issues of Access Currents, a free newsletter the Board
    issues every other month by mail and e-mail. In addition, we responded
    to press inquiries from:
      --National and syndicated newspapers, magazines and radio and
            television shows such as: Houston Chronicle; Los Angeles Times;
            and the Washington Post.
      --Government related newspapers and journals including: Government
            Computer News and Federal Computer Week.
      --Disability related newsletters including: Report on Disability
            Programs and the Disability Compliance Bulletin.
      --Trade association periodicals such as: Transit Access Report; Land
            Development Today magazine; Buildings Magazine; States News
            Service; and the International Council of Cruise Lines
            newsletter.
      --Local newspapers, television, and radio stations such as: Orange
            County Register; Nashville City Paper; Daily Times (Merryville,
            TN); Canyon Current (Canyon City, CO); El Nuevo Dia (The New
            Day), a newspaper in Puerto Rico; and the Daily Camera
            (Boulder, CO newspaper).
        We also wrote an article on section 508 for Telecommunications for
    the Deaf, Inc. (TDI) and developed an article on the Board's section
    508 standards for the Information Technology and Disabilities Journal,
    a new, quarterly electronic journal.
        We added to our growing inventory of technical assistance materials
    by creating new brochures on the Board and the Architectural Barriers
    Act. We also posted several new documents on the Board's website,
    including a research report on play surfaces, a new report on audible
    pedestrian signal products and their interface with traffic signal
    controllers, and a summary on ADAAG's detectable warning requirements.
    We also updated the on-line version of ADAAG including the requirements
    for children's elements, prisons and courtrooms, play areas, and
    recreation facilities into one integrated document.
        Last September, the Board issued new guidelines that address access
    to various types of recreation facilities covered by the ADA. These
    guidelines, which supplement the Board's ADA Accessibility Guidelines,
    specify access to amusement rides, boating facilities, fishing piers
    and platforms, golf courses, miniature golf courses, sports facilities,
    and swimming pools, wading pools, and spas. The guidelines are one of
    the first of their kind in detailing access to these environments. To
    help users become familiar with the Board's new recreation facility
    guidelines, including the meaning and intent of specific provisions, we
    developed seven supplementary guides on each of the facility types
    covered. The guides summarize and explain requirements for each
    facility type.
    Fiscal Year 2004 Plans--Leading Source of Information
        The upcoming publication of the new ADA and ABA Accessibility
    Guidelines offers a timely opportunity to develop and implement an
    accessible web-based technical assistance and training strategy to
    augment current Board publications. Completion of the revised and
    reformatted ADA and ABA Accessibility Guidelines will necessitate a
    review of the Board's many technical assistance manuals and
    publications. Many documents will need revision; others may no longer
    be required, and some new publications may be indicated.
        The redesign of our agency graphic identity has provided us with a
    coordinated range of new templates for the layout of reports,
    bulletins, our internet presence, and other print and electronic
    materials. We developed this new and more appropriate graphic
    expression, including both logo and text, for our family of print
    materials. We did this to reflect the Board's professionalism and to
    communicate that we are the only Federal agency devoted to
    accessibility in the built environment and in communications and
    electronic technologies.
        Also, in a few years we will be largely finished with our planned
    rulemaking activities. It is an opportune time to share our
    accomplishments and insights with the rest of the world and encourage
    them to look at some of the access issues we have explored such as
    access to electronic and information technology, playgrounds, and
    recreation facilities. To do this will require that our documents
    become available in other languages. In fiscal year 2004, we will
    redesign most of our publications as well as our website using the
    Board's new graphic identity and will translate the ADA and ABA
    Accessibility Guidelines into other languages.
    Fiscal Year 2005 Objectives--Leading Source of Information
        In fiscal year 2005 and beyond, we will develop training and
    information materials on our planned final rules on outdoor developed
    areas, access to passenger vessels, and access to public rights-of-
    ways. As we publish final rules, we make every effort to ensure that
    training and technical assistance materials will be available to
    organizations and individuals that must apply the new requirements.
        Additionally, we plan to further our outreach activities to foreign
    government agencies who ask for our assistance in promoting access in
    their countries. In recent years we have hosted numerous delegations
    from other countries who are interested in learning more about our
    experiences with the Americans with Disabilities Act and other laws, as
    well as to discuss general accessibility issues. We plan to share our
    accomplishments and insights with the rest of the world by translating
    many more of our documents and guidelines into other languages and by
    looking for opportunities to work collaboratively with international
    entities on accessibility issues. With this new material we can more
    effectively encourage others to look at some of the unique access
    issues we have addressed.

             ARCHITECTURAL BARRIERS ACT COMPLIANCE AND ENFORCEMENT

        The Board enforces the Architectural Barriers Act (ABA), which
    requires that most buildings designed, constructed, altered, or leased
    by the Federal Government and certain other Federally financed
    facilities be accessible to people with disabilities. Complaints
    received by the Board concern post offices, national parks, military
    facilities, veterans hospitals, subway stations, and a variety of other
    facilities. When the Board has jurisdiction and finds that the
    applicable accessibility standards were not followed, we request a
    corrective action plan and monitor the case until the barrier is
    removed. Even when the Board does not have jurisdiction or no violation
    is found, we attempt to negotiate voluntary barrier removal.
        The Board's long-range goal is to work in partnership with Federal
    agencies and others to make the Federal Government a model of
    compliance with accessibility standards. The Board's experience with
    resolving complaints is that most violations are not intentional. When
    violations are found, it is usually because the people responsible for
    designing buildings, reviewing plans, and on-site construction did not
    have a good understanding of the accessibility standards and how to
    apply them. People responsible for building planning and design at
    headquarters, regional and field offices, and local sites must have a
    working knowledge of the accessibility standards if compliance is to be
    achieved. As Federal agencies are reorganized and personnel assignments
    and responsibilities change, it is important that agencies have
    effective systems for training new people responsible for applying the
    accessibility standards and for monitoring compliance with the
    Architectural Barriers Act. Training will be even more important when
    the accessibility guidelines and standards for the Architectural
    Barriers Act are revised.
    Fiscal Year 2003 Results--ABA Compliance
        In fiscal year 2003, the Board received 140 written complaints.
    These included complaints investigated under the Architectural Barriers
    Act, and also those concerning facilities not covered by that law but
    potentially covered by other laws, such as the Americans with
    Disabilities Act and the Rehabilitation Act. Of the 140 complaints, we
    opened 83 as new Architectural Barriers Act cases. Although the Board
    did not have authority under the Architectural Barriers Act in the
    other 57 complaints, we responded to the complainants, usually by
    referring them to the appropriate enforcement agency. In addition, we
    referred another 37 complainants to other agencies for action when our
    investigations revealed there was no violation of the Architectural
    Barriers Act or we did not have jurisdiction. The Board receives many
    comments from its customers, indicating they are pleased that we make
    this extra effort to ensure that their complaints are addressed. The
    Board continued its high rate of successful complaint resolution in
    fiscal year 2003. Of those cases closed where the Board had
    jurisdiction and a violation of applicable standards was found, 100
    percent resulted in the successful removal of barriers. Additionally,
    in those instances where the Board did not have jurisdiction over the
    facility or no violation was found, we negotiated voluntary barrier
    removal in 21 percent of the cases.
        The Board responds quickly to all new complaints and contacts
    complainants frequently to update them on the status of their
    complaints. In fiscal year 2003, the Board sent initial letters to
    complainants acknowledging receipt of their complaint or began an
    investigation of the issues they raised within an average of 4 days.
    The Board's customers regularly say they are pleased to hear from a
    Federal agency so promptly. It is Board practice to keep complainants
    informed on a regular basis throughout the course of our
    investigations. In fiscal year 2003, we contacted 116 complainants to
    provide updates on the status of their complaints.
    Fiscal Year 2003 Results--Working in Partnership with Agencies
        During fiscal year 2003 we continued ongoing actions under our
    long-term goal of working in partnership with agencies and others to
    make the Federal Government a model of compliance with accessibility
    standards. Under our partnership with the National Institutes of Health
    (NIH), we completed a series of training sessions on accessibility
    requirements under the Americans with Disabilities Act Accessibility
    Guidelines and the Uniform Federal Accessibility Standards.
        We completed our partnership with the General Services
    Administration (GSA) resulting in its development of a comprehensive
    desk guide of GSA policies and procedures regarding accessibility for
    use by GSA personnel to assist in implementing its National
    Accessibility Program. We also continued working in partnership with
    the Smithsonian Institution, Kennedy Center, and Library of Congress to
    develop a resource tool that organizations can use as guidance in
    evaluating and improving their emergency evacuation plans for persons
    with disabilities.
    Fiscal Year 2004 Plans--ABA Compliance
        In fiscal year 2004, the Board will continue to investigate
    complaints under the Architectural Barriers Act. At the beginning of
    fiscal year 2004, the Board had 104 active cases. We expect to receive
    145 new complaints in fiscal year 2004. Of this total, we estimate that
    85 will be opened as new Architectural Barriers Act cases and 60 will
    be referred to other agencies for enforcement under other laws, such as
    the Americans with Disabilities Act and the Rehabilitation Act. The
    Board anticipates responding to complaints in an average of 3 or fewer
    business days and will continue to provide periodic updates to
    complainants on the status of their complaints. We also will evaluate
    and refine our electronic complaint-filing system and the compliance
    and enforcement information presented on our website.
    Fiscal Year 2004 Plans--Working in Partnership with Agencies
        In fiscal year 2004, we will continue working with agencies to
    assist in development of ways to assess and improve plans for emergency
    evacuation of persons with disabilities. We will continue efforts to
    learn about plans or actions being developed by the standard-setting
    agencies with regard to implementation of the new ABA standards.
    Fiscal Year 2005 Objectives--ABA Compliance
        In fiscal year 2005, the Board will continue to investigate
    complaints under the Architectural Barriers Act. We estimate that we
    will have 105 active cases at the beginning of fiscal year 2005 and
    will receive 145 new complaints. We expect to open 85 new Architectural
    Barriers Act cases and refer 60 complaints to other agencies for
    enforcement under other laws. We will continue to provide good customer
    service.
    Fiscal Year 2005 Objectives--Working in Partnership with Agencies
        Once new ABA standards are issued by the standard-setting agencies,
    our objective will be to work with the agencies on the development of
    web-based training or other interactive methods to ensure their
    effective implementation. In addition, we will continue our efforts to
    work with agencies to identify and publicize best practices for
    ensuring ABA compliance.
                                     ______

                         OFFICE OF PERSONNEL MANAGEMENT

                Prepared Statement of Kay Coles James, Director

        Mr. Chairman and members of the subcommittee, I am pleased to have
    this opportunity to submit for the record a statement discussing the
    appropriations request for the Office of Personnel Management (OPM) for
    fiscal year 2005 and the relationship between that request and the
    implementation of the President's Management Agenda and other critical
    administration initiatives.
        Before reviewing the President's request for appropriations for
    OPM, I would like to provide some context by outlining briefly the
    significant strides we have made and the tremendous challenges we face.
        Consistent with our objective of shaping a Federal workforce that
    honors the President's commitment to the taxpayers for citizen-
    centered, results-oriented, market-based government, we have made the
    President's Management Agenda the cornerstone of our corporate
    management. We are proud to note that the Office of Management and
    Budget cited us as one of the two most improved agencies, based on our
    rating on the Executive Branch management scorecard. Our employees have
    embraced the agenda and work as a team to identify and solve management
    problems. Since September of 2002, under the competitive sourcing
    initiative, OPM employees have aggressively competed and won all 11
    competitions undertaken.
        Given the government-wide nature of our responsibilities, we have
    focused on improving the strategic management of human capital in all
    agencies in many ways. We have analyzed the human capital efforts of
    agencies and shared our insights and guidance by providing agencies
    with workshops, tools, and information on specific human capital
    topics.
        Perhaps our most groundbreaking achievement was our joint effort
    with the new Department of Homeland Security (DHS) in creating a human
    resources management (HRM) system that provides the flexibility to
    manage more than 180,000 employees in a manner consistent with the
    unique mission requirements of that Department. The pioneering
    development of such a system through a joint regulatory process was
    unique. The collaborative and inclusive nature of the process involved
    employees, managers, the Department's largest labor unions, and a broad
    array of stakeholders and experts from the Federal sector and private
    industry. Currently, we are reviewing the many comments submitted in
    response to the publication of draft regulations on February 20, 2004.
        In addition, in conjunction with DHS and other agencies, OPM
    assisted Federal employees with safety planning, both at work and at
    home. Our efforts involved producing a series of publications to
    educate Federal workers and their families on dealing with emergency
    situations and providing training for employees in both security and
    emergency procedures. Further, we have conducted, for the past 2 years,
    surveys on emergency planning in the agencies and have worked to
    highlight areas of improvement to ensure better safety for employees.
        Beyond DHS, OPM is now working in a total partnership, as
    prescribed by law, for the standup of the new National Security
    Personnel System at the Department of Defense (DOD). OPM and DOD are
    pursuing a similar process to that used during the DHS process, with
    joint agency staff teams, meetings with unions and stakeholders, and,
    ultimately, joint signoff of implementing regulations by Secretary
    Rumsfeld and me.
        In fiscal year 2005, our appropriations request will build on those
    achievements in several ways. First, it will help us to continue to
    focus on the strategic use of human resources flexibilities tailored to
    each agency's unique requirements.
        Second, it will enable us to build the capacity to hold agencies
    accountable for using tools effectively, as well as sustaining the core
    values of Federal service. Third, OPM's budget request includes funding
    for security and emergency action programs to support increased
    outreach efforts designed to ensure the safety and security of the
    Federal workforce. OPM's efforts are being conducted in conjunction
    with the DHS and the General Services Administration.
        A significant highlight of our request is the support for OPM to
    continue our critical work as the managing partner for e-Government
    projects. For example, our request for $6.615 million will allow us to
    complete the Federal payroll enterprise architectural model and
    recommend a technology solution to replace legacy systems following the
    consolidation of payroll providers. We project that this investment
    will help yield over $1 billion in cost savings and avoidance through
    the project's life cycle. Also, with $3 million in base funding and
    $3.9 million from our revolving fund, we will continue our recruitment
    one-stop initiative to operate and enhance the USAJOBS Federal
    employment information system, increasing usage and satisfaction for
    Federal job seekers. Since launching new technology in August of 2003,
    the USAJOBS website has been used by job seekers to log more than 53
    million visits; and more than 483,000 new resumes have been created by
    Americans interested in public service careers. Through the USAJOBS
    website, this initiative is delivering to Federal agencies a greater
    number of highly-qualified candidates in a more efficient and cost-
    effective manner.
        While the requests for other e-Government initiatives are somewhat
    smaller, they are no less crucial. The $2 million requested for the
    Enterprise Human Resources Integration effort will enhance the
    capability of agencies to submit timely and accurate data
    electronically to OPM's data warehouse. This data warehouse will help
    improve decision making and policy development through comprehensive,
    accurate, and efficient transfer of data, as well as by allowing
    improved analytics. Additionally, with our requested $2 million in
    salaries and expenses funding for e-Clearance, we will promote
    reciprocity of security clearances among agencies. Expanding
    reciprocity can save money and improve efficiency without adverse
    consequences to security.
        Our $800,000 request for the e-HRIS initiative will enable us to
    research, plan, and develop a project plan to establish standardized
    and integrated human resources information systems across the Federal
    Government, and the $685,000 sought for e-training will facilitate the
    transformation of the Go.Learn.gov site to a fully reimbursable
    activity that increases economies of scale and, through shared
    solutions, reduces duplicative investments.
        In addition to the innovative approaches taken in our e-Government
    initiatives, the establishment of the Human Capital Performance Fund is
    a major step toward transforming Federal employment by creating a pay-
    for-performance culture. This Fund is an important tool for use by
    Federal agencies in rewarding high-performance employees. It points the
    way toward greater emphasis on employee performance contributions to
    mission accomplishment, rather than longevity. By requiring robust
    performance management as a criterion for funding, it would also
    provide an incentive for agencies to improve their performance
    management systems and human capital strategies and align them more
    closely with their missions and goals.
        As you are aware, the establishment of this Fund has not affected
    the operation of the General Schedule pay system itself. Individual
    employees remain at their existing grades and steps and continue to
    receive annual across-the-board pay adjustments, locality payments, and
    periodic within-grade increases. However, if the request for $300
    million for the Human Capital Performance Fund is granted, high-
    performing employees will be rewarded with additional payments that
    will be treated as basic pay for the purposes of retirement and other
    benefits and will stay with the employees in the future.
        OPM will administer the Fund to ensure that agency plans for the
    distribution of payments from the fund are predicated strictly on
    appropriately assessed employee and/or organizational performance.
        Full funding of this request is essential to the progress of
    meaningful pay reform for the benefit of dedicated employees,
    critically challenged agencies, and taxpayers.
        Of course, beyond the e-Government initiatives and the Human
    Capital Performance Fund, OPM is requesting funding for the ongoing
    operation of our transformed agency. Our focus will be to build the
    government's capacity for human capital flexibility, accountability,
    and national security. With the funding we have requested for our new
    organizational framework--called Team OPM--we will concentrate on
    developing strategic human resources flexibilities through approaches
    tailored to each agency's unique requirements. We will also build the
    capacity to hold agencies accountable for using tools effectively, as
    well as sustaining the core values of Federal service. Also, as noted
    earlier, we will devote additional resources to the support of
    government-wide disaster and emergency action working groups.
        Turning to our request for resources to support these priorities,
    it is important to note that the total OPM fiscal year 2005 budget
    request of slightly more than $35 billion, an increase of nearly $1.4
    billion, includes appropriations that are 98 percent mandatory and only
    2 percent discretionary.
        OPM's general fund request for basic operating expenses totals
    $131.3 million and covers 831 full-time equivalent (FTE) employees.
    This includes $114.9 million in annual funds, $11.4 million in no-year
    funds for the e-Government projects discussed earlier (excluding
    recruitment one-stop), and $5 million in 2-year funds to coordinate and
    conduct program evaluation and measurement.
        The annual funds include an increase of slightly more than $3
    million and 24 FTE to increase the human capital support to agencies,
    to develop hiring solutions, to provide enhanced information technology
    support, to conduct competitive sourcing studies, and to support
    homeland security and emergency response needs.
        With regard to the transfers from benefits trust funds, OPM is
    requesting a total of nearly $128.5 million to support 1,151 FTE in the
    administration of the employee retirement and insurance programs. This
    includes more than $100.8 million in annual funds, representing an
    increase of almost $2.2 million from fiscal year 2004. These resources
    will be devoted to retirement benefits calculation, increased call
    center support during peak season, telephone system upgrades, and
    contract cost increases. The total also includes more than $27.6
    million in no-year funds for the retirement systems modernization
    effort.
        It is important to note here that a significant portion of the
    funding for the Office of the Inspector General in OPM is derived from
    trust fund transfers, too. That request will be discussed in greater
    detail by that office in a separate statement, but it should be
    mentioned that the overall request totals $18.1 million dollars and 140
    FTE. Of that total, $1.6 million would come from general funds, while
    $16.5 million would represent transfers from the trust funds. Of
    course, we strongly support the important work of Inspector General Pat
    McFarland and his fine staff. OPM maintains an independent relationship
    with the IG, but on issues of common concern, such as the maintenance
    of employee and retiree confidence in the trust funds and the Combined
    Federal Campaign, the teamwork and professionalism of the IG and his
    staff are outstanding.
        In addition to the 141 FTE financed by reimbursements from other
    agencies for the provision of HRM technical assistance and from OPM
    programs for the provision of agency-wide services, it is also worth
    noting that OPM provides a variety of services that are financed by
    payments from other agencies through our revolving fund.
        For ongoing revolving fund programs, the fiscal year 2005 budget
    includes slightly more than an estimated $1 billion in obligations and
    2,601 FTE to be financed by payments from other agencies for OPM's
    services.
        These services include professional development and continuous
    learning for Federal managers and executives; providing one-stop access
    to high-quality e-training products and services; testing potential
    military personnel for the Department of Defense in those locations
    where it is cost-effective for OPM to do so; providing employment
    information and assessment services; automating other agencies'
    staffing systems; providing examining services when requested by an
    agency; providing technical assistance and consulting services on all
    facets of HRM; coordinating the selection and development of
    Presidential Management Fellows; and, through contracts with private
    companies, conducting suitability and security investigations.
        As always, the OPM budget request includes mandatory appropriations
    to fund the government contributions to the health benefits and life
    insurance programs for Federal annuitants. This is because OPM serves
    as the ``employing agency'' for these individuals relative to these
    benefit programs.
        Given the mandatory nature of these payments, we are requesting a
    ``such sums as may be necessary'' appropriation for each of these
    accounts. We estimate that, for the 500,000 annuitants under age 65 who
    elect post-retirement life insurance coverage and for whom we are
    responsible, $35.0 million will be needed, while an appropriation of
    about $8 billion will be required to pay the government's share of the
    cost of health benefits coverage for the 1.9 million annuitants who
    participate in that program. That represents an increase of $688
    million over fiscal year 2004.
        In addition, as mandated by the financing system established in
    1969 by Public Law 91-93, liabilities resulting from changes
    (principally pay raises) since that year which affect retirement
    benefits must be amortized over a 30-year period. We are requesting a
    ``such sums as may be necessary'' payment to the Civil Service
    Retirement and Disability Fund for that purpose. We estimate the amount
    needed to be $26.4 billion, an increase of $402 million to cover this
    service cost that is not funded by and for active employees under the
    Civil Service Retirement System.
        Finally, the President's budget for fiscal year 2005 proposes a pay
    increase for white-collar workers of 1.5 percent, to be distributed
    between an across-the-board raise and locality pay as determined by the
    President later in the year. In addition, funding in the amount of 0.2
    percent has been included in agency budgets for use in addressing
    specific recruitment and retention needs. When combined with the basic
    pay adjustment and the $300 million request for the Human Capital
    Performance Fund, the overall amount available for a pay adjustment
    amounts to 2.0 percent.
        Once again, we have included in the government-wide general
    provisions in the budget the appropriate legislative language to ensure
    that blue-collar Federal employees receive pay adjustments up to the
    amount received by their white-collar colleagues if warranted by local
    private sector market rates.
        Thank you for the opportunity to discuss OPM's request for the
    record. I would be pleased to provide any additional information the
    subcommittee may require.
                                     ______

         Prepared Statement of Patrick E. McFarland, Inspector General

        Mr. Chairman and members of the subcommittee, thank you for
    providing me with this opportunity to discuss the President's fiscal
    year 2005 request for appropriations for the Office of the Inspector
    General (OIG). The total request for the Office of the Inspector
    General is $18,088,000, which is an increase of $2,257,000 above the
    amount appropriated in fiscal year 2004. Of this amount, $1,627,000 is
    from the salaries and expenses/general fund, and $16,461,000 is from
    the trust funds. The additional resources are requested to:
      --Increase criminal investigative oversight of the Office of
            Personnel Management (OPM) administered trust fund programs;
      --Conduct audits of pharmacy benefit managers participating in the
            Federal Employees Health Benefits Program (FEHBP);
      --Expand the scope of audit for the largest community-rated health
            maintenance carriers;
      --Further develop computer assisted audit tools and techniques to
            ensure effective audits of the FEHBP;
      --Increase the number of health carrier information systems audits;
            and
      --Provide pre-award contract audit support.
        The Office of the Inspector General recognizes that oversight of
    the retirement and health and life insurance trust funds administered
    by OPM is, and will remain, its most significant challenge. These trust
    funds are among the largest held by the United States Government. Their
    assets totaled $650.0 billion in fiscal year 2003, their revenue was
    $78.2 billion, and their annual program and operating expenses were
    $164.1 billion. The amounts of their balances are material to the
    integrity of the government's financial position. I continue to
    allocate the vast majority of the Office of the Inspector General's
    efforts and resources to trust fund oversight, and we remain fully
    committed to trust fund activities.
        OPM makes outlays from the retirement trust funds in the form of
    payments to millions of annuity recipients. The health insurance trust
    fund provides payments to approximately 260 health insurance plans
    nationwide. In turn, the health insurance carriers pay millions of
    claims for services filed by their enrollees and health care providers.
    We have shown through our investigations and audits that such health
    insurance payments may be at risk through improper, inaccurate or
    fraudulent claims.
        We are obligated to Federal employees and annuitants to protect the
    integrity of their earned benefits. Our audit and criminal
    investigative work reduces losses due to fraud and otherwise improper
    payments and recovers misspent funds whenever possible. We have a
    special obligation to the Federal agencies and the American taxpayers
    who provide the majority of the funding.
        The Office of the Inspector General has achieved an impressive
    record of cost effectiveness. Audits and criminal investigations of the
    OPM administered trust fund programs have resulted in significant
    financial recoveries to the trust funds and commitments by program
    management to recover additional amounts. Since fiscal year 1992, these
    recoveries and commitments have exceeded $1 billion which is
    approximately $10 of positive financial impact for each direct program
    dollar spent. In addition, we believe that Office of the Inspector
    General audits and criminal investigations provide a significant
    deterrent against future instances of fraud, waste, and abuse.
        The Office of the Inspector General's fiscal year 2005 request
    includes additional resources totaling $2.25 million. Of this amount,
    $0.6 million will be used to increase criminal investigative oversight
    of the Federal Employees Health Benefits Program and the Civil Service
    Retirement/Federal Employees' Retirement programs.
        These additional criminal investigative resources will be dedicated
    to speed the handling of our current inventory of criminal
    investigative cases and also increase our ability to handle the growing
    number of referrals we have been receiving because of past success. As
    a result of this additional oversight, we expect to increase the number
    of arrests, indictments and convictions by approximately 60 percent, as
    well as increase financial recoveries by $5 million for the trust funds
    from criminal investigations. We are particularly concerned with the
    extent to which health care fraud puts the health and safety of current
    Federal employees, annuitants, their survivors, and eligible family
    members at risk.
        An additional $0.7 million will be used to conduct audits of
    pharmacy benefit managers (PBMs). It is estimated that $6 billion will
    be paid during 2004 in prescription drug premiums by the Office of
    Personnel Management and Federal employees. This represents
    approximately 26 percent of total premiums paid for health benefits
    coverage for Federal employees and annuitants. The premiums paid for
    prescription drug coverage have risen exponentially over the last 10
    years. However, Federal prescription drug benefits have never been
    audited because the FEHB Program historically has defined health care
    providers and suppliers as other than Federal subcontractors. Since
    health care providers and suppliers, including PBMs were not
    subcontractors, they were not subject to our audits. In light of
    increasing expenditures on prescriptions and allegations against PBMs,
    the FEHB Program has amended its carrier contracts to define PBMs as
    Federal subcontractors subject to our audits.
        By performing these audits, we will help the FEHBP recover
    inappropriate costs charged to it in previous years, negotiate more
    favorable contracts, and positively affect the future costs and
    benefits provided to program enrollees. Ultimately, these audits will
    reduce health care costs while improving the quality of health care for
    FEHBP enrollees.
        An additional $0.5 million will be used to expand the scope of
    audits for the largest community-rated health maintenance organization
    carriers participating in the FEHBP. During fiscal year 2002, $4.9
    billion of FEHBP premiums were paid to community-rated carriers. Of
    this amount, $3.4 billion was paid to 25 carriers most of whom use some
    sort of experience-based rating to set premiums. The additional
    resources will enable us to expand the audit testing to include reviews
    of this information to identify overpayments charged to the FEHB
    Program which will result in increased financial recoveries to the
    Program totaling approximately $5 million.
        An additional $0.3 million will be used to increase the efforts of
    our office's information systems audit program. The purpose of this
    program is twofold: (1) to perform information systems audits of Office
    of Personnel Management systems, including computer security, and (2)
    to develop computer-assisted audit tools and techniques (CAAT) such as
    computer claims analysis applications that our auditors use while
    conducting carrier audits. These new computer-related resources will be
    used primarily to increase the number of information systems audits we
    conduct on providers participating in the FEHBP.
        Also, we will further our development of a data warehouse of health
    benefit claims. A data warehouse offers the best opportunity for
    detecting erroneous health benefit payment transactions by medical
    providers, insurance carriers and subscribers by accumulating all
    benefit claims for all fee-for-service insurance carriers in a single
    data repository. This effort will enhance our current claims reviews by
    enabling the auditors to target certain types of potential claim
    payment errors on a program-wide rather than on a plan-by-plan basis.
    This will provide a significant improvement in our audit efficiency and
    effectiveness by offering us the opportunity to address significant
    issues one time only, instead of multiple times per year and to recover
    overcharges to the program when appropriate.
        The data warehouse will provide information enabling our criminal
    investigative staff to react quickly to criminal investigative leads.
    For example, the OIG investigators will be able to determine the
    potential program risks associated with an identified provider or
    subscriber fraud allegation, and take appropriate action in a matter of
    hours instead of the days or weeks currently required.
        The remaining $0.1 million increase will be used to obtain
    technical expertise in the field of pre-award contract auditing. We
    will perform audits of selected bid proposals before OPM enters into
    large contracts with vendors.
        I would also like to bring to your attention the significant
    progress we have made in implementing Public Law 105-266, the Federal
    Employees Health Care Protection Act of 1998. Final regulations
    necessary to implement the financial sanctions authorities provided in
    this legislation were published in the Federal Register in March 2004.
    These financial sanctions, in the form of civil monetary penalties and
    monetary assessments, provide OPM the ability to recover, through
    administrative action, FEHBP funds lost to provider misconduct. In
    addition, we believe they will serve as a deterrent against FEHBP
    program violations.
        Also, OPM is now using new suspension and debarment regulations
    that went into effect during fiscal year 2003, to process actions. To
    date over 3,400 debarments under the new authorities have been issued.
    These new authorities are more efficient to administer and are designed
    specifically to address health care provider integrity concerns within
    the FEHBP. They have largely supplanted the previous regulations which,
    although we have used them to issue over 24,000 debarments and
    suspensions since 1993, are relatively inefficient to operate and,
    since they were dependent on Medicare or other agency debarments, were
    not tailored directly to the health, safety, and integrity issues that
    are most significant in the FEHBP.
        Thank you for this opportunity to present my resource request for
    fiscal year 2005.
                                     ______

                        GENERAL SERVICES ADMINISTRATION

                            Public Buildings Service

             Prepared Statement of F. Joseph Moravec, Commissioner
        As Commissioner of the Public Buildings Service of the U.S. General
    Services Administration, I am pleased to present a statement for the
    record regarding our fiscal year 2005 budget request.
        There are three primary programs within the Federal Buildings Fund
    (FBF)--New Construction, Leasing, and Asset Management.

                                NEW CONSTRUCTION

        We construct new buildings when our agency customers have a need
    for specialized space. The majority of our newly constructed buildings
    are courthouses, border stations, laboratories and highly specialized
    facilities like the U.S. Mission to the United Nations and the National
    Oceanic and Atmospheric Administration, (NOAA) Weather Satellite
    control center. The courthouse construction program has a fewer number
    of projects this year due to the large investment required to construct
    the Los Angeles, CA Courthouse. This project is the No. 1 priority on
    the Judiciary's 5-Year Plan, which reflects priorities approved by the
    Judicial Conference.
        As part of our performance-based budget, we have committed to
    completing 85 percent of our new construction projects on schedule, and
    within 1 percent of the original appropriation by fiscal year 2005. PBS
    is undertaking many initiatives to keep projects on schedule and within
    budget. Project status is being closely monitored throughout design and
    construction to alert us to any emerging issues in a timely manner. For
    projects over $25 million, evaluations are scheduled at 15 percent, 60
    percent and 100 percent of the design process. In addition, a new
    performance measurement tool has been developed and implemented. This
    tool allows comparison of a project's construction schedule and outlays
    to standards and reports variances for both measures.

                                    LEASING

        GSA has a total leased inventory of over 160 million square feet
    located in 6,200 buildings across the United States and its
    territories. Our leasing program is an important tool for managing our
    portfolio because when clients' space requirements cannot be met with
    available Federal space, we lease space from the private sector. This
    program area has been undergoing significant expansion due to the
    growth of Defense, law enforcement, and security-related agencies. The
    decision to lease space is part of a coherent overall local Portfolio
    Strategy. Our strategies to keep leasing costs at or below market
    levels include comparing lease offers to comparable industry
    benchmarks, using market surveys to comparison shop for best prices,
    using published market sources to gain a better understanding of area
    markets and partnering with the private sector for brokerage services.
    We are very proud that our vacant space within our leased inventory is
    1.4 percent. The top priority within the Leasing Program is
    implementing the National Broker Contract. Analysis has indicated that
    ``no cost'' contracts and limited fee-based broker contracts will help
    meet future capacity needs, lower leasing costs and provide a higher
    level of customer service and satisfaction. GSA has taken the first
    steps toward implementing this important initiative.

                                ASSET MANAGEMENT

    Repairs and Alterations
        Our inventory of owned buildings contains more than 100 million
    square feet of space where the design and physical condition of the
    space make it very difficult to meet modern day needs. This space
    typically has inefficient energy systems, lacks the flexibility to
    readily provide state-of-the-art information technology features to
    occupants and--for those buildings constructed during the 1960's and
    1970's--have exterior materials which have outlived their useful lives.
    To address many of these issues we have instituted a portfolio
    restructuring and reinvestment strategy that uses private sector
    techniques to tier our owned properties, remediate those that can still
    cost-effectively contribute to the overall financial strength of the
    FBF, and reshape other parts of the portfolio to include disposal of
    some properties. GSA measures the percentage of government-owned assets
    with a Return on Equity greater than 6 percent to gauge progress in
    this area. For each of the past several years, we have directed nearly
    $1 billion toward the reinvestment in the modernization of our
    inventory, with on-time, on-budget completion a program priority.
    Within government owned space, the vacancy rate is 8.3 percent with 35
    percent committed to tenants and 25 percent currently under
    construction or alteration. That makes the amount of vacant available
    space in the owned inventory 5.0 percent.
    Operations
        The most critical initiative affecting the Asset Management program
    is the Human Capital Strategy. The Human Capital Strategy/Workforce
    Transformation project is primarily driven by the following factors:
      --An aging workforce and previous inability to replenish talent lost
            through attrition;
      --Customer demands for more complete real estate services; and
      --Skills needed to focus PBS business priorities on customer
            relationships.
    PBS is currently engaged in implementing a comprehensive Human Capital
    Strategy that will guide the recruiting, training, management and
    deployment of our most important asset in the years ahead.
        For GSA to meet our customers' expectations and remain cost
    competitive with the private sector, we must maintain below-market
    operating costs and reduce energy consumption, while simultaneously
    maintaining a high level of customer satisfaction. Our strategy is to
    leverage buying power through better planning, using national tools
    like the Federal Supply Schedule, and holding contractors accountable
    for performance. We must leverage our workforce via user-friendly
    contracting vehicles, multi-regional operations/maintenance and energy
    contracts, electronic data systems, contractual data sharing, workload
    visibility, and national vendor alliance management and acquisition.
    Because many operational services are readily available from the
    private sector, and to obtain the best possible value for the taxpayer,
    we are subjecting many of the activities we currently perform with in-
    house staff to the rigorous analysis required by the A-76 process.
        I am willing to answer any questions you or other members of the
    subcommittee may have on the President's fiscal year 2005 budget
    request for the General Services Administration.
                                     ______

                        GENERAL SERVICES ADMINISTRATION

             Prepared Statement of Stephen A. Perry, Administrator

        Mr. Chairman and members of the committee, the General Services
    Administration (GSA) budget request for fiscal year 2005 reflects our
    strong commitment to fulfilling our mission, which is: ``to help
    Federal agencies better serve the public by offering, at best value,
    superior workplaces, expert solutions, acquisition services and
    management policies. All areas of GSA, including the Public Buildings
    Service, the Federal Technology Service, the Federal Supply Service,
    our Office of Governmentwide Policy and our Office of Citizen Services
    are working together to efficiently and effectively meet the
    requirements of our Federal agency customers and the public.
        Americans demand that the Federal Government show results.
    Accordingly, President Bush has challenged GSA and all Federal agencies
    to improve performance through the use of good management practices as
    outlined in the President's Management Agenda. In striving to achieve
    improved performance results, Federal agencies often rely upon GSA to
    provide the property management and acquisition services they need for
    successful operation. Additionally, each Federal worker relies upon
    GSA's assistance in creating a productive work environment by providing
    the appropriate facilities, equipment, supplies and services they need.
    GSA is committed to achieving our critically important mission in an
    efficient and effective manner that yields best value for the American
    taxpayer.
        In the last few years, GSA has strengthened its Performance
    Management Process to document customer-focused goals, action plans and
    performance measures to enhance our achievement of high performance
    results and accountability. Our fiscal year 2005 budget request will
    provide the resources needed to achieve these high priority goals in
    support of Federal agencies, including our support of the U.S.
    Military, Homeland Security, the Judiciary and other law enforcement
    and security related agencies.
        As you know, GSA offers its core expertise in acquisition services
    to Federal agencies on a ``non-mandatory'' basis. Therefore, agencies
    can decide to devote their own resources directly to the acquisition
    process or they can use GSA to provide this service. Where GSA provides
    the most efficient and effective approach, agencies are increasingly
    deciding to use GSA and thereby reducing the overall cost to the
    government. Further, this enables the customer agency's personnel to
    avoid duplication of effort and focus on their core missions. GSA
    charges fees to cover its costs and most of GSA's resources come from
    these customer payments. In fact, only a relatively small amount of GSA
    resources, close to 1 percent of funding, is from direct
    appropriations.

                        FISCAL YEAR 2005 BUDGET REQUEST

        The total GSA budget for fiscal year 2005 budget is $24.3 billion.
    This is a 3.0 percent increase over fiscal year 2004, representing
    increased business in revolving funds (i.e., the General Supply Fund
    and the Information Technology Fund). Approximately 1 percent, or $218
    million, of this amount is for funding GSA's appropriated activities.
        The volume of services that GSA provides to other Federal agencies
    has increased each year because of our successful efforts to make GSA a
    more timely and cost-effective source for property management and
    acquisition services. At the same time, we have made process
    improvements and significantly streamlined our organization. Our
    employment level of 12,508 for fiscal year 2005 is 26 percent below the
    fiscal year 1995 levels. Lower employment levels mean that only 5.0
    percent, or $1.2 billon, of our budget is expended for salaries and
    benefits and that 95 percent of GSA's funding is spent directly with
    private sector firms for goods and services procured on behalf of
    Federal agencies.
        For fiscal year 2005, although our overall net request for budget
    authority is down $225 million from fiscal year 2004, given the
    increased income level there is a robust construction and repair and
    alteration program. In addition, our request also funds modest spending
    increases to support our E-Government component of the President's
    Management Agenda. The fiscal year 2005 budget does not include a
    request for an appropriation to the Federal Buildings Fund (FBF). The
    FBF New Obligational Authority request is funded entirely from rent
    revenue and other income to the Fund.
    Public Buildings Service
        GSA's Public Buildings Service (PBS) has reinvigorated the process
    for carrying out its responsibility to maximize the value of GSA's
    portfolio of government-owned buildings. The government-owned
    facilities under GSA's stewardship represent a real estate portfolio
    with a replacement value of approximately $34.7 billion. For fiscal
    year 2005, we are requesting $7.2 billion in New Obligational Authority
    (NOA) to spend available resources in the Federal Buildings Fund. Of
    this amount, $980 million is for our Repairs and Alterations program.
        One of GSA's biggest financial challenges is funding the large
    backlog of deferred maintenance and repair work at its government-owned
    facilities. To address this challenge, we have taken steps to transform
    our owned portfolio into one comprised of well-maintained, modernized,
    functional assets with positive cash flows. We have determined that in
    order to better allocate our funds for capital investment, we must
    redeploy our non-performing assets so that those properties that remain
    in our portfolio will provide appropriate workplaces for Federal
    workers.
        PBS has begun to implement the policy of Executive Order 13327 on
    Federal Real Property Asset Management. GSA already ``promotes the
    efficient and economical use of America's real property assets.'' We
    use asset management principles to allocate the limited resources of
    the Federal Buildings Fund to address the backlog of Repairs and
    Alterations projects. These asset management principles were applied to
    develop our $980 million Repairs and Alterations program for fiscal
    year 2005. The program includes:
      --$394 million for basic (non-prospectus) Repairs and Alterations
      --$473 million for prospectus Repairs and Alterations
      --$50 million for design
      --$13 million for chlorofluorocarbons program
      --$30 million for energy conservation program
      --$20 million for glass fragmentation retention program
        There is $650 million for Construction and Acquisition of
    Facilities in GSA's fiscal year 2005 budget request. It includes the
    following projects:
      --$381 million for construction for U.S. Courthouses in Los Angeles,
            CA and El Paso, TX; and design of a U.S. Courthouse in San
            Diego, CA
      --$89 million for FDA Consolidation in Montgomery County, MD
      --$14 million for FBI Facility in Los Angeles, CA
      --$2 million for Southeast Federal Center Site Remediation,
            Washington, DC
      --$53 million to purchase 10 West Jackson Blvd., Chicago, IL
      --$91 million for 12 Border Stations
      --$10 million for non-prospectus construction and acquisition
      --$10 million for repayment to the Judgment Fund
        Government-owned space represents approximately half of our
    inventory, however, today we are continuing to secure leased space to
    meet general-purpose office and special space needs. For fiscal year
    2005 we project adding 2.6 million rentable square feet of leased space
    to our inventory. Under the Federal Buildings Fund operating programs,
    the $3.7 billion budget for Rental of Space is based on projections of
    known requirements such as (1) leases already in the inventory and the
    scheduled cost increases associated with these leases and (2)
    identified expansion and cancellation projects.
        The $1.7 billion budget request for Building Operations funds
    essential building services provided by PBS for facilities occupied by
    our Federal Government customers, including cleaning, maintenance,
    minor repairs, utilities, space management and other building services.
        The following performance measures illustrate some of our
    successes.
      --Costs for leased space are 7.4 percent below the industry average.
      --Operating costs are 14.8 percent below industry benchmarks.
      --Energy consumption has been reduced by 19 percent from the fiscal
            year 1985 baseline. PBS plans to reduce energy consumption by
            an additional 11 percent by the end of fiscal year 2005.
      --PBS has improved the percentage of Repairs and Alterations projects
            completed on time from 75 percent in fiscal year 2001 to 78
            percent in fiscal year 2003.
    Electronic Government
        Expanding the scope and level of the Federal electronic government
    (E-Gov) program is a major focus of the President's Management Agenda.
    Through E-Gov initiatives GSA is transforming the way information is
    disseminated to the American people. By leveraging Internet
    technologies, GSA is building a more citizen-centric and results-
    oriented Federal Government. In support of E-Gov initiatives, our
    budget request includes $23.4 million in Operating Appropriations for
    select E-Gov initiatives led by GSA, $5 million for the E-Gov Fund, and
    $40 million in the General Supply Fund for government-wide initiatives.
        To provide much needed resources for E-Gov projects, GSA is
    proposing a new general provision that would amend existing law to
    permit the Administrator, after consulting with the Office of
    Management and Budget, to retain surplus funds generated by the
    operation of the General Supply Fund in an amount not to exceed $40
    million in any given fiscal year and use those funds for E-Gov
    initiatives. These funds would be used for government-wide E-Gov
    projects for purposes authorized under the E-Gov Act of 2002 (Section
    3604 of Title 44). The fiscal year 2005 budget anticipates $40 million
    in funding from the GSA General Supply Fund.
        GSA realizes that common solutions shared by agencies are
    absolutely critical to the effective and secure operations of the
    government. The $23.4 million requested in the fiscal year 2005 budget
    will be used to provide standardized Federal approaches to electronic
    government. GSA will provide a leadership role to customer agencies by
    integrating key E-Gov initiatives into the daily business of
    government. For example:
      --USA Services, one of the President's E-Gov initiatives, is part of
            GSA's Office of Citizen Services and Communications. USA
            Services seeks to make government more citizen-centric by
            providing a front door where citizens can get answers to their
            questions about the Federal Government by phone, on line, by e-
            mail, or by print publications. At the same time, USA Services
            seeks to improve citizen customer service government-wide. We
            are requesting $1.5 million to establish government-wide
            standards in customer service, performance benchmarking, and
            best practices for Federal contact centers responding to
            citizen inquiries.
      --A component of USA Services is the internet site FirstGov.gov, the
            official web portal of the U.S. Government. We are requesting
            $17.3 million, an increase of $3.7 million, to maintain and
            enhance FirstGov.gov by further leveraging Internet technology
            and by providing a highly secure environment. And by sharing
            the FirstGov technology and infrastructure, we are helping the
            government reduce costs. In fiscal year 2003, there were 580
            Federal web sites using FirstGov.gov search services as their
            primary search engine mechanism, equating to a savings of $21
            million from avoiding the need to purchase search engine
            software for each individual web site.
      --GSA is playing a key role in setting standards for identity
            management and electronic authentication. In order for the
            Federal e-Government initiatives to be successful, the Office
            of Governmentwide Policy is working towards establishing a
            cross-agency governance structure and process for e-
            Authentication and identity management in order to unify
            Government systems. GSA is requesting $4.6 million to support
            this effort, an increase of $0.57 million.
        Another key E-Gov initiative led by GSA is e-Travel. In 2003, the
    Office of Governmentwide Policy (OGP) and our partner agencies
    established a standard booking engine as well as a consistent travel
    and voucher system for the Federal Government. As the e-Travel service
    becomes operational, management of the e-Travel contracts will transfer
    from the Office of Governmentwide Policy (OGP) to the Federal Supply
    Service (FSS) in fiscal year 2005. FSS will integrate e-Travel with
    GSA's other travel service offerings. GSA will provide an additional
    $9.9 million to this E-Gov project in fiscal year 2005 through the
    General Supply Fund.
        We believe these and other E-Gov initiatives are critical to
    becoming a citizen-centric government. These projects provide
    government-wide solutions to meet common needs across agencies, thus
    eliminating redundancies and duplicate spending.

                             APPROPRIATION REQUEST

        While only about 1 percent of the total proposed budget is funded
    through direct appropriations, our Operating activities are a vitally
    important part of GSA's total program. These funds support our Office
    of Governmentwide Policy function, the Office of Citizen Services and
    Communications, the E-Gov Fund, the Office of Inspector General, Former
    Presidents, the Presidential Transition, and various other operating
    programs. The $218 million requested is $15 million above fiscal year
    2004 levels. Approximately half of this increase, $7.7 million, is for
    Presidential transition.
        Our request is shown by account in the following table:

                                         THE FISCAL YEAR 2005 BUDGET IN SUMMARY
                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                        Fiscal Year     Fiscal Year     Fiscal Year
                                                                        2003 Actual    2004 Current    2005 Request
    ----------------------------------------------------------------------------------------------------------------
                            TOTAL OBLIGATIONS

    Operating Accounts (Appropriations).............................        $853,133        $206,550        $218,682
    Federal Buildings Fund Direct (Including Appropriations)........       6,546,606       7,100,494       7,313,195
    Reimbursable Programs...........................................       1,245,899       1,014,798       1,155,694
    Real Property Relocation........................................  ..............           6,050           6,000
    General Supply Fund.............................................       4,066,351       4,896,773       5,130,708
    Information Technology Fund.....................................      10,034,941       9,970,687      10,071,313
    Working Capital Fund............................................         316,914         347,877         357,698
    Federal Citizen Information Center Fund (Reimb.)................           2,650           3,901           4,353
    Permanent Appropriations........................................          15,928          29,493          34,926
                                                                     -----------------------------------------------
          Subtotal..................................................      23,082,422      23,576,623      24,292,569
                                                                     ===============================================

                     REQUIRING APPROPRIATIONS ACTION

    Operating Appropriations:
        Office of Governmentwide Policy.............................          55,569          59,669          62,100
        Operating Expenses, GSA.....................................          81,089          83,971          82,175
        Electronic Government Fund..................................           4,968           2,982           5,000
        Election Reform Payments....................................         650,000               0               0
        Election Reform Reimbursements..............................          14,903               0               0
        Office of Inspector General.................................          37,270          38,938          42,351
        Federal Citizen Information Center..........................          13,356          13,917          14,907
        Presidential Transition.....................................               0               0           7,700
        Former Presidents...........................................           3,156           3,373           3,449
                                                                     -----------------------------------------------
          Subtotal Budget Authority/Appropriation...................         860,311         202,850         217,682
                                                                     ===============================================

    Federal Buildings Fund New Obligational Authority:
        Construction & Acquisition of Facilities....................         734,868         745,314         650,223
        Repairs and Alterations.....................................         985,009       1,002,997         980,222
        Installment Acquisition Payments............................         178,897         169,677         161,442
        Rental of Space.............................................       3,381,265       3,551,032       3,672,315
        Building Operations.........................................       1,546,514       1,608,064       1,709,522
                                                                     -----------------------------------------------
          Subtotal FBF New Obligational Authority...................       6,826,553       7,077,084       7,173,724

        FBF Net Budget Authority....................................         463,347         254,194          15,447
        FBF Appropriations..........................................         375,711         459,669               0
                                                                     -----------------------------------------------
          TOTAL, Transportation/Treasury Appropriation Action (BA/         7,673,508       7,266,017       7,376,499
           NOA).....................................................
                                                                     ===============================================

        Budget Authority............................................       1,310,302         443,127         218,222
        Appropriations..............................................       1,222,666         648,602         202,775
    Total, VA/HUD Appropriations Action (BA): Federal Citizen                 13,356          13,917          14,907
     Information Center (Direct)....................................
    ----------------------------------------------------------------------------------------------------------------

        Mr. Chairman, this concludes my formal statement, and I look
    forward to continuing to discuss our fiscal year 2005 budget request
    with you, members of the committee and your staff.
                                     ______

                          DEPARTMENT OF TRANSPORTATION

                  Federal Motor Carrier Safety Administration

            Prepared Statement of Annette M. Sandberg, Administrator

                    OVERVIEW: SAFETY, SECURITY, PRODUCTIVITY

        People depend on motor carriers for the safe, reliable, and
    efficient movement of the goods they use everyday. The trucking
    industry comprises almost 650,000 motor carriers operating in
    interstate commerce and some 7.9 million large trucks. Trucks account
    for most of the freight movement in our Nation's transportation system.
    Approximately 80 percent (by value) of all domestic commodity movements
    are carried by truck. The trucking industry also employs approximately
    9.9 million people in jobs related to trucking activity, including
    several million drivers. People rely on motor coaches for safe and
    secure transportation. Commercial motor coaches traveled 2.4 billion
    miles in 2001, carrying more than 500 million passengers. Clearly, both
    the trucking and motor coach industries contribute to competitiveness
    and a robust economy.
        Mobility, as crucial as it is to our economic well-being, presents
    significant hazards in terms of safety on our highways. Trucks and
    buses share roadways with passenger vehicles and pedestrians. Over the
    last several years, approximately 5,000 people have died annually in
    crashes involving a truck. This is unacceptable. Truck transportation
    of hazardous materials presents even greater potential safety
    consequences. And, there is increasing recognition and appreciation
    that there can be no safety without security. In most cases, there is a
    close connection between safety and security, and strategies designed
    to mitigate one often impact both.
        FMCSA has defined five strategic goals linking to Department of
    Transportation and national objectives, illustrated in Figure 1 below.
    Among these, safety is FMCSA's primary mission. At the same time, the
    agency looks to employ a coordinated strategy that balances the inter-
    relationships between these missions and leverages solutions that
    achieve the greatest overall public good.

        The agency's $455 million request for fiscal year 2005 will fund
    programs and activities supporting all five agency strategic goals.
    Figure 2, below, illustrates the allocation of funds by agency
    strategic goal in our fiscal year 2005 budget request.

                                   CMV SAFETY

        Safety is the capstone of this agency's strategic hierarchy. The
    FMCSA safety vision is to develop and promote, in coordination with
    other Departmental modes, data-driven, analysis-based, and innovative
    programs to achieve continuous safety improvements in the Nation's
    highway system, intermodal connections, and motor carrier operations.
    Saving lives and reducing crashes involving trucks and motor coaches on
    our highways is the agency's primary mission, and our fiscal year 2005
    budget request allocates approximately 86 percent of the agency's
    resources to 10 performance segments in support of this strategic goal.
    Figures for 2002 show a reduction in truck-related fatalities of 4.2
    percent from 2001, despite a projected increase in truck vehicle miles
    traveled (TVMT). This decrease extends to five consecutive years (1998-
    2002) the trend of improved commercial motor vehicle safety. We may be
    beginning to realize the results of agency regulation and safety
    interventions undertaken since the establishment of the agency in 1999,
    enabling us to pursue with greater confidence our coordinated safety
    strategy.
        With the encouragement of Secretary Mineta, FHWA Administrator
    Peters, NHTSA Administrator Runge, and I are coming together for
    safety. Improving highway safety is an administration and national
    goal. All highway fatalities are unacceptable. If we are to stem the
    tide of this terrible loss of life on our Nation's highways we all must
    play a role, combine our knowledge and expertise, and coordinate our
    program delivery. My colleagues and I share the belief that our
    programs are complementary rather than competing. So, FMCSA will work
    together with FHWA and NHTSA to pool and focus our effort, energy, and
    resources where they will have the greatest impact on safety. Our new
    CMV safety goal, harmonized with the DOT Highway Safety performance
    goal and FHWA and NHTSA measures, evinces our intermodal approach.
    Encouragingly, FMCSA achieved its fatality rate performance target for
    2002.
        Enforcement is FMCSA's primary safety mitigation strategy and the
    agency's core competency. Appropriately, it is the focus of the
    greatest share of program resources. FMCSA conducts enforcement
    operations and provides grants to support State enforcement efforts. To
    the extent possible, we look to increasingly align Federal and State
    enforcement operations in mutually-reinforcing ways. The effectiveness
    of enforcement interventions in reducing crashes, fatalities, and
    injuries is borne out by findings of the CR Impact Assessment Model and
    the Roadside Inspection and Traffic Enforcement Intervention Model. We
    propose to expand the toolbox of enforcement techniques, close
    loopholes permitting unsafe practices, and improve our penalty
    structure. We look to implement a balanced enforcement model--an
    approach that balances and capitalizes on prevention (compliance
    reviews, safety audits), deterrence (inspections, traffic enforcement),
    and remediation (sanctions and penalties) interventions. New entrant
    safety audits will broaden our enforcement regime.
        Information is a high near-term priority. As a data-driven
    organization, information is the essential backbone for all major FMCSA
    operational and support programs and activities. To ensure our maximum
    operational effectiveness and efficiency, we need to base our decisions
    on the highest quality data possible and sound statistical analysis of
    that data. A highlight for fiscal year 2005 will be issuing the results
    of the Large Truck Crash Causation Study. Information initiatives are
    addressed in the respective performance segments and the cross-cutting
    Information Management proposal for fiscal year 2005 is attached as an
    Appendix.
        States play essential partnership roles in highway safety,
    providing critical safety data and extending regulation and enforcement
    reach. The Motor Carrier Safety Assistance Program, which provides
    (MCSAP) grants to State highway safety authorities, is the primary
    means we have of moving our goal of safety advocacy from focus to
    action.

                                   HM SAFETY

        FMCSA authority extends to enforcing compliance with the Federal
    Hazardous Materials Regulations (FHMRs) to provide adequate protection
    against the risks to life and property inherent in the highway
    transportation of hazardous materials in commerce. The agency's goal is
    to reduce serious reportable hazardous materials incidents involving
    trucks. This links to and supports the DOT hazardous materials
    performance goal. Approximately 5 percent of the agency's fiscal year
    2005 budget request is attributed to 3 performance segments
    contributing to achievement of this goal. A priority initiative is the
    institution of a grant program to extend safety inspection by States of
    HM carriers crossing the borders.

                                  HM SECURITY

        Continued emphasis on commercial carrier, driver, vehicle, and
    cargo security, and particularly hazardous materials operations is
    required, supporting the DOT Security strategic goal and administration
    priorities. Following the successful transfer of the Transportation
    Security Administration (TSA) to the Department of Homeland Security,
    FMCSA will continue to work in concert with TSA and other agencies to
    establish the protocols ensuring the security of commercial motor
    vehicle transportation. To this end, FMCSA has designated approximately
    2 percent of the fiscal year 2005 budget request to two performance
    segments aimed at heightening the awareness of hazardous materials
    carriers to security threats.

                                CMV PRODUCTIVITY

        The efficient movement of goods is a critical component of a
    healthy economy. FMCSA's authority extends to ensuring compliance of
    household goods carriers with the Federal Motor Carrier Commercial
    Regulations (FMCCRs). Judging by complaints received on our hotline,
    and more recently on the new website we have established for this
    purpose, closer scrutiny of and attention to the responsibilities of
    carriers and the rights of consumers is needed. Reducing the cycle time
    for response to complaints is a priority. Our fiscal year 2005 budget
    request includes approximately 1 percent for two performance segments
    supporting CMV productivity and the integrity of goods movement. Our
    aim is to provide informative and timely responses to all household
    goods complaints and HHG Congressional inquiries. We will track our
    progress toward accomplishment of this goal by the following two new
    performance metrics: percent of HHG consumer complaints receiving an
    initial response within 72 hours of the complaint, and percent of HHG
    Congressional inquiries receiving an initial response within the DOT
    time limit.

                           ORGANIZATIONAL EXCELLENCE

        At the core of organizational excellence are our strategies for
    developing, acquiring, and sustaining the components of capability to
    perform our safety, security, and productivity missions: people,
    information, and financial resources. The President's Management Agenda
    (PMA) frames our agency efforts to ensure we put the right capability
    in the right place, at the right time, and at the right cost. Our five
    Organizational Excellence performance segments align with the PMA
    initiatives. We aim to sharpen our resource effectiveness and have
    allocated 6 percent of our fiscal year 2005 budget request in support
    of these performance-accelerating strategies.
        In addition to the PMA, we are increasingly integrating findings
    and recommendations of the Government Accounting Office (GAO), DOT
    Office of the Inspector General (OIG), and the National Transportation
    Safety Board (NTSB) as integral components of our agency strategy and
    operational guidance. Our activities supporting these recommendations
    are addressed in our performance budget narrative. As a result of these
    efforts, we are pleased to have closed numerous recommendations in
    fiscal year 2002.
        Strategic Management of Human Capital and Competitive Sourcing.--We
    will soon complete our agency-wide competency survey, and the priority
    objective will be the completion of the agency's Human Capital Plan.
    The Human Capital Plan will provide baseline information about the
    competencies of our workforce relative to our mission and performance
    targets; projections of potential competency gaps; and strategies for
    preventing those gaps. Competitive Sourcing is one approach in a
    coordinated strategy for managing human capital effectively and
    efficiently, along with hiring, learning and development, the use of
    personnel flexibilities, restructuring and reorganization of work, and
    contracting new work to result in best-value service to our customers.
        Budget and Performance Integration and Financial and Procurement
    Performance.--Our agency's initial performance budget effort 1 year ago
    provided the framework for a more performance-based approach to
    formulation of this year's request. Agency senior leadership met and
    reviewed cross-cutting performance implications in the allocation of
    program resources in this performance budget request for fiscal year
    2005. To advance our resource-to-results linkage, we have integrated
    our grant programs into our program logic, the better to track and
    discern the contribution of complementary Federal and State program
    efforts. We are also piloting FMCSA Division Administrator annual State
    plans to further increase the linkage between Federal and State plans,
    and to strengthen alignment with national goals. Our alignment and
    attribution of resources by performance segment also supports our
    advances in managerial cost accounting.
        E-Government.--FMCSA is a data-driven and citizen-centered
    organization. The agency looks to increasingly capitalize on
    information and IT to streamline internal processes, and to increase
    public accessibility to programs and information. Our e-Gov initiatives
    include advances in e-grants, business compliance one-stop, e-
    rulemaking, and others.

                       FMCSA ADMINISTRATOR'S IMPERATIVES

        My priorities for fiscal year 2004-2005 include:
      --Full implementation of the New Entrant Program as mandated by MCSIA
      --Reauthorization of FMCSA safety programs
      --Improved safety data to inform targeting of enforcement operations
      --Reduction in the backlog of rulemakings
      --Improving the credibility and integrity of the CDL program
      --Improving cycle time for response to household goods complaints.
                                     ______

                      Bureau of Transportation Statistics

           Prepared Statement of Richard Kowalewski, Deputy Director

        Mr. Chairman, Ranking Member Murray, members of the subcommittee,
    thank you for the opportunity to discuss the Bureau of Transportation
    Statistics' fiscal year 2005 budget request.
        The Bureau of Transportation Statistics (BTS) proudly joins other
    agencies in our Federal statistical system to provide the unbiased data
    that drive planning, projections, and policies at the Federal, State,
    and local levels. Those decisions in turn determine the course of
    countless business and civic initiatives that support our prosperity,
    quality of life, and well-being as a Nation. In the transportation
    arena, BTS is committed to helping ensure the health and growth of
    efficient, safe, and environmentally sound infrastructure and
    operations across the various transportation modes.
        The availability and use of BTS data support each of Secretary
    Mineta's Strategic Goals of safety, mobility, global connectivity,
    environmental stewardship, security, and organizational excellence.
    While our data are critical for decision making, they also provide an
    important, unbiased report card. The success of government programs
    cannot be simply proclaimed; it must be objectively measurable by the
    people those programs serve. Thus, BTS plays a critical role at both
    ends of the policymaking process: we fuel transportation decisions and
    help provide critical performance benchmarks. Operating under the
    strict guidelines that apply to any Federal statistical agency, and in
    line with congressional intent in creating BTS, we do our work
    objectively, free of bias toward any one mode of transportation.

                             RECENT ACCOMPLISHMENTS

        BTS has accomplished much in the past year and has set its sights
    on doing fewer things better in the budget year to come. Our fiscal
    year 2005 budget request of $32.2 million from the Highway Trust Fund
    reflects critical information needs and incorporates decisions we have
    made internally to further the work that supports our mandate. In
    addition, as authorized in the VISION 100 aviation legislation, we
    propose that $4.045 million in reimbursable funding from the Airport
    and Airway Trust Fund be used to cover direct costs of our air
    transportation statistics program, which produces our most-requested
    and closely watched data.
        BTS's air transportation statistics program is relied upon for
    decisions with far-reaching economic implications. Our data on
    passenger enplanements drive the Federal Aviation Administration's
    (FAA) distribution of Airport Improvement Grants, and our data on
    flight delays and their causes help in FAA's decisions about
    infrastructure and operational investments, as well as decisions by the
    airlines and the traveling public. We have worked with Alaskan carriers
    to improve the quality of the monthly traffic data that they report to
    BTS and which the U.S. Postal Service uses to decide which carriers are
    eligible to receive mail contracts for intra-Alaskan mail under the
    Rural Service Improvement Act. We provided airline financial and
    operating information for decisions on post-9/11 grants and loan
    guarantees to passenger and freight carriers. Our aviation data assist
    the Transportation Security Administration in decisions regarding the
    allocation and deployment of resources across the country, and support
    the Office of the Secretary in making decisions about service to
    underserved communities and on international routes.
        For more than 11 years, Congress also has turned to BTS for both
    in-depth and quick turn-around answers, briefings, and visual
    presentations of data. We have analyzed the impact of railroad
    rationalization in the upper Great Plains, compared the costs of
    highway and rail construction, and assessed the impact of international
    trade on highway demands in our border States. We have prepared maps
    showing structurally deficient and functionally obsolete bridges in
    each State and congressional district so that members of Congress can
    be better informed in setting priorities on infrastructure needs.
        As the smallest of the Federal statistical agencies, BTS has always
    worked hard to maximize available resources, matching the right
    expertise to the job at hand and tuning our programs based on
    customers' feedback. That feedback has helped us determine the most
    effective approach in doing fewer things better.
        In 1997, for example, we developed an innovative survey design that
    allowed us to cut the size of the Commodity Flow Survey in half,
    reducing its budgetary cost and burden on respondents, without
    compromising data quality. Between 2001 and 2003 we replaced a 30-year-
    old patchwork mainframe computer system that had been running our
    aviation data programs and replaced it with a modern mid-tier computer
    platform to increase our efficiency and the data's usability. Our work
    in helping to develop, validate, and verify performance measures for
    DOT contributed toward the high ranking of the Department's fiscal year
    2003 performance report by the Mercatus Center of George Mason
    University--DOT's performance report tied for number one in the Federal
    Government.
        BTS is working to improve its operations through initiatives of the
    President's Management Agenda, and to reorganize our lines of business
    to be simpler, more easily managed, and more results-oriented. As
    envisioned in the Administration's Safe, Accountable, Flexible, and
    Efficient Transportation Equity Act (SAFETEA) legislation and our
    budget, BTS proposes to sharpen its focus around five core data
    programs and two cross-cutting research programs. The core data
    programs are freight, travel, transportation economics, air
    transportation, and geographic information systems. The cross-cutting
    programs assess overall transportation system performance and improved
    statistical methods to address transportation-specific problems.
        In the freight and travel areas, this past year saw the release by
    BTS of the full datasets from our two major survey activities, the
    National Household Travel Survey, collected in 2001-2002 with the
    Federal Highway Administration (FHWA), and the Commodity Flow Survey,
    collected in 2002 with the Census Bureau. Analysis of each of these
    datasets will play a critical role in driving Federal, State, and local
    transportation planning and investment for the next 5 to 10 years.
        BTS is especially pleased to have unveiled two new economic indices
    that for the first time provide a comprehensive picture of
    transportation activity, help us to analyze its economic impact, and
    provide better information on what passengers pay for airline service:
      --The monthly Transportation Services Index (TSI) measures outputs in
            the for-hire movement of freight and people and is a new
            leading economic indicator, better clarifying our understanding
            of transportation's relationship to the economy.
      --The quarterly Air Travel Price Index (ATPI) illustrates the rate of
            national and local market fluctuations in the price of air
            travel. The ATPI yields greater understanding of the cause and
            effect relationship between airline industry market decisions,
            external market factors, and the affordability of travel.
        These indices provide new insight into interrelationships and
    potential macro-economic impacts of changes in transportation activity.
    This, in turn, helps economists better anticipate turning points in our
    Nation's economy. We are also working, consistent with the late Senator
    Moynihan's original vision for BTS, on improving our measures of the
    productivity of the Nation's transportation sector.
        In fiscal year 2004, BTS also released an innovative product called
    GeoFreight, an intermodal freight planning tool on CD-ROM that
    graphically displays the geographic relationship between freight
    movements and infrastructure. Developed jointly with FHWA, the tool was
    designed to aid the planning of State and local governments and augment
    their ability to anticipate demands on capacity.
        Our work on improved statistical methods has led to the adoption of
    a new method to protect the confidentiality of statistical data that
    responds to customer demands to make more data available while
    preventing the disclosure of confidential data. We also led the
    development of Information and Dissemination Quality Guidelines for the
    Department, as required by recent data quality legislation.
        We have also worked at increasing the accessibility of our data.
    Our Web-based data platform, TranStats, has won several awards as an
    exemplary e-government initiative, including the Industry Advisory
    Council/Federal CIO Council Excellence.Gov Award (Top 5 Winner), the
    Sun/Computerworld iForce Excellence Award for Business Intelligence,
    and the Computerworld Honors Program Award. Along with our other web-
    based information services, we serve an estimated 3.7 million users per
    year, allowing users to analyze data on-line and access electronic
    copies of the documents of the National Transportation Library.

                             CHALLENGES THAT REMAIN

        While BTS has made good progress in many areas of our statistical
    programs, challenges remain that need to be addressed to improve BTS's
    performance, such as BTS's freight flow data for imports and exports,
    geolocation data on the Nation's transportation network, and exposure
    data for general aviation operations.
        Recently, the Transportation Research Board has called upon BTS to
    fill gaps in our freight data program. The modest budget increase we
    have requested for fiscal year 2005, along with our refocusing of
    effort on core programs, will allow us to increase sample sixes on our
    key freight and travel data, improving the quality of data available to
    our users.
        BTS has much to accomplish at a time when our Nation has a new
    level of interest in and understanding of how the interconnectedness of
    our transportation system affects global competitiveness and national
    security. We need to develop a more timely and complete understanding
    of freight flows, as our economy moves increasingly to a just-in-time
    rhythm. We need a more comprehensive overview of our Nation's mobility
    and connectivity by collecting data that link transit trips, passenger
    terminal information, highway usage and capacity, and levels of
    commercial service. We also need improved highway safety exposure data,
    allowing improved analysis of the area where most of our transportation
    deaths occur. Possession of these data would reveal areas of economic
    opportunity, help us set our course more precisely, and help us to
    better predict the potential transportation impacts of terrorist
    attacks.
        We look forward to working with the committee to meet the Nation's
    needs for reliable, accurate transportation data, so that our
    policymaking can be well-informed and our transportation planning can
    make accurate assessments of the Nation's transportation needs. We will
    continue to seek out innovative data collection strategies that provide
    better data quality at lower cost.
                                     ______

                  Research and Special Programs Administration

         Prepared Statement of Samuel G. Bonasso, Deputy Administrator

        Chairman Shelby, Ranking Member Murray, and members of the
    committee, on behalf of the Research and Special Programs
    Administration (RSPA), thank you for the opportunity to address the
    important safety, environmental and other performance goals supported
    by the President's fiscal year 2005 funding request for RSPA. With the
    active participation of our State, local, private sector and university
    partners, RSPA has made significant advances in meeting our performance
    goals, and we are looking forward to working with the members of this
    committee and with the Congress in continuing to reduce deaths,
    injuries, property damage and economic consequences resulting from
    hazardous materials, pipeline, and other transportation incidents.
    Working together, we need to develop and implement the programs and
    systems America needs to meet the important transportation safety
    challenges facing the Nation.
        Effective fulfillment of RSPA's safety responsibilities is critical
    to both the transportation and economic needs of the Nation.
    Approximately 28 percent of America's freight ton-miles involve
    transportation of hazardous materials, regulated by RSPA. The safe and
    secure movement of hazardous materials is fundamental to America's
    economy and industry, delivering much of the petroleum products and raw
    materials that fuel American business. Hazardous materials are also
    fundamental to everyday personal needs--for example, chlorine treats
    our water, making it safe to drink; anhydrous ammonia fertilizes our
    fields, allowing America to feed our Nation and some of the world. The
    volume of hazardous materials regulated by RSPA is substantial:
      --The Office of Pipeline Safety regulates 2.3 million miles of
            pipeline that move 63 percent of America's consumed energy--
            they are literally the arteries of our way of life. On a ton-
            mile basis, pipelines carry 21 percent of the Nation's freight.
      --The Office of Hazardous Materials Safety regulates over 800,000
            daily shipments of hazardous materials--working with all modes
            of transportation on packaging and handling to help assure safe
            movement through America's transportation system. Hazardous
            materials outside of pipelines account for 7 percent of the
            freight ton-miles transported annually in the United States.
      --The Transportation Safety Institute conducts cutting-edge training
            in hazardous materials safety, as well as safety, security and
            environmental stewardship training in all modes of
            transportation for State and local first responders, public and
            private sector engineers, inspectors, and other employees.
        Equally important to the efficient operation of America's
    transportation systems are RSPA's emergency transportation and research
    activities. Through RSPA:
      --The Office of Emergency Transportation manages the DOT Crisis
            Management Center, a 24/7 operations center to track and
            respond to natural and human-caused transportation incidents;
            and coordinates continuity of operations and emergency
            transportation planning for all Department of Transportation's
            (DOT) operating administrations and in direct coordination with
            all other Federal departments.
      --The Office of Innovation, Research and Education leads DOT's
            involvement in the President's Hydrogen Fuel Initiative,
            coordinating with all DOT administrations, the Department of
            Energy and other Federal agencies in conducting research and
            development and standards-setting activities to ensure the
            safety of hydrogen-fueled vehicles and the infrastructure to
            support them.
      --The Office of Innovation, Research and Education manages 26
            University Transportation Centers that conduct research in all
            areas of transportation engineering and management, advancing
            the state of the practice and preparing students to be the
            transportation systems leaders of tomorrow.
      --The Volpe National Transportation Systems Center provides technical
            systems expertise to all DOT agencies and non-DOT clients in
            all areas of transportation systems, including safety, homeland
            and national security, mobility, environmental stewardship,
            systems engineering, navigation, operator performance, and
            economic analysis.
        Implicit in all of these regulatory, technical, research and
    training activities supporting safety is a significant concern for
    national and homeland security. Our overall focus on safety supports
    administration and Congressional goals for improving transportation
    security. All of RSPA's offices work closely with the Department of
    Homeland Security to ensure that our program activities keep security
    as an important focus, an integral part of providing safe
    transportation systems.
        RSPA's budget is performance-based, keyed to DOT's six strategic
    goals, rather than to specific ``budget line activities.'' RSPA strives
    to deliver the results that Congress expects in all six DOT strategic
    areas:
      --Safety.--Enhancing public health and safety by working toward
            elimination of transportation-related deaths and injuries.
      --Mobility.--Advancing accessible, efficient intermodal
            transportation for the movement of people and goods.
      --Global Connectivity.--Facilitating a more efficient domestic and
            global transportation system that enables economic growth and
            development.
      --Environmental Stewardship.--Promoting transportation solutions that
            enhance communities and protect the natural and built
            environment.
      --Security.--Balancing homeland and national security transportation
            requirements with the mobility needs of the Nation for personal
            travel and commerce.
      --Organizational Excellence.--Advancing the Department's ability to
            manage for results and achieve the goals of the President's
            Management Agenda.
        The President's total budget request for RSPA in fiscal year 2005
    is $137.3 million, an increase of $11.7 million (9.0 percent) over the
    fiscal year 2004 enacted level. Seventy-five percent of the President's
    fiscal year 2005 budget request for RSPA is dedicated towards achieving
    results supporting the DOT safety strategic goal. Another 16 percent
    supports the environmental stewardship strategic goal, reducing
    environmental damage from pipeline incidents, with the remaining 9
    percent supporting the other goals. The additional resources requested
    will primarily support efforts to reduce hazardous materials incidents
    and to advance preparation for emergency transportation response.
        RSPA sets performance goals to implement the DOT strategic goals.
    Some of those goals, and the funding requested to achieve them,
    include:
      --Safety.--RSPA requests $103.3 million, an increase of $7.6 million,
            to meet our three critical safety performance goals:
        --Reduce deaths, injuries, property damage and economic
                consequences resulting from hazardous materials
                transportation incidents.
        --Reduce death, injuries, and property damage resulting from
                pipeline incidents.
        --Promote the safe transport of hydrogen fuels and fuel systems so
                that alternative fuel vehicles can be developed as a safe
                alternative to petroleum-fueled vehicles.
      --Mobility/Security.--RSPA requests $5.7 million, an increase of $2.0
            million, in order to prepare our Nation's transportation
            system--in advance--to aid people and property harmed by
            natural and terrorist disasters.
      --Environmental Stewardship.--RSPA requests $22.5 million, an
            increase of $1.7 million, to reduce the amount of oil or other
            hazardous liquids released from pipeline systems.
      --Organizational Excellence.--RSPA requests $5.9 million, an increase
            of $0.4 million, in order to improve our operating efficiencies
            in all programmatic areas.
        RSPA is achieving results in all of our critical areas, and is
    committed to continuing improvements in transportation safety. For
    example:
      --The number of serious hazardous materials incidents in
            transportation has dropped by 18.5 percent since 2000.
      --RSPA's Office of Pipeline Safety has addressed most of a 12-year
            backlog of outstanding Congressional mandates and
            recommendations from oversight agencies.
      --RSPA is ensuring that pipelines are tested and repaired according
            to higher integrity management standards, and RSPA is working
            with our Federal partners to expedite the repair permits.
      --Hazardous liquid pipeline incidents have decreased by 28 percent
            and the volume of oil spilled has been significantly reduced.
      --Third party excavation accidents have decreased by 59 percent over
            the past 10 years, even while housing starts were on the rise,
            which brings construction risk near pipelines by encroachment
            on rights-of-way.
      --RSPA's Transportation Capability Assessment for Readiness (TCAR)
            scores continue to improve annually.
      --The Transportation Safety Institute trains over 50,000 students
            annually, graduated its 650,000th student in 2003, and recently
            acquired university credit for various courses.
      --The University Transportation Centers continue to graduate over
            1,500 students with advanced degrees annually.
      --RSPA's Hazardous Materials Emergency Preparedness Grants program,
            which prepares communities to respond to hazardous materials
            incidents, received a ``moderately effective'' score of 83
            percent on a Program Assessment Rating Tool (PART) analysis
            conducted for the fiscal year 2005 budget cycle. We are working
            to remedy implement the recommendations resulting from the PART
            analysis.
        In conclusion, RSPA's requested $11.7 million increase will be
    invested in improving our performance, further reducing death,
    injuries, property damage and economic consequences resulting from
    transportation incidents.
        Again, Mr. Chairman, thank you for the opportunity to testify
    before you today. I look forward to responding to any questions you may
    have.
                                     ______

                           DEPARTMENT OF THE TREASURY

                      Financial Crimes Enforcement Network

                 Prepared Statement of William J. Fox, Director

        Chairman Shelby, Senator Murray, and members of the committee,
    thank you for the opportunity to submit my statement for the record on
    the President's fiscal year 2005 budget request for the Financial
    Crimes Enforcement Network. This $7.271 million request reflects the
    important role FinCEN plays in the United States government's efforts
    to understand, detect, and prevent terrorist financing.
        On December 1, 2003, I became FinCEN's fourth director. Prior to
    coming to FinCEN, I was working as the principal assistant to the
    General Counsel of the Treasury Department on issues relating to
    terrorist financing, which were issues that occupied a great deal of my
    time. Coming from the Department, I understood, to a large extent, the
    nature of FinCEN's responsibilities and what it was doing to carry out
    the obligations imposed by these responsibilities. In these 5 months, I
    have done a great deal of listening and learning from inside and
    outside of FinCEN. I have met extensively with the law enforcement and
    intelligence communities that we serve and the financial industry that
    we help regulate. I also have met with some of my counterparts in
    foreign governments and communicated with many more and I have met with
    and listened to the staffs of interested committees in the Congress--
    including this subcommittee.
        In this short time, I have found an organization populated with
    employees with diverse and highly specialized talents, who are
    extremely dedicated to the agency and its mission. I have found an
    agency that is a good steward of the human and capital resources that
    have been provided by the Congress. However, I have also found an
    agency facing many important challenges--challenges relating to the
    effective and efficient management of the extremely sensitive data
    collected under the Bank Secrecy Act; challenges relating to its
    analytic staff and the analytic product they produce; challenges
    relating to the administration of its regulatory programs under the
    Bank Secrecy Act; challenges relating to refocusing its important
    partnerships with financial intelligence units around the world--the
    Egmont Group; and, challenges relating to the agency's present
    organizational structure.
        My statement will address how FinCEN is going to meet these
    challenges and then it will focus on our fiscal year 2005 budget
    request.

                                   BACKGROUND

        FinCEN's mission is to help safeguard the financial system of the
    United States from being abused by criminals and terrorists. FinCEN
    works to accomplish its mission through: (1) administration of the Bank
    Secrecy Act--a regulatory regime that provides for the reporting of
    highly sensitive financial data that are critical to investigations of
    financial crime; (2) dissemination of the data reported under the Bank
    Secrecy Act to law enforcement and, under appropriate circumstances,
    the intelligence community; (3) analysis of information related to
    illicit finance--both strategic and tactical analysis; and, (4) the
    education and outreach provided to law enforcement and the financial
    industry on issues relating to illicit finance. FinCEN has many
    attributes that are key to understanding the agency and how it works to
    achieve its mission:
      --FinCEN is a regulatory agency.--FinCEN has an obligation to
            administer the Bank Secrecy Act, the principal regulatory
            statute aimed at addressing the problems of money laundering
            and other forms of illicit finance, including terrorist
            financing. It is responsible for shaping and implementing this
            regulatory regime and, in concert with the functional banking,
            securities, and commodities regulators and the Internal Revenue
            Service, for ensuring compliance with that regime. The agency
            is also charged with protecting the integrity and
            confidentiality of the information collected under the Bank
            Secrecy Act.
      --FinCEN is a financial intelligence agency.--While not a member of
            the intelligence community, FinCEN, with the help of the
            Internal Revenue Service, collects, houses, analyzes and
            disseminates financial information critical to investigations
            of illicit finance.
      --FinCEN is a law enforcement support agency.--While FinCEN has no
            criminal investigative or arrest authority, much of our effort
            supports the detection, investigation and successful
            prosecution of financial crime.
      --FinCEN is a network.--We are not directed to support one agency or
            a select group of agencies. We make our information, products
            and services available to all agencies that have a role in
            investigating illicit finance. In fact, we network these
            agencies. Our technology tells us when different agencies are
            searching the same data and we put those agencies together--
            avoiding investigative overlap and permitting the agencies to
            leverage resources and information.
        Given this important mission, FinCEN fits perfectly in the
    Department of the Treasury; possibly even more so after the Homeland
    Security reorganization rather than before that reorganization. The
    creation of the Office of Terrorism and Financial Intelligence within
    Treasury only enhances that fit. FinCEN will be able to help
    ``operationalize'' Treasury's policy priorities on these important
    issues and our operational analytic work will complement the analysis
    that will eventually be done in the newly created Office of Financial
    Intelligence. I believe this coordinated effort will lead to a greater
    emphasis and understanding of money laundering, terrorist financing and
    other forms of illicit finance not only at Treasury, but within the
    United States, and that will make us all safer. FinCEN will also
    benefit from the Department-wide, policy-coordinating role this office
    will provide.

                      FINCEN'S COUNTER-TERRORISM STRATEGY

        The single, most important operational priority for FinCEN is
    counter-terrorism support to law enforcement and the intelligence
    community. To emphasize the importance of this work we have improved
    and are now implementing a comprehensive counter-terrorism strategy
    that draws from our analytic support to law enforcement, our regulatory
    tools and expertise, and our international networking capabilities. We
    believe the implementation of this strategy will strengthen our focus
    and ensure that FinCEN is more active and aggressive rather than
    reactive on issues relating to terrorism. The strategy has five basic
    components.
    Analysis of Terrorist Financing Suspicious Activity Reports
        FinCEN analyzes suspicious activity reports for both tactical and
    strategic value. At the tactical level, we are implementing a program
    in which every report that indicates a connection to terrorism is
    immediately reviewed and validated and then analyzed with other
    available information. This information will be packaged and referred
    to the Terrorist Threat Integration Center (TTIC), FBI-TFOS, and other
    relevant law enforcement. Moreover, this information will be stored in
    a manner that facilitates its access and availability for analysis. We
    have already had success with this process resulting in important
    information being passed along to law enforcement agency.
        At the strategic level, we are also devoting analysts to study Bank
    Secrecy Act data and all other available information to gain an
    increased understanding of methodologies, typologies, geographic
    patterns of activity and systemic vulner-abilities relating to
    terrorist financing. These analysts will focus on regional and systemic
    ``hot spots'' for terrorist financing, studying and analyzing all
    sources of information. Such focus, which produced the study mandated
    by the Congress on Informal Value Transfer Systems, can significantly
    add to the knowledge base of law enforcement. For example, we have
    begun a process to comprehensively study illicit trade in diamonds and
    other precious stones and metals and the links to terrorist finance.
    Although this initiative is currently underway, in order to fully
    implement it, we will need to upgrade analysts' security clearances and
    obtain additional equipment appropriate for the handling and processing
    of national security information.
    USA PATRIOT Act Sections 311 and 314 Implementation
        Some of the new tools afforded us through the USA PATRIOT Act are
    proving to be invaluable in the war against terrorist financing,
    particularly Section 314 of the Act. FinCEN also has initiated a
    program to provide the analytic, regulatory and legal resources needed
    to support effective implementation of Section 311 by the Treasury
    Department. I have directed my staff to give priority to the pro-active
    targeting of those financial institutions and jurisdictions that are
    involved, wittingly or unwittingly, in the financing of terror. This
    prophylactic measure goes to the very heart of FinCEN's mission--to
    safeguard the financial system of the United States from money
    launderers and the financiers of terror.
        Building on a successful pilot program that we began with the
    Bureau of Immigration and Customs on a 314(a) money-laundering request,
    FinCEN is now dedicating several analysts to apply this program to all
    314(a) terrorism requests. Specifically, the analysts will run all
    314(a) terrorism-related requests against Bank Secrecy Act data
    concurrent with these requests being sent to financial institutions.
    Based on this initial data review, the law enforcement requester will
    then be able to request a more in-depth analysis if desired.
    International Cooperation and Information Sharing
        FinCEN will increase the exchange of terrorist financing
    investigative and analytical information with other foreign financial
    intelligence units around the world. We are implementing a program by
    which FinCEN will automatically request information from relevant
    financial-intelligence-unit counterparts as part of any terrorism
    related analysis project. As part of this program, we are also
    upgrading our response to incoming requests for information from
    financial intelligence units by providing appropriate information and
    analysis from all sources of information.
    Terrorism Regulatory Outreach
        We will continue our work in improving our ability to provide
    information to the regulated community to better identify potential
    terrorist financing activity. One area of particular focus will be
    money services businesses. Money services businesses continue to
    require more attention and resources, and FinCEN will undertake an
    initiative to educate segments of the industry most vulnerable to
    terrorist abuse. These segments include small businesses that typically
    offer money remittance services, check cashing, money orders, stored
    value products and other informal value transfer systems. As we learned
    from the attacks of September 11, funds used to finance terrorist
    operations can be and have been moved in small amounts using, for
    example, wire transfer, traveler's check and automated teller machine
    services. I have directed FinCEN's Office of Regulatory Programs and
    Office of Strategic Analysis to enhance our outreach program that will
    include training on how terrorists have used and continue to use money
    services businesses; the reason for and importance of the registration
    requirement for money services businesses; and the importance of
    complying with the reporting requirements of the Bank Secrecy Act,
    especially suspicious activity reporting. We are planning to streamline
    suspicious activity reporting for small money services businesses with
    a simplified form.
    Analytic Skill Development
        As a general matter, I have directed that FinCEN make training of
    personnel the highest human resource management priority. The top
    priority of this new program will be analytic skill development
    relating to terrorist financing. We plan to begin by seeking reciprocal
    opportunities for terrorist finance analytic skill development within
    law enforcement, the Egmont Group, the intelligence community and the
    financial industry. This initiative is intended to build a foundation
    for continuous improvement of our analytic assets through cross
    training and diversification; production of joint terrorist financing
    threat assessments and other reports; understanding of intelligence
    processes; the international context of terrorist financing; and the
    financial industry perspective. In addition, we will need to support
    training focused on financial forensics, language skills, and
    geographically targeted studies that focus on culture, infrastructure
    and other unique aspects of a particular region.
        I believe the full implementation of this strategy will materially
    assist the Department of the Treasury and the United States in
    addressing the financing of terror. Approaching this problem in a
    systemic way with dedicated resources is, in our view, the best way to
    make this strategy a success.

                         FINCEN'S NEAR TERM CHALLENGES

        As I mentioned before, FinCEN is facing a number of significant
    challenges. Because each of these challenges affects FinCEN's
    effectiveness, I feel it is important to raise these challenges with
    the subcommittee.
    Security and Dissemination of Bank Secrecy Act Information
        As the administrator of the Bank Secrecy Act, there is no duty I
    view as more critical then the effective collection, management and
    dissemination of the highly sensitive and confidential information
    collected under that Act. If FinCEN does nothing else, it must ensure
    that such data are properly collected, are secure and are appropriately
    and efficiently disseminated. This is FinCEN's core responsibility.
        FinCEN must modernize the way it houses and provides access to
    information collected under the Bank Secrecy Act. Currently, our data
    are accessed by most of our customers through an outmoded mainframe
    system. This system does not have the robust data mining capabilities
    or analytical tools we should be providing. This has led many of our
    customers to ask for wholesale copies of the data, or direct access to
    the data in a way that will not permit us to perform our
    responsibilities relating to the administration and management of the
    data. Accordingly, we must create a system that provides robust data
    mining and analytical tools to our customers in law enforcement and
    that preserves our ability to: (1) effectively administer and secure
    and audit use of the information; (2) network those persons who are
    querying the data to prevent overlapping investigations and encourage
    efficient use of law enforcement resources; and, (3) develop and
    provide adequate feedback to the financial industries we regulate,
    which will ensure better reporting. That system is called ``BSA
    Direct.''
        When fully implemented, BSA Direct will make available robust,
    state-of-the-art, data mining capabilities and other analytic tools
    directly to law enforcement. We plan to provide all access to these
    data through BSA Direct, working with our law enforcement customers to
    ensure that their individual systems will be able to extract the
    maximum value from the Bank Secrecy Act reporting. We will be exploring
    ways to enable these agencies to integrate the Bank Secrecy Act
    reporting with their other systems while maintaining, and even
    improving our ability to audit and network the use of the data and
    obtain feedback concerning their value. This new system will provide us
    with the capability to discharge our responsibilities relating to the
    administration of these sensitive data: security and access control,
    networking, and feedback. This system will also significantly enhance
    our coordination and information sharing abilities, as well as our
    ability to safeguard the privacy of the information and monitor BSA
    compliance. We have already started work on this system and its
    deployment is crucial to FinCEN moving forward and meeting its various
    challenges. We have requested in our fiscal year 2005 budget a transfer
    of $2.5 million from the Internal Revenue Service for this system.
    Enhancing FinCEN's Analytical Capabilities
        Another challenge FinCEN is facing relates to its analytic
    capabilities. In my view, FinCEN must move away from its current
    emphasis on data checks and data retrieval, and move its analytic
    resources toward more robust and sophisticated analysis. FinCEN had
    moved to data checks and data retrieval in response to criticisms about
    lag time in responding to simple requests for information. Now, as our
    systems improve, our customers will be able to retrieve data
    themselves, which will give FinCEN more time and resources for analysis
    of data.
        I believe that FinCEN can and must provide value through the
    application of our focused financial analytic expertise to mining
    information and providing link analyses that follow the money of
    criminals and terrorists, or identify systemic or geographic weaknesses
    to uncover its source or the existence of terrorist networks. For
    example, in addition to providing geographic threat analysis for law
    enforcement, FinCEN has been studying systemic trends in money
    laundering and terrorist financing. We were instrumental in bringing
    the black market peso exchange system to the forefront of policy
    decisions, and we are focusing on other trends and patterns that we now
    see emerging in the global market. I recently made a trip to Dubai to
    participate in the growing dialogue on the potential use of diamonds
    and other commodities for illicit purposes, including money laundering
    and terrorist financing. We recently developed cases from Bank Secrecy
    Act data involving foreign gem companies with links to the United
    States and referred this information to law enforcement authorities.
    This is part of our focus on and study of what may be another iteration
    of money laundering and terrorist financing--commodity-based systems.
        In my view, while FinCEN still has some of the best financial
    analytic talent in the United States government, the challenges we face
    require us to further develop that talent to enable the full
    exploitation and integration of all categories of financial
    information--well beyond Bank Secrecy Act information. I have directed
    FinCEN's managers to concentrate on training, as well as the hiring of
    new, diverse financial analytic expertise.
    Enhancing FinCEN's Technology
        As I have mentioned, information sharing is critical to our
    collective efforts to detect and thwart criminal activity and that is
    why I believe enhancing our technological capabilities is extremely
    important. Section 314(a) of the USA PATRIOT Act allows law enforcement
    to query United States financial institutions about suspects,
    businesses and accounts in money laundering and counter terrorism
    investigations. FinCEN facilitates this interaction between the
    financial industry and law enforcement by electronically sending law
    enforcement requests to various banks that, in turn, check their
    records and relay the information back to FinCEN to then provide to the
    requestor. This saves law enforcement time and resources. We are
    currently enhancing the Section 314(a) electronic capabilities to allow
    for the originating request to be made to FinCEN via a secure website.
    This system is an example of how critical technology is to our law
    enforcement counterparts.
        We must continue to work to enhance the development of the PATRIOT
    Act Communications System, a system that permits the electronic filing
    of reports required under the Bank Secrecy Act. This system was
    developed and brought on-line under a very tight legislative deadline.
    FinCEN received the E-GOV award for its work on this system. Filing
    these forms on-line is not only more efficient; it will help eliminate
    some of the data errors and omissions.
        As of April 19, 2004, 1.2 million Bank Secrecy Act forms had been
    electronically filed through this system. We now support nearly 1,100
    users, which include 15 of the top 25 filers of Bank Secrecy Act
    information. These top 25 filers accounted for approximately 50 percent
    of all Bank Secrecy Act forms filed in fiscal year 2003. While this is
    all good news, the bad news is that the current number of forms filed
    electronically remains quite small on a percentage basis. The forms
    being filed through the PATRIOT Act Communications System represents
    only approximately 5 percent of the universe of all Bank Secrecy Act
    reports filed. I have directed our PATRIOT Act Communications System
    team to reach out to the financial industry and determine what more
    needs to be done to convince them to file electronically. As we learn
    about what is holding institutions back from filing, I have directed
    our team to work closely with system developers to build the system
    stability and tools necessary to improve the overall percentage of
    filing.
        FinCEN presently lacks the capacity to detect Bank Secrecy Act form
    filing anomalies on a proactive, micro level. As I mentioned earlier,
    BSA Direct will integrate Bank Secrecy Act data into a modern data
    warehouse environment and it will include tools to flag Bank Secrecy
    Act form filing anomalies for action by FinCEN and/or referral to
    appropriate authorities. In the meantime, FinCEN is developing a
    request to the Detroit Computing Center to provide periodic exception
    reports on financial institutions whose Bank Secrecy Act form filing-
    volume varies beyond prescribed parameters during prescribed time
    frames. While we will not be able to conduct the sophisticated
    monitoring that will be available with BSA Direct, this interim step
    should produce an alert in the event of a catastrophic failure to file
    forms, as was experienced in the Mirage case in which the Mirage Casino
    in Las Vegas failed to file over 14,000 currency transaction reports in
    an 18-month period.
    Enhancing FinCEN's Regulatory Programs
        The administration of the regulatory regime under the Bank Secrecy
    Act is a core responsibility for FinCEN. Given the nature of our
    regulatory regime--a risk-based regime--our partnership with the
    diverse businesses in the financial services industry is the key to our
    success. I must tell you that it is my perspective that the financial
    industry is generally a model of good corporate citizenship on these
    issues. The industry's diligence and commitment to the recordkeeping
    and reporting requirements of the Bank Secrecy Act is by and large
    outstanding. The industry's cooperation with FinCEN in implementing
    many of the provisions of the USA PATRIOT Act has strengthened the
    foundation of our efforts to safeguard the financial system from
    criminal abuse and terrorist financing. I have met with many of our
    industry partners in the last several months, both old and new, and I
    have been struck with how concerned they are that the information they
    provide be of value to the fight against terrorist financing and other
    financial crimes. In turn, FinCEN is committed to enhancing the
    guidance they need as they strive to meet the requirements and
    objectives of new regulations.
        The challenge before FinCEN on this issue is simple: we must ensure
    the remaining regulatory packages required by the USA PATRIOT Act are
    completed and implemented. Moreover, as we work with our regulatory
    partners to implement this regulatory regime, we must provide constant
    feedback and guidance. We have asked the industry to create anti-money
    laundering programs that are risk-based--custom tailored to each
    institution based upon the business in which that institution engages
    and the customers that institution has. We must find ways to help the
    industry define that risk. Development of secure web-based systems that
    will foster the communication discussed above is a step in the right
    direction. But we must continue to find new and better ways to reach
    out to the industry. They understand the threat money laundering and
    illicit finance poses to our financial system and they are willing to
    help.
        Perhaps our most significant challenge lies in ensuring that
    financial institutions are appropriately examined for compliance with
    the Bank Secrecy Act and its implementing regulations. As you know, we
    have issued and will continue to issue anti-money laundering program
    regulations that will bring new categories of businesses under this
    form of Bank Secrecy Act regulation for the first time.
        We have and will continue to rely on the judgment, expertise, and
    resources of the Federal banking, securities and commodities
    regulators. But the expansion of the anti-money laundering regime comes
    with the additional responsibility and challenges of examining
    thousands of addresses and businesses for compliance. We have relied on
    the Internal Revenue Service to examine those non-bank institutions.
    The addition of the insurance industry and dealers in precious stones,
    metals, and jewels, two categories of financial institutions for which
    we will shortly issue final anti-money laundering program regulations,
    will themselves stretch the resources of agencies responsible for
    examination. We must find ways to ensure that these regulatory programs
    are implemented in a fair, consistent and timely manner that is focused
    on achieving the goals of the Bank Secrecy Act. Although difficult,
    this is an issue that must be resolved.
        Finally, we intend to take even a more active role in working with
    our regulatory partners to ensure the effective examination of
    financial institutions. We will find appropriate ways to enhance our
    ability to provide prompt, interpretive guidance to examiners, obtain
    consistency in the application of the regulations across industry
    lines, and identify and address compliance issues as they arise.
    Enhancing FinCEN's International Program
        FinCEN's international initiatives and programs are driven by a
    stark reality: finance knows no borders. Next year will mark the tenth
    anniversary of the founding of the Egmont Group--a milestone event that
    FinCEN will host in Washington, DC next June. The Egmont Group is an
    international collection of ``financial intelligence units''--entities,
    which, like FinCEN, are charged with the collection and analysis of
    financial information to help prevent money laundering and other
    illicit finance. The Egmont Group has achieved remarkable growth since
    its inception in 1995. Membership has risen from 6 charter members to
    84. This membership number will rise to 92 this year and is expected to
    top 100 by the time of the June 2005 Plenary.
        The Egmont Group serves as an international network, fostering
    improved communication and interaction among financial intelligence
    units (FIUs) in such areas as information sharing and training
    coordination. The goal of the Group is to provide a forum for FIUs
    around the world to improve support to their respective governments in
    the fight against financial crimes. This support includes expanding and
    systematizing the exchange of financial intelligence information,
    improving expertise and capabilities of personnel employed by such
    organizations, and fostering better and more secure communication among
    FIUs through the application of technology.
        Egmont's secure web system permits members of the group to
    communicate with one another via secure e-mail, and to post and assess
    information regarding trends, analytical tools, and technological
    developments. FinCEN, on behalf of the Egmont Group, maintains the
    Egmont Secure Web. Currently, 76 of the 84 members (90 percent) are
    connected to the secure web site. I am very pleased to announce that
    FinCEN will launch a new and more efficient secure web site for Egmont
    in June. We expect this new site will generate more robust usage, which
    will enhance international cooperation among Egmont members.
        FinCEN has played a significant role in the growth and health of
    the Egmont Group and it maintains bilateral information sharing
    agreements with financial intelligence units around the world. However,
    in my view, this program has not received the priority it should have
    in recent times. Merely because of the simple statement I made
    earlier--that finance knows no borders--we must step up our
    international engagement with our counterparts around the world. Our
    plan is to do three principal things:
      --Lead the Egmont Group to begin focusing on actual member
            collaboration. Egmont members should be collaborating in a more
            systemic way to address issues relating to terrorist financing,
            money laundering and other illicit finance at both a tactical
            and strategic level.
      --Enhance the FinCEN analytical product we provide to our global
            counterparts when we receive requests for information. Today,
            we principally provide the results of a data check. We think we
            owe our colleagues more in-depth analysis of the information we
            provide. As noted before, we will also be making more requests
            for information and analysis from our partners--particularly
            when the issue involves terrorist financing or money
            laundering.
      --Foster exchanges of personnel with financial intelligence units
            around the world. We have already begun discussions with
            certain counterparts about such an exchange and we are hopeful
            we can begin this program soon. The benefits of this type of
            exchange are obvious. It is the best way we can learn together
            how to address a truly global problem.
        FinCEN will also enhance its support for Treasury policy officials'
    work in the Financial Action Task Force (FATF) and FATF regional
    bodies. We will continue our work with the State Department in the
    drafting and editing of the ``International Narcotics Control Strategy
    Report.'' Finally, we will continue our important efforts on financial
    intelligence unit outreach and training. Presently, we are working with
    the United Arab Emirates on a South Asia FIU Conference for
    Afghanistan, Bangladesh, India, Maldives, Pakistan and Sri Lanka.
        Additionally, FinCEN has given its support and participation to the
    ``3+1'' Working Group on terrorist financing in the Tri-border Area.
    The issues of information sharing and the bolstering of FIUs in the
    participating states of Argentina, Brazil and Paraguay are critical
    issues for the U.S. delegation to the ``3+1'' Working Group led by the
    Department of State's Office of Counter-Terrorism.
    FinCEN's Organizational Structure
        We have been working closely with Treasury on our efforts to more
    effectively marshal our resources at FinCEN. As a result, I recently
    proposed a realignment of FinCEN that reflects my priorities to enhance
    FinCEN's analytical component and improve its focus and services
    devoted to outreach, education and technology on behalf of both its
    clients and the financial services community. We have briefed your
    staff on this proposal and, just last week; have received approval from
    the Department to go forward with this realignment.
        Essentially, the realignment provides the ability to pull out the
    non-analytical functions presently entangled in FinCEN's analytical
    unit so that those managers and analysts can focus exclusively on
    analysis. We are also combining all client services and systems under a
    single manager in order to ensure that our technology is coordinated
    and better focused on serving its users. Similarly, I want this
    organizational structure to highlight the importance of education and
    training of our law enforcement clients and the regulated community.
    Only by working closely and cooperatively with these groups can FinCEN
    truly understand what services it must provide and what requirements it
    must meet to assist in the detection, prevention and dismantling of
    terrorist financing.

                        FISCAL YEAR 2005 BUDGET REQUEST

        The proposed fiscal year 2005 budget is designed to assist in
    strengthening our role in the United States Government's efforts to
    understand, detect, and prevent terrorist financing. I also believe it
    will allow us to begin to meet the challenges that I have outlined
    above. The President's fiscal year budget request would provide
    $64,502,000 and 291 full-time equivalents for FinCEN. This request
    includes:
      --$1.533 million and 4 FTE for program increases to:
        --(1) enhance regulatory support to newly covered industries as
                required under the USA PATRIOT Act ($0.278 million and 2
                FTE);
        --(2) enhance access to Bank Secrecy Act information by putting
                information technology aids in place to the Gateway system
                to increase the current 1,000 law enforcement users to
                3,000 users by fiscal year 2008 ($1.055 million and 2 FTE);
                and,
        --(3) procure financial and administrative services which would
                enable FinCEN to consolidate its accounting and financial
                reporting by using a Treasury franchise service provider,
                assuring continued submission to TIER and other accounting-
                related reporting in the Treasury format ($0.200 million
                and FTE).
      --$2.5 million transfer from the Internal Revenue Service for the
            Bank Secrecy Act (BSA) Direct System. See infra.
      --$3.238 million and 10 FTE for adjustments necessary to maintain
            current levels ($1.716 million) and program annualizations for
            fiscal year 2004 initiatives ($1.522 and 10 FTE).

                                   CONCLUSION

        The fiscal year 2005 budget request for FinCEN supports the
    President's fight against terrorism, and continues to build the
    framework necessary for accomplishing our complex mission of protecting
    the United States financial systems from abuses imposed by criminals
    and terrorists and assisting law enforcement in the detection,
    investigation, disruption and prosecution of such illicit activity
    through our role as the administrator of the Bank Secrecy Act.
        I look forward to continuing to work with you to meet these
    challenges and enhance our contributions to the war on financial crime
    and terrorist financing.
        Mr. Chairman, this concludes my statement.
                                     ______

                    Alcohol and Tobacco Tax and Trade Bureau

           Prepared Statement of Arthur J. Libertucci, Administrator
        Mr. Chairman, Senator Murray, and members of the subcommittee, it
    is my pleasure and honor to have the opportunity to highlight the
    Alcohol and Tobacco Tax and Trade Bureau's (TTB) accomplishments for
    the past year and discuss our fiscal year 2005 budget submission.
        The Alcohol and Tobacco Tax and Trade Bureau was established
    January 24, 2003, as a result of the Homeland Security Act of 2002. The
    Act authorized the transfer of all of the firearms, explosives, and
    arson functions of the Bureau of Alcohol, Tobacco and Firearms (ATF) to
    the Department of Justice and established TTB within the Department of
    the Treasury. While the agency was given a new name, the history of
    TTB's regulatory responsibilities dates back to creation of the
    Department of the Treasury and the first Federal taxes being levied on
    distilled spirits in 1791.
        The mission of TTB is to collect alcohol, tobacco, firearms and
    ammunition excise taxes, to ensure that alcohol beverages are labeled,
    advertised, and marketed in accordance with the law, and to administer
    the laws and regulations in a manner that protects the revenue,
    protects the consumer, promotes voluntary compliance, and facilitates
    import and export trade in beverage and industrial alcohols.
        Not since the late 1940's has there been such a large overhaul and
    reorganization of the government and its agencies. The challenges in
    standing up a brand new bureau were many, but the men and women on
    board at the time of the transition understood and were ready for the
    challenging job that lay ahead. When we began, we only had about half
    of our projected FTE on board. Most of fiscal year 2003 and part of
    fiscal year 2004 were dedicated to hiring personnel in all of our
    offices in Washington, DC, and around the country, and finding
    appropriate office space for field personnel.
        Late in 2003 we began the move to our new headquarters location,
    two blocks from the Department. This was accomplished in two phases. A
    majority of the offices located in Washington, DC, which include
    Headquarters and Field Operations staff, moved September 2003. My staff
    and the Office of Chief Counsel moved April 2004. Our goal in both
    moves was to continue with business as usual, carrying out our mission,
    and have as seamless a transition as possible.

                                  AUTHORITIES

        TTB oversees the regulation of alcohol under the Federal Alcohol
    Administration Act (FAA Act) and the Internal Revenue Code of 1986
    (IRC). Under the FAA Act, TTB regulates the authorized operations,
    labeling, advertising, and trade practices for those engaged in the
    alcohol beverage industry. This includes trade practice provisions,
    which regulate such practices as exclusive outlets, tied house
    arrangements, commercial bribery, and consignment sales. These
    provisions are intended to ensure fair dealing within the industry and
    to protect the consumer by prohibiting sales arrangements that result
    from anti-competitive practices.
        We also administer the IRC provision relative to the qualification
    and operation of distilleries, wineries, breweries, and industrial
    alcohol producers and users. Under this authority, we administer
    classification and collection of tax on alcohol products, and the
    collection of various occupational taxes from alcohol dealers. TTB's
    responsibilities under the IRC cover the production, packaging,
    bottling, labeling, and storage requirements related to alcohol
    products.
        With respect to tobacco, TTB work involves chapter 52 of the IRC,
    relating to the manufacture, importation, exportation, and distribution
    of tobacco products. Specifically, we examine applications and issue
    permits for tobacco manufacturers and importers, and export warehouses,
    and oversee their operations. TTB classifies a wide variety of tobacco
    products for tax purposes, and collects the tax on such tobacco
    products, as provided under the statute and implementing regulations.
    Finally, TTB also administers the excise tax on firearms and ammunition
    pursuant to its authority under the IRC.

                                    MISSION

        TTB administers Federal tax laws on alcohol, tobacco, firearms, and
    ammunition, and ensures that the alcohol and tobacco commodities TTB
    regulates are lawfully sold in the United States. In carrying out its
    mission responsibly, TTB must be sensitive to the industry's concerns
    as the government's customers, by reducing delays and regulations that
    impede business while also providing a tangible benefit to the American
    public. TTB's history indicates that an appropriate regulatory presence
    provides a deterrent against tax evasion schemes. TTB is committed to
    carrying out its responsibilities in a manner that makes effective and
    efficient use of the public resources entrusted to us. We carry out our
    mission without imposing inappropriate or undue burden on those whom we
    regulate and from whom we collect taxes. At the same time we maintain
    an aggressive enforcement program that deters violations by industry
    members and promotes voluntary compliance.
        The split from our predecessor agency has enabled TTB to return to
    its roots and focus on collecting the revenue and protecting the
    public. In the year since our inception, we have returned to that core
    mission, and we have proven that despite myriad administrative details,
    we have been able to focus on excise tax collection. Allow me to
    explain some of our highlights of the past year.
        TTB created a Field Operations Directorate that includes the pre-
    established National Revenue Center in Cincinnati, Ohio, which
    reconciles returns, reports, and claims; screens applications and
    issues permits; and provides expert technical assistance for industry,
    the public, and government agencies to ensure fair and proper revenue
    collection. The NRC is currently undergoing a business process
    reengineering study in order to maximize customer service and
    efficiency, while allowing TTB to handle an ever-increasing workload
    with existing staff.
        The Trade Investigations Division (TID), staffed with
    Investigators, has seven field groups located across the country
    dedicated to ensuring that only qualified applicants are granted
    permits to engage in the production and distribution of alcohol and
    tobacco products. Field investigations of industry members are
    conducted to help promote voluntary compliance with the laws and
    regulations enforced by TTB and prevent misleading labeling and
    advertising of alcohol beverages.
        Investigators also respond to credible information suggesting a
    health-related contamination of an alcohol or tobacco product. In
    addition, TID conducts trade practice and Certificate of Label Approval
    (COLA) fraud investigations. Some investigations over the year have
    resulted in revocations of permits or in the applicant withdrawing the
    permit as it is unable to meet the government requirements to operate.
    The work done by Trade Investigations is not only about educating our
    customers, but showing our presence and clearly helping carry out our
    unique and necessary mission.
        Because of a greater field presence, in fiscal year 2003 we
    accepted 13 Offers-in-Compromise (OIC) for a total of $1.162 million.
    In fiscal year 2004, we have so far accepted 12 OICs for a total of
    $270,086, and we have an additional 7 cases pending for $176,472. As an
    example, we collected a $35,000 OIC from a company who was found to
    have been receiving and shipping product without proper label approval.
    Investigators also conducted a product integrity investigation into a
    winery in the Southwest and found numerous label, record keeping, and
    administrative violations. We have also participated in counterfeit
    alcohol and tobacco investigations along the border in Texas and New
    Mexico.
        TTB's Tax Audit Division and program was first established in late
    fiscal year 2003 as part of TTB's strategic plan to collect the revenue
    that is rightfully due from the alcohol, tobacco, and firearms and
    ammunitions industries because in the past, ATF's program priorities
    and investigations were placed primarily on firearms and explosives.
    The division was established to provide a systematic approach to
    safeguard over $14 billion in annual revenue collected by TTB.
        The Tax Audit Division verifies the proper payment of tax and
    ensures compliance with the laws and regulations that protect the
    revenue and promote voluntary compliance. TTB Tax Audit uses a risk-
    based approach to target non-compliant industry members. A goal in 2004
    is to establish a baseline for measuring tax revenue audited in a 5-6
    year period and the industry compliance rate (percentage of taxpayers
    audited with no material findings, thereby validating the amount of tax
    paid was accurate and rightfully due).
        TTB's accomplishments in Tax Audit include establishing 10 audit
    offices across the country and recruiting and hiring 80 audit staff.
    The average staff person has 10 years of previous audit experience and
    holds one audit certification (i.e. Certified Public Accountant). TAD
    also established a formal industry-training program: 75 percent of the
    workforce has been trained in three or more industries (Distilled
    Spirits Plants, Beer, Wine, Manufacture of Non-beverage Products, and
    Firearms). They also implemented an automated audit documentation tool
    to facilitate a standard audit approach and create efficiencies, and
    developed an audit work plan scheduling 110 taxpayers for review in
    2004.
        I am pleased to report that initial audit findings have identified
    approximately $4.7 million in additional tax revenue due, and to date,
    these audits have resulted in approximately $500,000 in additional
    revenue collected by TTB. Further, these audits have identified an
    additional $523,000 in revenue due to the governments of Puerto Rico
    and the Virgin Islands for taxes collected on articles (i.e. rum)
    produced in Puerto Rico or the Virgin Islands (also called cover over).
        These divisions work hand in glove with the Risk Management Staff
    who develop, implement, and maintain programs that ensure TTB is
    collecting all the revenue due and protecting the public. Divisions
    within Headquarters Operations often support the work done by TTB
    Auditors and Investigators in the field.
        The Regulations and Procedures Division (RPD) drafts new and
    revised regulations under the Internal Revenue Code and the Federal
    Alcohol Administration Act. They issue rulings, procedures, and
    informational documents to clarify the law and regulations. Most
    notably, they evaluate important policy issues before TTB and write
    proposed regulations and Treasury Decisions for publication in the
    Federal Register and the Code of Federal Regulations.
        In 2003, much attention was placed on the issuance of limitations
    set for health claims related to consumption of alcoholic beverages. On
    March 3, 2003, TTB, along with the Treasury Department, issued final
    regulations to prohibit the appearance on labels or in advertisements
    of any health-related statement that is untrue or tends to create a
    misleading impression. The regulations require that specific health
    claims must be truthful, adequately substantiated by scientific or
    medical evidence, disclose the health risks associated with both
    moderate and heavier levels of alcohol consumption, and outline the
    categories of individuals for whom any alcohol consumption poses risks.
    The new rules took effect June 2, 2003.
        In addition, in March 2003, TTB and the Treasury Department issued
    proposed regulations that would clarify the status of flavored malt
    beverages by refining the regulatory definitions of ``beer'' and ``malt
    beverage.'' The proposal would limit the amount of alcohol added to
    beer or malt beverages through flavors use. It would also require
    display of alcohol content on flavored malt beverage labels, and would
    prohibit references to distilled spirits on all malt beverage labels.
    The proposal garnered a considerable amount of congressional interest
    and TTB received over 16,000 comments from the public; the norm is 10-
    20 comments per Notice of Proposed Rulemaking. In the weeks and months
    following the closure of the comment period, staff catalogued and
    reviewed the comments. A decision will be published once Treasury
    completes the review.
        This past year brought the opening of the new laboratory facility
    that TTB's Scientific Services Division shares with the ATF. This
    state-of-the-art facility, which was dedicated in June 2003, in
    Ammendale, Maryland, provides chemists and support staff an optimum
    working environment in which to process samples for its customers. The
    Laboratory supports TTB by providing expertise in the analytical
    analyses of distilled spirits, wines, malt beverages, specially
    denatured alcohol, non beverage alcohol, and tobacco products. TTB has
    a second lab in Walnut Creek, California, known as the Compliance
    Monitoring Laboratory that primarily conducts tests of alcohol
    beverages. In this regard, TTB uses a market basket sampling approach
    as well as other methods to evaluate products on the market and ensure
    that products are properly labeled, do not contain prohibited
    substances, and that the products do not impose a health hazard to
    consumers.
        An important component of TTB's external relations are its
    partnerships in the international arena. The International Trade
    Division (ITD) acts as TTB's liaison on issues related to alcohol
    beverages, and facilitates the trade of alcohol beverages by serving as
    an advisor to industry members, various U.S. Government agencies and
    embassies. In this capacity TTB is represented at international trade
    meetings and participates in international trade negotiations,
    primarily working with the Office of the United States Trade
    Representative (USTR).
        Again, through ITD, TTB contributed to the World Wine Trade Group's
    (WWTG) progress toward a labeling agreement designed to facilitate
    trade in wine among the member countries. The WWTG is an informal group
    of seven countries who have a common interest in exporting wine
    worldwide. The United States, Canada, Chile, Argentina, South Africa,
    New Zealand and Australia are members of this group.
        Also, in the international trade arena, TTB continues to work with
    USTR in crafting a Memorandum of Understanding (MOU) with Mexico to
    clarify requirements for U.S. bottlers who receive bulk tequila. The
    United States has worked hard to convince the Mexican government to
    reconsider their proposal to ban the exportation of bulk tequila.
    Mexico cited failures by other countries in protecting the standard of
    tequila as a reason for suggesting the ban. Such a ban would adversely
    impact the U.S. distilled spirits industry's ability to profitably
    continue to sell and distribute tequila in the United States and all
    over the world, and, in turn, cause Mexico to inadvertently hurt one of
    their own most profitable exports. TTB participated in several meetings
    this year in Mexico, the United States, and Canada and played a key
    role in delaying the implementation of the bulk shipment ban by
    describing to the Mexican government our past efforts in enforcing the
    integrity of tequila and by stressing our continued commitment to
    protect this beverage and demonstrating how the TTB enforcement
    mechanism makes such a ban unnecessary. The MOU seeks to both clarify
    and prevent undue extraterritorial requirements on U.S. bulk tequila.
        One of the largest components of Headquarters Operations is the
    Advertising, Labeling and Formulation Division. This division carries
    out TTB's statutory mandate to prevent consumer deception and ensure
    that alcohol labels provide the consumer with adequate information as
    to the identity and quality of the product.
        In fiscal year 2003, ALFD's staff of nine label specialists
    reviewed 101,000 Certificate of Label Approval (COLA) applications and
    issued nearly 75,200 certificates. Four formula specialists reviewed
    over 1,800 domestic beverage alcohol formulas, and approximately 1,500
    pre-import applications.
        In May 2003, ALFD launched an electronic filing system for use by
    industry members and third parties to file applications for COLAs. This
    new web-based system, known as COLAs Online, provides industry members
    with a streamlined, more expedient and paperless means of obtaining a
    COLA. COLAs Online allows industry members to submit COLA applications
    via the Internet, as well as provides a way for ALFD employees to
    review the application electronically. Submitted applications are
    electronically approved, returned for correction, or rejected. The
    system also provides an online capability for industry members to
    obtain the status of electronically filed forms and the Public COLA
    Registry section of COLAs Online allows the public to view approved
    COLAs, including images of the alcohol labels. We currently receive
    approximately 15 percent of all COLA applications electronically and we
    expect that amount to steadily increase with time.
        In addition to these divisions, TTB is supported by a world class
    cadre of attorneys and Office of Management personnel. Often these are
    the employees who serve as the glue to the functions we perform as a
    Bureau. Further, a majority of services we use are contracted out and
    managed though a Memorandum of Agreement with ATF. This arrangement
    facilitates TTB becoming a stand-alone Bureau within the Department of
    Treasury. The memorandum will be renegotiated, but TTB continues to
    search for, and has found, many new ways to less expensively outsource
    required services including moving many management functions to the
    Bureau of Public Debt.

                    FISCAL YEAR 2005 APPROPRIATIONS REQUEST

        The funding request for fiscal year 2005 is $81.9 million and 544
    FTE, a $2.4 million increase over fiscal year 2004. This increase
    represents adjustments necessary to maintain current levels of
    operations. It supports TTB's core mission to protect the public and
    collect the revenue. The request is fiscally sound, and I believe that
    we have proven that while we are a small Bureau, we are focused and
    effective, providing results-driven service to America.
        One of our priorities for fiscal year 2005 is to be completely
    separate from ATF's Information Technology services. ATF is not a
    service provider and is part of the Department of Justice. At this
    time, ATF has given written notice that beginning in fiscal year 2006,
    it will no longer service TTB's information technology needs. Also, ATF
    may not be able to provide administrative and other management services
    to TTB. We have formulated a plan that will help us cover services
    internally and externally by outsourcing from the public and private
    sectors. As resources become available, we believe we can judiciously
    acquire the services needed to run our Bureau, although much work needs
    to be done to complete this task by fiscal year 2006.

                                   CONCLUSION

        Through the judicious and responsible use of the resources Congress
    provides, we look forward to continuing to provide services that are
    not only unique in American Government, but provide a clear service to
    America by collecting taxes and protecting the public. It is not only
    my honor to lead the men and women of this Bureau, but I appreciate
    your support of this new Bureau and our wholehearted efforts to carry
    out our mission. Thank you.
                                     ______

                         U.S. OFFICE OF SPECIAL COUNSEL

             Prepared Statement of Scott J. Bloch, Special Counsel

        I am pleased to present testimony on behalf of the U.S. Office of
    Special Counsel and our fiscal year 2005 budget request. As the new
    Special Counsel, I look forward to working with the U.S. Senate in my
    role as independent guardian of the merit system of civil service by
    protecting Federal employees from unfair workplace discrimination or
    mistreatment, including reprisal for whistleblowing, as well as
    imposing corrective action to protect those employees and bringing
    disciplinary action against negligent supervisors.

                                     GOALS

        My goals for the agency are twofold: (1) to continue to strengthen
    the civil service merit system by vigorously enforcing the three
    statutes for which the Office of Special Counsel bears responsibility:
    the Civil Service Reform Act, the Whistleblower Protection Act, and the
    Hatch Act; (2) to provide an intense, more visible level of enforcement
    of the Uniformed Services in Employment and Re-Employment Rights Act
    (USERRA).

                  GUIDING PRINCIPLES FOR ACHIEVING THESE GOALS

        The integrity of the civil service merit system depends on the
    alertness and effectiveness of its watchdogs. The most significant
    challenge we face into next year is to eliminate our pending case
    backlog and to develop methods to make the agency more efficient and
    effective in its main mission, while at the same time assuring
    complainants a fair review. No Federal employee should have to wait
    years, in some instances, for a valid complaint or situation to be
    addressed or an offending supervisor disciplined.
        We will accomplish this by asking for great energy and focus of the
    current staff, and by bringing on new talent, skilled at locating
    issues and understanding problem solving, keen on protecting rights and
    mindful of the need to address cases that lack jurisdiction or do not
    meet the requisite thresholds. In all of this, we will be guided by the
    understanding that this is being done so that we can better service the
    merit system and protect whistleblowers. If we can do all of that, then
    we can institute a mode of operation that prevents us from allowing
    such a backlog of cases to surface again.
        During this challenging time in our Nation, the security of the
    country depends on our armed forces. And our armed forces depend as
    never before on the vital roles played by national guardsmen and
    reservists. Every reservist and guardsman must know that the United
    States stands fully behind them, and will investigate and fight for
    justice on their behalf regarding their employment and re-employment
    after active service deployments. Without extremely strong enforcement
    in this area, serving in the guard and reserves becomes less
    attractive, and the entire military system currently in use becomes
    weakened.
        The teeth behind our effectiveness in enforcing each of our
    mandates lie in our ability to litigate in pursuit of justice. To
    become a more effective enforcer implies an increase in meritorious
    litigation, which I hope to pursue.
        Finally, I know that Congress also shares our desire to protect
    Federal whistleblowers; however, the protection does not occur if
    Federal employees do not know about the existence and purpose of the
    Office of Special Counsel. Therefore, a critical function is our
    extensive outreach and training efforts so that Federal employees know
    they can call us when they have a complaint or problem within their
    agency.

                            RELEVANT FUNDING FACTORS

        For fiscal year 2005, the OSC is requesting $15.449 million, in
    order to fund approximately 113 full-time employees (FTE) and related
    non-personnel costs.
        The purpose of this requested increase is to manage and process the
    agency's steadily increasing workload since fiscal year 2000 of
    prohibited personnel practice complaints, whistleblower disclosures,
    and Hatch Act matters, and to reduce persistent case processing
    backlogs--including serious backlogs in the processing of whistleblower
    disclosures. Given the increasing workload of OSC, 113 FTE is a modest
    request.
        Looking at the data for the past several years, I believe several
    factors account for or contribute to this workload increase. They
    include: publicity about an increased number of high-profile cases
    handled by the OSC, including whistleblower disclosures, and four
    Public Servant Awards issued to whistleblowers by the OSC; heightened
    awareness and concern over national security disclosures after the
    events of September 11, 2001; increased public interest in elections
    since the 2000 presidential election, and the start of the 2004
    campaigns; the OSC's 2302(c) Certification Program; and significant
    improvements in OSC's web site, increasing awareness by government
    employees and others of the OSC and its functions.
        I will highlight specific areas that I believe warrant an increase
    in staffing:
      --In April 2004, soon after I became the new Special Counsel, I
            established a new Special Projects Unit (SPU) specifically to
            examine the organization's system for handling cases, to handle
            the pending backlogs, and to consider and experiment with new
            methods for increasing the efficiency and effectiveness of all
            other aspects of the OSC. Several of the most experienced OSC
            attorneys are now assigned to the unit to help remove the
            current backlog of cases and to prevent such problems in the
            future. This includes a careful look at the agency's web site
            and methods of electronic filing.
      --Given the increasing numbers of complaints and cases in all units
            of the agency, increased levels of labor and staff costs are
            required to ensure no backlogs will build up again.
      --Regarding prohibited personnel practice complaints, increased staff
            costs are also required for higher compliance with the 240-day
            prosecution deadline currently required by statute.
      --I am confident of our ability to fulfill our stated goal of
            providing a more visible level of enforcement of USERRA, even
            in (and especially in) the midst of one of the largest-ever
            demobilizations of reservists from overseas in the coming year.
            In conjunction with other Federal entities, we will
            aggressively prosecute USERRA claims. But this may require a
            higher number of staff focused in the USERRA area.
      --Public awareness of the OSC's Disclosure Unit (DU) has grown in
            recent years and the greater awareness of national security
            issues, following the terrorist attacks of September 11, 2001,
            and subsequent events, have also caused a record number of
            whistleblower disclosure filings with the OSC. During fiscal
            year 2002-2003, for example, the DU received 535 or more
            disclosures each year--compared with 380 disclosures in fiscal
            year 2001 and an average of 360 in the preceding 4 fiscal
            years. Many of the disclosures filed after fiscal year 2001
            have dealt with national security issues (some involving
            complex and sensitive classified material) that have required
            the work of more than one DU staff attorney.
          As of September 30, 2003, the total number of cases pending in
            the DU was a record 690 (up drastically from 556 at the end of
            fiscal year 2002, and 287 at the end of fiscal year 2001). A
            significant number of these cases were more than a year old,
            including matters designated after initial review as the
            highest priority disclosure--an allegation of a substantial and
            specific danger to public health and safety likely to merit
            referral to the head of the agency involved for investigation.
            The OSC is requesting additional FTE allocation to DU backlog
            reduction efforts (i.e., to provide timelier resolutions of
            whistleblower disclosures filed with the OSC).
          By law, the OSC has 15 days to review a disclosure and to
            determine whether there is a substantial likelihood that the
            information provided discloses any violation of law, rule, or
            regulation; gross mismanagement; gross waste of funds; abuse of
            authority; or a substantial and specific danger to public
            health or safety. Given the increasing numbers and complexity
            of disclosures in recent years, as well as the time required to
            contact whistleblowers, examine information submitted, perform
            necessary analysis, and draft required correspondence, this
            timetable has, in reality, proven to be unattainable in most
            cases. This has resulted in a persistent backlog.
          While the OSC is fully committed to directing whatever resources
            are required to immediately process and refer critical national
            security disclosures, additional resources (not only in staff
            but in facilities and other resources needed to properly handle
            such critical matters) are needed.
          The Disclosure Unit backlog has become an issue of understandable
            concern to Congress. It has also been a pressing concern to the
            OSC, which has implemented several measures in recent years in
            efforts to improve upon its timeliness in processing
            whistleblower disclosures. For example, the DU has implemented
            a priority system for matters received; those priorities are
            tracked using the agency's automated case tracking system;
            additional employees have been detailed to DU work; and, as
            funds have permitted, a limited number of additional staff has
            been allocated to the unit.
      --In response to recent calls for the OSC to attack the problem more
            aggressively, the OSC has begun the process of applying more
            intensive and focused strategic workforce planning to that
            problem, as part of a comprehensive strategy to address all
            areas of backlog in the agency. No strategy can succeed,
            however, without adequate funding to support additional staff
            and associated resources. The OSC's fiscal year 2005 budget
            request will provide funding for the additional staff needed to
            more adequately comply with the 15-day time limit for DU
            decisions, and to make progress toward the goal of reducing the
            Unit's backlog.
      --The increased amount of litigation necessary to strongly enforce
            adherence to the statutes also has a cost in terms of employee
            resources.
      --Next, in this busy election year, we expect our Hatch Act
            complaints and cases to increase as they always do during the
            national election cycle. The unit has received a significant
            increase in the number of complaints alleging Federal, State,
            and local Hatch Act violations, and a steadily growing number
            of requests for advisory opinions on the Act. Between fiscal
            year 2001-2003, the Hatch Act Unit received an average of 198
            complaints per year, compared to 84 complaints on average in
            each of the previous 3 fiscal years. Likewise, there has been a
            significant increase in the number of alleged Hatch Act
            violations referred for field investigation--i.e., 35 in fiscal
            year 2003, compared to 8 in fiscal year 2002, and 10 in fiscal
            year 2001.
          Hatch Act enforcement spawned lengthy and resource-intensive MSPB
            litigation activity by OSC in fiscal year 2003.
          The OSC's fiscal year 2005 budget request will provide funding
            for the staff resources needed to handle increasing numbers of
            Hatch Act complaints, opinions, and enforcement efforts,
            including litigation.
      --As mentioned, outreach within the Federal workforce is critical to
            the mission of OSC. Success in outreach obviously generates a
            greater numbers of complaints, whistleblower disclosures,
            allegations and requests for assistance than in previous years.
            I believe our excellent professional staff will rise to the
            occasion, but the agency needs an increase in FTEs and an
            increased travel budget to keep up with those demands.
      --Higher labor funding is also required to better address Freedom of
            Information Act (FOIA) processing, investigations, and
            enforcement.
      --The OSC's fiscal year 2004 funding was intended to pay for the cost
            of 113 FTE, but the agency has incurred several unfunded
            mandates: increased benefit costs (transit subsidy increases),
            new requirements for financial statements and audits,
            significant increase in costs under an interagency agreement
            for receipt of administrative services, and unanticipated real
            estate taxes for its D.C. office. Salaries and benefits make up
            approximately 83 percent of OSC's operating expenses for fiscal
            year 2004, so the agency has little ability to reprogram funds
            when salaries and benefits for authorized FTE exceed
            appropriations. While these types of costs may be easily
            absorbed by most agencies' budgets that dwarf OSC's, these
            types of expenses can easily swamp a relatively tiny agency
            like ours, materially having an impact on achieving goals and
            even core missions.
      --To be successful in meeting our goals of vigorously enforcing the
            statutes for which we are responsible, with the least possible
            headcount, we are moving to further automate several steps
            within our processes, which also bears costs in equipment and
            development resources.

                                 PROGRESS MADE

        As noted earlier with respect to prohibited personnel practice
    complaints, the OSC's ongoing and intensive efforts to improve upon its
    responsiveness began to yield results in fiscal year 2003. The agency
    processed 85 percent of those complaints within the 240-day timetable
    established by Congress. The OSC intends to build on these results, and
    achieve close to 100 percent success in this regard--all the while
    avoiding any backlogs.

                                    SUMMARY

        The largest part of the requested increase in the fiscal year 2005
    budget, therefore, is for the full cost of the fiscal year 2004 FTE
    increase. The capacity to fund 113 FTEs is needed to properly manage
    OSC's statutory responsibilities and to reduce, if not eliminate,
    processing delays.
        Our office exists to ensure good government. When people behave in
    ways that do not promote good government, or jeopardize safety and
    health in the Nation, we must take corrective and disciplinary action.
    We exist to promote good, efficient, fair government, and integrity for
    the Nation among the Federal workforce. The fiscal year 2005 budget
    request will enable OSC to reach its mission to promote good government
    in an expeditious way.
        Thank you for your interest in the Office of Special Counsel.
                                     ______

                          FEDERAL ELECTION COMMISSION

              Prepared Statement of Ellen L. Weintraub, Vice Chair

        Mr. Chairman, Ranking Member Murray, and members of the committee,
    it is my privilege to present the Federal Election Commission's (FEC's)
    fiscal year 2005 appropriation request. To begin, on behalf of the
    agency, I thank you for last year's appropriation. Your bipartisan
    support of the FEC budget has enabled us to continue to implement the
    Bipartisan Campaign Reform Act of 2002 (BCRA), which amended the
    Federal Election Campaign Act of 1971.
        Our fiscal year 2005 appropriation request is for $52,159,000, an
    increase of $2,016,596 or 4.02 percent, and for 391 FTE, the same as
    our fiscal year 2004 FTE level. This year, as last year, the FEC is
    seeking only a modest increase over the fiscal year 2004 budget of
    $50,142,404 (less the government-wide across-the-board 0.59 percent
    rescission) and 391 FTE. I am pleased to report this request conforms
    to the President's fiscal year 2005 budget request for the FEC.
        Additionally, last year Congress appropriated $800,000 (less the
    0.59 percent rescission) to the Commission for the operations of the
    Office of Election Administration (OEA), with the understanding that
    any remaining funds and other assets of the OEA would be transferred,
    pursuant to section 801 of Public Law 107-252, to the Election
    Assistance Commission (EAC) once the EAC was constituted. We are
    pleased to report, effective April 1, 2004, the OEA and all of its
    assets (including $500,527 in unobligated funds, property and records),
    personnel and liabilities, were transferred to the EAC.
        The fiscal year 2005 request represents a continuation of fiscal
    year 2004 funding levels, adjusted for inflation, and salary and
    benefit increases ($1,744,700--a 4.85 percent increase). As such, it
    represents a Current Services request for fiscal year 2005, with no
    additional funds or staff for new programs or initiatives by the FEC
    and represents an overall increase of only 1.92 percent for non-
    personnel costs. These minimal increases are detailed in our fiscal
    year 2005 Budget Justification.
        In its annual review of legislative recommendations, the Commission
    has submitted 12 recommendations for legislative action. Four of those
    were unanimously endorsed as priority recommendations; the remaining 8
    as non-priority. The 4 priority recommendations, in brief, are that
    Congress: (1) allow as a permissible use of Federal campaign funds
    donations to State and local candidates and for any other lawful
    purpose that does not violate subsection (b) of section 439a; (2)
    increase the amount that authorized committees may give to authorized
    committees of other candidates; (3) modify terminology of ``reason to
    believe'' finding; and (4) require mandatory electronic filing of
    Senate reports. The remaining 8 recommendations, while placed in the
    non-priority category are, nonetheless, supported unanimously by the
    Commission as substantive or technical in nature. We are confident
    these legislative changes will result in efficiencies, not only for the
    FEC, but also for the regulated community.
        Over the past few years, the FEC has achieved major successes,
    including meeting statutory and court deadlines for the BCRA
    implementation and legal challenges to the BCRA, as well as the
    expansion of the compliance program. These successes are the result of
    FEC efforts and support from our Congressional oversight committees. In
    addition, two programs have received accolades from the regulated
    community--the Administrative Fine Program and Alternative Dispute
    Resolution (ADR) Program. With the addition of these two programs, we
    have been able to successfully streamline the enforcement process.
        I now will provide a brief overview of the FEC's three core program
    areas and relate those areas to the agency's fiscal year 2005 budget
    request.

                               DISCLOSURE PROGRAM

        The FEC's disclosure program includes not only the review and
    placement of information on the public record, but also educational
    outreach, including campaign finance workshops and seminars, a toll-
    free line for consumer requests, and automatic fax transmission of our
    publications 24 hours a day, 7 days a week. FEC meeting agendas and
    related documents also are available on our web site. Our disclosure
    program accounts for over a third of the agency's staffing (137 FTE),
    distributed among the Public Records Office, Information Technology
    Division, Reports Analysis Division, Press Office, Information Office
    and those sections of the Office of General Counsel that formulate
    proposed regulations and draft responses to advisory opinion requests.
        Improvements in productivity, aided by IT enhancements, generally
    have enabled the FEC to keep pace with the large increases in Federal
    campaign finance activity during recent election cycles, activity which
    has nearly doubled in the last 12 years. Total disbursements for a non-
    Presidential election cycle have increased from $1.1 billion in 1986,
    to $3.8 billion for the 2000 presidential and 3.1 billion for the 2002
    congressional cycle--a 282 percent increase. We anticipate $4 billion
    in total disbursements for Federal campaigns in the 2004 cycle, from
    about 8,000 committees filing over 90,000 reports and generating 3
    million itemized transactions. The 2006 cycle, a congressional cycle,
    should be slightly lower in volume than the 2004 presidential cycle.
    Every election cycle since 1992 has seen a new record in total spending
    in Federal elections for Congressional and Presidential elections. With
    your help, we are building an impressive communications system capable
    of handling our Information Technology (IT) needs well into the future.
    This system offers the capability of instantly updating our database
    and expanding the types of information collected. As you are aware,
    however, this system is expensive. The average annual cost is about $1
    million to maintain the electronic filing system.
        With the passage of mandatory electronic filing, we are beginning
    to see the benefits of timeliness and work process improvements such a
    sophisticated system affords. Since the institution of electronic
    filing, median time to process all documents has improved from 10 to 11
    days to 5 to 6 days.

                               COMPLIANCE PROGRAM

        Obtaining voluntary compliance is the foundation of the FEC's
    strategic and performance plans, and is at the core of our mission
    statement. A credible enforcement program, however, is necessary to
    provide sufficient incentive to the regulated community to achieve this
    voluntary compliance. In fiscal year 2005, we anticipate assigning 189
    FTE to the compliance function, including enforcement, supervisory and
    support staff from OGC, Information Technology and the Audit Division.
    In the audit track of the compliance program, we are pleased to report
    sufficient resources have been provided to allow the Commission to
    initiate 40 to 45 audits ``for cause'' for the 2004 election cycle, as
    opposed to 25 in the 1998 cycle. Details on the compliance program are
    contained in the fiscal year 2005 Budget Justification.
        The first major overhaul of the FEC's enforcement program occurred
    in May 1993. Faced with a large number of complex cases the Commission
    developed the Enforcement Priority System (EPS), to prioritize cases
    for substantive enforcement action. This system is designed to provide
    a consistent and impartial ranking of cases based on the relative
    seriousness of the alleged violations, and gives us a tool to match the
    seriousness of a particular case to the resources available to
    undertake the investigation. We use the EPS in conjunction with the
    case management system, which enables the Commission to measure
    performance with regard to the substantive resolution of cases by issue
    and to measure timeliness of enforcement actions. Under EPS, the
    Commission has activated more cases, closed more cases with substantive
    action, and resolved some cases that would otherwise have been
    dismissed.
        The EPS has enabled the Commission to focus limited enforcement
    resources on the more important enforcement actions and to close low-
    rated and stale cases. The increased level of civil penalties assessed
    by the Commission following implementation of the EPS has demonstrated
    the benefits of pursuing more substantive cases. In 1991, there were
    262 cases closed with civil penalties totaling $534,000; in 1995, there
    were 229 cases closed with $1,967,000 in civil penalties. By fiscal
    year 2003, there were 377 cases closed with civil penalties and fines
    totaling $2,774,603.
        Before 2000, the FEC's enforcement program was administered
    entirely by the Office of General Counsel. Two new components of the
    Commission's enforcement efforts--the Administrative Fine Program and
    the ADR program--are administered by the Staff Director. The goal of
    the ADR Program is to resolve matters quickly and effectively through
    bilateral negotiations. Both the ADR and Administrative Fine programs
    are designed to expand the FEC enforcement presence and resolve certain
    types of cases without resorting to the more lengthy traditional
    enforcement process. The Commission has met its compliance goals.
    Today, the Commission focuses its legal resources on the more complex
    enforcement matters, while using administrative processes to handle
    less complex matters. For example, from fiscal year 1995 through fiscal
    year 2000, the FEC closed an average of 197 cases each fiscal year. In
    fiscal year 2001, with the addition of the Administrative Fine and ADR
    programs, the FEC closed 518 cases, a 163 percent increase over the
    fiscal year 1995-2000 annual average of 197 cases. In fiscal year 2002,
    the FEC closed 229 cases, including enforcement, ADR and administrative
    fine cases. The total in fiscal year 2003 was 535 closed cases. We are
    confident the figure for fiscal year 2004 will be higher.

                             PUBLIC FUNDING PROGRAM

        The Commission also administers the program providing a public
    subsidy to Presidential election campaigns. During fiscal year 2005,
    approximately 64 FTE from the Audit Division, Office of General
    Counsel, and Information Technology Division, will be directly involved
    in this program, which will entail audits of the seven candidates
    receiving matching funds for the 2004 election. In addition, two
    general election candidate committees will be audited, as will two host
    committees and two convention committees, for a total of 13
    Presidential audits in fiscal year 2004 and 2005. This program began
    certifying eligible primary candidates for matching funds and
    processing submissions for funding awards on January 2, 2004.
        On a related matter, we believe it is appropriate to bring to your
    attention the potential shortfall in the Presidential Public Funding
    Program. There was a brief shortfall with the February primary matching
    payments for the 2004 Presidential election, which was restored with
    the February deposits to the Fund. This is the only anticipated
    shortfall for the 2004 cycle. We did not experience a major shortfall
    for the 2004 Presidential election because several major candidates
    decided not to take Federal matching funds for the 2004 primaries;
    however, this may change in future elections. The Treasury Department
    maintains the matching fund account which is comprised of money derived
    from a taxpayer check-off system. Shortfalls in 1996 and 2000 occurred
    for several reasons. First, the eligibility requirements for receiving
    matching funds have not been adjusted for inflation since 1974, thus
    allowing more candidates to qualify for matching funds. Second, the
    ``front-loading'' of the primary and caucus nominating process which
    puts a premium on ``early'' fundraising for Presidential candidates,
    resulted in a high volume of funds being raised in 1995 and 1999 that
    were eligible for matching payments in January of 1996 and 2000. Absent
    legislative action, the Public Funding Program faces potential
    shortfalls because of declining participation in the check-off program,
    and the failure to index contributions to inflation while the pay-outs
    are indexed.
        The foregoing summarizes the FEC's fiscal year 2005 budget request.
    For a more detailed review of this request, I would urge members of the
    committee to consult our more detailed Budget Justification, which
    includes charts delineating how our budget request would be allocated
    and how it compares to previous years. It also demonstrates how the FEC
    has developed and used strategic and performance planning.
        Again, I thank you, Mr. Chairman and the committee, for your
    continued support and the opportunity to present our fiscal year 2005
    budget request.
                                     ______

                     OFFICE OF NATIONAL DRUG CONTROL POLICY

                Prepared Statement of John P. Walters, Director

        I am pleased to set forth the fiscal year 2005 budget request for
    the Office of National Drug Control Policy (ONDCP). I want to thank the
    subcommittee for its strong bipartisan commitment to our shared
    national goal of reducing drug use in America, especially among our
    youth. This subcommittee provides critical funding to support ONDCP's
    programmatic, policy, and budget development functions.
        Your support of ONDCP's $510.959 million budget request permits
    ONDCP to continue fulfilling our dual mission of serving as the
    President's primary Executive Branch support for counter-drug policy
    and program oversight and simultaneously managing our own programmatic
    responsibilities. We continue to work to achieve results of our stated
    goals and we are meeting those goals. For example, in February 2002,
    President Bush unveiled his goal of reducing youth drug use by 10
    percent in 2 years in the National Drug Control Strategy. That goal has
    been exceeded. The 2003 Monitoring the Future Study confirms that
    current use (past 30 days) of any illicit drug between 2001 and 2003
    among students declined by 11 percent. Similar declines were seen for
    past year use (11 percent) and lifetime use (9 percent).
        ONDCP takes seriously its primary statutory responsibility to
    develop national drug control policy and a supporting budget, to
    coordinate and oversee the implementation of that policy and budget,
    and evaluate drug control programs to ensure that our efforts are
    coordinated and focused on obtaining measurable results. In addition to
    our policy role, ONDCP is responsible for managing and evaluating four
    key programs: The National Youth Anti-Drug Media Campaign, the Drug-
    Free Communities Support Program, the High Intensity Drug Trafficking
    Areas Program (HIDTA) Program, and the Counterdrug Technology
    Assessment Center (CTAC).
        ONDCP is requesting $510.959 million in budget authority for fiscal
    year 2005. The fiscal year 2004 enacted level is $522.247 million. The
    budget request reflects four program accounts: Salaries and Expenses;
    the Counterdrug Technology Assessment Center (CTAC); Other Federal Drug
    Control Programs; and the High Intensity Drug Trafficking Areas (HIDTA)
    program.
    A. Salaries and Expenses: $27.609 million
        In fiscal year 2005, ONDCP is requesting $27.609 million for
    Salaries and Expenses to support a full complement of 125 Full-Time
    Equivalents (FTEs) and a pay raise. The request reflects a decrease of
    $222,321 below the fiscal year 2004 enacted amount. This request is
    essential if ONDCP is to carry out its policy, budget, and programmatic
    responsibilities in a manner consistent with achieving measurable
    results. This includes:
                Operational Request: $26.259 million
        Will provide compensation and benefits for all authorized FTEs
    including a full complement of Executive Level (EX) positions; contract
    services; rental payments to the General Services Administration;
    travel and transportation; communications and utilities; printing and
    reproduction; supplies, materials and equipment.
        Includes resources to support 125 FTEs, an increase of 5 FTEs over
    the fiscal year 2004 enacted level. This FTE increase is requested to
    offset the loss of many of the 30 military detailee positions the
    Department of Defense has supported at ONDCP since 1996. Increasing the
    staff level to 125 FTEs will enable ONDCP to assess and respond to the
    drug threat facing the Nation. ONDCP will be able to monitor agency
    implementation of the National Drug Control Strategy programs and
    improve interagency coordination. ONDCP will be able to evaluate
    programs and identify those that work. Additionally, ONDCP will be able
    to provide policy guidance and oversight to the Counterdrug Technology
    Assessment Center (CTAC), High Intensity Drug Trafficking Area (HIDTA)
    Program, and Other Federal Drug Control Programs.
        Provides for two new initiatives: High Speed TS Communication Line
    Costs and Communication Line Costs for DOD Intel-Link computers on-
    site. ONDCP will need to assume these costs because of budget
    realignments within the DOD Counterdrug budget.
                Policy Research Request: $1.350 million
        This request will continue and expand ONDCP's policy research
    program, an increase of $7,965 over the fiscal year 2004 enacted
    amount. ONDCP conducts research to develop and assess drug policy,
    identify and detail changing trends in the supply of and demand for
    illegal drugs, monitor trends in drug use and identify emerging drug
    problems, assess program effectiveness, and improve the sources of data
    and information about the drug situation. The requested funding will
    support a wide range of new and continuing policy research projects.
    B. Counterdrug Technology Assessment Center (CTAC): $40 million
        In fiscal year 2005, ONDCP is requesting $40 million to support the
    Counterdrug Technology Assessment Center (CTAC). The fiscal year 2004
    enacted level is $41.752 million. The aggregate request includes
    funding for two distinct components: Research and Development Program
    ($18 million) and the Technology Transfer Program ($22 million).
                Technology Research and Development: $18 million
        Demand Reduction R&D Program: $12 million.--CTAC's Demand Reduction
    Initiatives, in conjunction with the National Institute on Drug Abuse
    (NIDA), will continue to improve upon existing technology available for
    substance abuse, dependence, and addiction research. CTAC has
    established a ``niche'' in developing and installing advanced
    neuroimaging instrumentation at drug abuse research facilities
    operating under grants from NIDA. The Demand Reduction Technology
    Review Committee (DRTRC) has been established in conjunction with NIDA
    to address and prioritize research initiatives with which CTAC can
    assist in the future.
        Supply Reduction R&D Program: $6 million.--This funding will
    provide for developing technology for use by Federal, State, and local
    law enforcement agencies in reducing the supply of illegal drugs by
    developing technologies that satisfy identified law enforcement
    requirements for increased investigative capability. Once tested and
    evaluated, developed technologies become available either through the
    Technology Transfer Program or through independent purchase. Sponsored
    R&D items in fiscal year 2004 include a panoramic 360-degree video
    surveillance camera, a Project 25 digital audio body-wire, and a Title
    III telephone intercept expansion capability.
                Technology Transfer Program (TTP): $22 million
        The Technology Transfer Program (TTP) relies on technical and
    operational performance testbed evaluations and outreach to industry to
    acquire additional items for law enforcement. The TTP makes available
    state-of-the-art, affordable, easily integrated, and maintainable tools
    to enhance the capabilities of State and local law enforcement agencies
    for counterdrug missions. TTP is not a grant program; rather, it
    provides drug crime fighting information technology and analytical
    tools, communications interoperability, tracking and surveillance, and
    drug detection devices from a catalog of items proven to be
    operationally effective by Federal, State, and local law enforcement.
    Hands-on training and maintenance support are provided to all
    recipients, and TTP maintains extensive records of State and local
    applications and jurisdiction statistics on every aspect of the program
    including the status of deliveries, departments receiving equipment,
    and training records.
    C. Other Federal Drug Control Programs: $235 million
        In fiscal year 2005, ONDCP is requesting $235 million for the Other
    Federal Drug Control Programs. The fiscal year 2004 enacted level is
    $227.649 million. This account provides funds to a diverse group of
    ongoing programs: the National Youth Anti-Drug Media Campaign, the
    Drug-Free Communities Support Program, World Anti-Doping Agency (WADA)
    Membership Dues, the U.S. Anti-Doping Agency, Counterdrug Intelligence
    Executive Secretariat, National Drug Court Institute, and Performance
    Measures Development.
                The National Youth Anti-Drug Media Campaign: $145 million
        In fiscal year 2005, ONDCP is requesting $145 million for the
    National Youth Anti-Drug Media Campaign. The fiscal year 2004 enacted
    level is $144.145 million. The Media Campaign uses multi-media
    advertising and public communications strategies aimed at youth and
    parents to promote anti-drug attitudes and behavior. The Campaign is a
    comprehensive national effort that integrates paid advertising at
    national and local levels with Web sites, clearinghouses, media events,
    outreach to the entertainment industry, and strategic partnerships that
    enable messages to resonate in ways that generate awareness and
    ultimately change beliefs and intentions toward drug use by teens.
        Recently, ONDCP released results from the Monitoring the Future
    (MTF) Survey, which revealed that current use of illicit drugs among
    8th, 10th, and 12th graders was down a statistically significant 11
    percent from 2001. This reduction surpassed the President's ambitious
    goal of reducing youth drug use by 10 percent in 2 years. Moreover, MTF
    revealed that exposure to anti-drug advertising had an effect on
    improving youth anti-drug attitudes and intentions.
        While these results are promising, each day 4,800 kids try
    marijuana for the first time and more adolescents continue to enter
    treatment for marijuana dependence than for all other drugs combined,
    demonstrating the need for continued funding. Therefore, this request
    continues funding for ONDCP's Media Campaign, an integrated effort that
    combines paid and donated advertising with public communications
    outreach.
        In January 2004, the Media Campaign launched a new effort to urge
    friends and parents of teenagers to take early action against drug use.
    This new effort targets those closest to the user--friends and
    parents--and encourages them to intervene at an early stage. Giving
    friends and parents of teens the skills necessary to recognize symptoms
    of drug use and underage drinking, and to take action to stop it, can
    make a difference in the futures of young people at an important
    crossroads in their lives, before they need addiction treatment and
    before they encounter life-altering or deadly consequences.
                The Drug-Free Communities Support Program: $80 million
        In fiscal year 2005, ONDCP is requesting $80 million for the Drug-
    Free Communities Support Program (DFCSP). The fiscal year 2004 enacted
    level is $69.587 million. The DFCSP provides a competitive process to
    award matching Federal grants of up to $100,000 per year directly to
    local community anti-drug coalitions for the purpose of supporting
    local efforts to prevent or reduce drug use among youth. The program
    currently supports over 600 community coalitions in all 50 States, the
    District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
    Together, these community anti-drug coalitions serve a national network
    of local citizens, community leaders, and key professionals working
    daily to help keep young people free of the well-known dangers of drug
    use, including the underage use of alcohol and tobacco. Approximately
    30 of the DFCSP grants have been awarded to communities where American
    Indian or Alaskan Native youth are the majority of young people served.
    Approximately 40 percent of DFCSP grants go to communities in small
    towns and rural areas.
        Of the total amount of $80 million that ONDCP is requesting for
    this program in fiscal year 2005, $74.2 million will be awarded in
    grants to as many as 750 community anti-drug coalitions. An additional
    amount of $1 million is requested to continue support for the National
    Community Anti-Drug Coalition Institute to provide much-needed training
    and technical assistance to the growing number of coalitions around the
    country. An amount of $4.8 million is requested to support all other
    costs associated with grants management, program evaluation, and
    program administration.
                World Anti-Doping Agency Membership Dues: $1 million
        In fiscal year 2005, ONDCP is requesting $1 million for World Anti-
    Doping Agency (WADA) Membership Dues. The fiscal year 2004 enacted
    level is $0.795 million. The dues assessment is formula driven and
    accounts for the increase from fiscal year 2004. WADA receives its
    funding in equal amounts from the International Olympic Committee and
    world governments. Governments are divided into six geographic regions.
    The United States, along with Canada, Central America, the Caribbean,
    and South America, are part of the Americas region. The Americas region
    is required to contribute 29 percent of the governments' funding. As of
    fiscal year 2004, the regions dues are based upon the relative
    contribution levels to the Organization of American States.
        Created in 2001, WADA is a partnership among world governments,
    intergovernmental organizations, the Olympic movement, athletes, and
    other entities concerned about the consequences of doping and drug use
    in sport. WADA's mission is to promote healthy, doping free sport at
    the international level. WADA's doping-control program is key to
    upholding the fundamental rights of athletes to participate in doping-
    free sport through an effective detection and deterrence program,
    promoting consistency and ensuring an independent, quality-controlled
    process seeking equity for all athletes in all sports in all countries.
    In addition to drug testing, WADA's budget funds education and
    prevention programs for athletes at all age and levels (with a
    particular emphasis on youth) and research related to drug use in
    sport.
                United States Anti-Doping Agency: $1.5 million
        ONDCP is requesting $1.5 million to support the United States Anti-
    Doping Agency (USADA). The fiscal year 2004 enacted level is $7.158
    million. Since fiscal year 2002, funding to support USADA has been
    passed directly from ONDCP to USADA. USADA is a non-profit entity under
    the leadership of an independent board of directors. USADA began
    operations October 1, 2000, with full authority for drug testing,
    education, research, and adjudication for U.S. Olympic, Pan Am Games,
    and Paralympic athletes. Congress and the President have subsequently
    recognized USADA as the official anti-doping agency for the above-
    stated purposes (Public Law 107-67). Since its inception, USADA has
    received worldwide acclaim for its effective and innovative testing and
    education initiatives.
        The $1.5 million request would support USADA's ongoing drug testing
    regime that includes management, sample collection, and testing
    procedures. The fiscal year 2005 request considers the adjudication
    costs as the result of increased testing and the implementation of
    blood testing, which is more costly (and accurate) than urine drug
    testing. The request would also fund drug-related research, educational
    programs aimed at school-aged athletes and coaches, efforts to inform
    athletes of the rules governing the use of performance enhancing
    substances, and the ethics of doping and its harmful health effects.
    The public awareness efforts will be particularly important since the
    World Anti-Doping Agency adopted a new universal Code in March 2003
    that will govern U.S. amateur athletes.
                Counterdrug Intelligence Executive Secretariat: $4.5
                        million
        In fiscal year 2005, ONDCP is requesting $4.5 million for the
    administration and operations of the Counter-drug Intelligence
    Executive Secretariat (CDX). The fiscal year 2004 enacted level is
    $2.982 million. The CDX staff was established to coordinate the
    implementation of the General Counterdrug Intelligence Plan (GCIP)
    established in February 2000 and revalidated in May 2002. Fiscal year
    2005 funding of CDX will ensure that the action items established by
    GCIP, as well as additional projects requested by the interagency
    Counterdrug Intelligence Coordination Group, can be accomplished.
                National Drug Court Institute: $1 million
        In fiscal year 2005, ONDCP is requesting $1 million for the
    National Drug Court Institute (NDCI). The fiscal year 2004 enacted
    level is $0.994 million. Due to the fact that nearly 50 percent of the
    Nation's drug courts have only been in operation for the last 4 years,
    the Institute's education, research, and scholarship programs request
    these funds to continue the expansion of its discipline-specific and
    topic-specific drug court training programs for practitioners; to
    convene regional evaluation trainings in order to provide a forum for
    practitioners and researchers to enhance drug court evaluation
    techniques; to continue to publish and disseminate monographs on
    important and timely drug court issues; to continue to publish and
    disseminate the National Drug Court Institute Review; and to continue
    to publish and disseminate best practices fact sheets for drug court
    practitioners.
                Performance Measures Development: $2 million
        In fiscal year 2005, ONDCP is requesting $2 million for Performance
    Measures Development. The fiscal year 2004 enacted level is $1.988
    million. ONDCP will use the requested funding to develop and implement
    data sources to monitor illegal drug use and supply for national
    policy-makers. Projects funded with these resources will include
    efforts to work with selected programs to develop and/or improve needed
    data sources. In recent years, ONDCP has worked with the National
    Institute of Justice to redesign and expand the Drug Use Forecasting
    program into the Arrestee Drug Abuse Monitoring program. ONDCP has also
    worked with the DEA to improve the methodology of the Heroin Signature
    Program and the Domestic Monitoring Program. The requested funding will
    continue this collaborative interagency effort to develop and implement
    programmatic performance measures.
    D. High Intensity Drug Trafficking Areas (HIDTA): $208.35 million
        In fiscal year 2005, ONDCP is requesting $208.35 million for the
    operations of the High Intensity Drug Trafficking Area program ($206.3
    million for grants and Federal transfers and $2.050 million auditing
    for services and associated activities, including development and
    implementation of a data collection system to measure program
    performance). The fiscal year 2004 enacted level is $225.015 million.
    Each HIDTA has an Executive Committee (EXCOM) that serves as the
    governing body for the individual HIDTA. The EXCOM consists of an equal
    number of representatives from local/State and Federal agencies. The
    EXCOM is responsible for the development and implementation of the
    HIDTA Strategy and the attendant initiatives and budgets, as well as
    for the fiscal operations of the HIDTA.
        The HIDTA mission includes coordination efforts to reduce the
    production, manufacturing, distribution, transportation, and chronic
    use of illegal drugs, as well as the attendant money laundering of drug
    proceeds. In addition, HIDTAs assess regional drug threats, develop
    strategies to address the threats, integrate initiatives, and provide
    Federal resources to implement initiatives. These resources are
    allocated to link local, State, and Federal drug enforcement efforts
    and to optimize the investigative return on limited fiscal and
    personnel resources. Properly targeted, HIDTAs offer greater efficiency
    in countering illegal drug trade in local areas by facilitating
    cooperative investigations, intelligence sharing (coordinated at HIDTA
    Investigative Support Centers), and joint operations against drug-
    trafficking organizations.
        Since fiscal year 2002, in addition to recurring HIDTA funding,
    ONDCP has provided additional funds to HIDTAs that have developed and
    conducted investigations against major drug trafficking organizations
    with connections to the Consolidated Priority Organization Target
    (CPOT) list. (The CPOT list, developed in 2001 by key Federal law
    enforcement entities, with input from the Intelligence Community and
    other Federal agencies, is comprised of the drug trafficking
    organizations generally agreed to represent the most significant drug
    threat to the United States. The list, which is maintained by the
    Justice Department, is updated periodically and is not public.) In
    fiscal year 2004, ONDCP has proposed to make approximately $16 million
    available to generate and advance investigations of domestic targets
    with a nexus to or affiliation with major drug trafficking
    organizations on the CPOT list. ONDCP hopes that continued
    discretionary funding will be available for HIDTAs through the CPOT
    Initiative in fiscal year 2005.
        At present, 406 United States counties (about 13 percent of the
    total) in 43 States, Puerto Rico, the United States Virgin Islands, and
    the District of Colombia are designated as part of 28 HIDTAs. Since
    January 1990, counties in the following 28 areas have been designated
    as HIDTAs: Houston, Los Angeles, South Florida, New York, and the
    Southwest Border, which includes partnerships in South Texas, West
    Texas, New Mexico, Arizona, and Southern California (in 1990);
    Washington/Baltimore, and Puerto Rico/U.S. Virgin Islands (in 1994);
    Atlanta, Chicago, Philadelphia/Camden (in 1995); Gulf Coast (Alabama,
    Louisiana, and Mississippi), Lake County, Indiana, the Midwest (Iowa,
    Kansas, Missouri, Nebraska, North Dakota, and South Dakota), Northwest
    (Washington), Rocky Mountain (Colorado, Montana, Utah, and Wyoming) (in
    1996); Northern California (San Francisco Bay Area) and Southeast
    Michigan (in 1997); Appalachia (Kentucky, Tennessee, and West
    Virginia), Central Florida, Milwaukee, and North Texas (Northern Texas
    and Oklahoma) (in 1998); and Central Valley California, Hawaii, New
    England (Connecticut, Maine, Massachusetts, New Hampshire, Rhode
    Island, and Vermont), Ohio, and Oregon (in 1999); Northern Florida and
    Nevada (in 2001). The HIDTAs nationwide contribute significantly to the
    removal of drug traffickers and the trafficking organizations that
    drive the illegal drug market and also to the elimination of tons of
    illegal drugs that flow each year through high intensity drug
    trafficking areas to other American communities.
                                   conclusion
        Thank you for the opportunity to provide this formal statement for
    the record. I will be happy to address any questions you may have and I
    look forward to working with this subcommittee as we work to meet the
    goal of reducing drug use in America, especially among our youth.
                                     ______

                          SURFACE TRANSPORTATION BOARD

                  Prepared Statement of Roger Nober, Chairman
        Chairman Shelby and members of the subcommittee, I am Roger Nober,
    Chairman of the Surface Transportation Board (Board). I thank you for
    the opportunity to submit this statement setting forth the Board's
    budget request for fiscal year 2005.

                            BACKGROUND ON THE BOARD

        The Board is a three-member, bipartisan, decisionally independent
    adjudicatory body organizationally housed within the Department of
    Transportation (DOT) with jurisdiction over certain surface
    transportation economic regulatory matters.
        The rail oversight of the Board encompasses rate reasonableness,
    car service and interchange, mergers, line acquisitions, line
    constructions, and abandonments. The jurisdiction of the Board also
    includes certain oversight of the intercity bus industry and pipeline
    carriers; and rate regulation involving noncontiguous domestic water
    transportation, household goods carriers, and collectively determined
    motor carrier rates. The Board is statutorily empowered, through its
    exemption authority, to promote deregulation administratively.
        The Board's Section of Environmental Analysis performs
    environmental reviews on the Board's construction, abandonment, and
    merger matters as required by the National Environmental Protection
    Act. These reviews have become more complex and require significant
    resources.

                  THE BOARD'S FISCAL YEAR 2005 BUDGET REQUEST

        In fiscal year 2005, the Board requests budget resources totaling
    $21,283,000. This budget request mirrors the Board's fiscal year 2004
    budgetary authority approved by Congress, adjusted for the fiscal year
    2005 pay raise and some program increases. In this budget request, the
    Board also seeks resources and authority to operate at 150 FTEs, or
    five more FTEs than the current level.
        The Board would use the additional funds to address two primary
    costs. First, the additional resources are requested to cover salary
    and employee benefit costs associated with the fiscal year 2004 and
    fiscal year 2005 pay increase. Unlike many agencies, there is little
    room at the Board's current budget level to absorb a pay increase
    without the additional resources, because fixed costs, including salary
    and rent, comprise about 95 percent of the agency's expenses. Absorbing
    even a small amount of the pay increase impairs the Board's ability to
    perform its statutory mission.
        Second, the Board would use most of the additional resources to
    implement initiatives to expedite resolution of rail rate disputes
    between railroads and their largest customers and to offer a meaningful
    forum for the railroads' smaller customers. In fiscal year 2003, the
    Board adopted new rules to streamline the rail rate process, and it now
    provides for mediation and for technical conferences among the parties
    and Board staff that have produced agreements on numerous discovery and
    technical issues, thereby resolving matters that in the past would have
    taken months to litigate before the Board. Nevertheless, the press of
    large rate cases will continue, and we also expect parties will file
    small rate cases once new procedures for such cases are in place.
    Therefore, one of the additional FTEs would be to implement the
    congressional desire that the agency have an Administrative Law Judge,
    who would assist in fostering agreements among the parties in various
    agency proceedings and would expedite the resolution of small rate
    matters. Additional FTEs would provide the Board with another 3-person
    rate team for fiscal year 2005 to continue to resolve rate cases within
    their statutory deadlines.
        The requested authorization for 150 FTEs also will provide the
    Board with the discretion to hire staff to replace tenured, retirement-
    eligible staff prior to their anticipated retirement date. Several
    retirements can be expected in the near future, and having the
    flexibility to hire qualified people when they are available is
    particularly important for a high-rated agency that must hire economic
    and technical expertise when they are available in the labor market.
        Consistent with appropriation acts for past fiscal years, the Board
    requests a provision allowing user fee collections to be credited to
    the appropriation as offsetting collections and used for necessary and
    authorized expenses, to the extent that they are collected. The overall
    budget request reflects the workload that is expected and the statutory
    and regulatory deadlines associated with the resolution of the cases
    filed.

       RECENT DEVELOPMENTS THAT IMPACT THE BOARD'S BUDGET REQUEST--YUCCA
                                    MOUNTAIN

        Under the Interstate Commerce Act, the Board must authorize the
    construction of new rail lines that are part of the national rail
    system. Since the Board submitted its budget request for fiscal year
    2005, it has been named a cooperating agency in the environmental
    review associated with building a rail line to the repository at Yucca
    Mountain, in Nye County, Nevada. The Department of Energy (DOE) has
    been working for years on a program to use Yucca Mountain as a
    repository for spent nuclear fuel and high-level radioactive waste that
    would be transported there from throughout the United States.
        On April 2, 2004, DOE announced that its preferred mode to
    transport the radioactive materials from throughout the United States
    to Yucca Mountain was ``mostly rail,'' and it selected as its preferred
    corridor for a new rail line to Yucca Mountain one beginning near
    Caliente, Nevada. Then on April 8, 2004, DOE announced its intent to
    prepare an Environmental Impact Statement (EIS), as required by the
    National Environmental Policy Act, for construction and operation of
    this rail line.
        On May 5, 2004, DOE formally requested that the Board, along with
    the Bureau of Land Management and the Air Force, become a cooperating
    agency on the environmental review of the Caliente Corridor leading to
    the Yucca Mountain facility. DOE made this request due to the Board's
    statutory authority to review rail construction projects and its
    expertise in doing so.
        Our responsibilities as a cooperating agency have already begun.
    The Board's Section of Environmental Analysis attended the opening
    meetings to determine the scope of the environmental review for this
    project. Three meetings were held in Nevada over 3 days the week of May
    3rd in Armagosa Valley, Goldfield, and Caliente. A meeting was also
    held the week of May 10th in Reno, and another is scheduled for May 17
    in Las Vegas. Additional meetings are planned for this month and there
    will be numerous meetings this year and throughout the EIS process,
    which the DOE expects to last at least 2 years.
        DOE has not yet determined whether it will structure the line in a
    way that would trigger Board review. While the Board receives many
    applications to build new rail lines that are subject to the Board's
    jurisdiction, not every rail line construction project requires Board
    approval. The Board has jurisdiction over and must approve the
    construction of any common carrier rail line--a rail line on which the
    railroad must provide service to any shipper who requests it. However,
    the Board does not license the construction of a private rail line--a
    line over service is not available to the general public.
        When the Board receives an application to build and operate a new
    rail line, it conducts the required environmental review of these
    projects and, unless the project is not in the public convenience and
    necessity, licenses the project. In the typical case, the Board is the
    lead agency for any necessary environmental review.
        In conducting the environmental review, the Board is usually able
    to accept certain services that are paid for by the project proponent.
    For example, to complete the environmental review of a rail
    construction project, the applicant selects a third-party contractor
    from the Board's list of pre-approved contractors and retains it.
    Although the contractor works at the direction of the Board's Section
    of Environmental Analysis, the project proponent pays the contractor.
    The Board is not reimbursed for its staff time or travel.
        In discharging our duties as a cooperating agency, the Board will
    require a third party contractor who will assist the Board by attending
    meetings regarding the EIS, evaluating the environmental concerns, and
    providing the specialized, technical expertise concerning issues
    affecting the rail line construction that would supplement the work of
    the Board's Section of Environmental Analysis. The Board is working
    with DOE for DOE to reimburse the Board for the costs associated with
    this contractor.
        However, it would be difficult for the Board to accept any offer
    for DOE to pay for Board staff and travel since, as discussed, in the
    future DOE may seek Board approval for this line.
        Since DOE may become an applicant before the Board, the Board does
    not want to risk compromising its independence in considering the
    merits of a DOE application by accepting financial support from DOE for
    additional salary and travel costs. The Board's review of such a
    proposal must be independent. Otherwise, if the Board issued a license,
    that issuance could be subject to challenge in court on grounds that
    the agency's independence was jeopardized by its acceptance of
    reimbursements beyond those reimbursements that are ordinarily
    permissible in any rail construction case. A successful challenge could
    be costly to the taxpayers and delay the project.
        The Yucca Mountain EIS process will require the resources for two
    full-time staff and travel costs for the biweekly participation
    meetings. The Board's participation in the Yucca Mountain EIS will
    require 25 percent of the Board's current environmental staff, which
    would adversely affect the Board's ability to conduct the environmental
    reviews required for abandonment and rail line construction cases
    currently pending before the Board and those that may be in the
    pipeline awaiting formal filing. In order to fully participate, the
    Board would need an additional 2 FTEs and $250,000 above what it has
    requested for fiscal year 2005.

                           OVERALL GOALS OF THE BOARD

        In the performance of its functions, the objective of the Board is
    to ensure that, where regulatory oversight is necessary, it is
    exercised efficiently and effectively, integrating market forces, where
    possible, into the overall regulatory model. In particular, the Board
    seeks to resolve matters brought before it fairly and expeditiously.
    Through use of its regulatory exemption authority, streamlining of its
    decisional process and the regulations applicable thereto, and
    consistent application of legal and equitable principles, the Board
    seeks to facilitate commerce by providing an effective forum for
    efficient dispute resolution and facilitation of appropriate business
    transactions. The Board continues to strive to develop, through
    rulemakings and case disposition, new and better ways to analyze unique
    and complex problems, to reach fully justified decisions more quickly,
    and to reduce the costs associated with regulatory oversight.
        To be more responsive to the surface transportation community by
    fostering governmental efficiency, innovation in dispute resolution,
    private-sector solutions to problems, and competition in the provision
    of transportation services, the Board will:
      --Continue to strive for a more streamlined process for the
            expeditious handling of rail rate reasonableness and other
            complaint cases, in an effort to provide additional regulatory
            predictability to shippers and carriers;
      --Continue to process diligently cases before the Board and to ensure
            that appropriate market-based transactions in the public
            interest are facilitated;
      --Continue to develop new opportunities for the various sectors of
            the transportation community to work cooperatively with the
            Board and with one another to find creative solutions to
            persistent industry and/or regulatory problems involving
            carriers, shippers, employees, and local communities; and
      --Continue to work to ensure the provision of rail service that is
            responsive to the needs of customers.
               fiscal year 2004 and 2005 activities of the board
        Building upon the Board's success in fiscal year 2003--including
    issuing 890 decisions in fiscal year 2003, developing regulations to
    expedite the resolution of large rate cases,\1\ investigating ways to
    improve the process for small rate cases,\2\ and informally resolving
    disputes between railroads and between railroads and their customers--
    the Board will continue to look for ways to streamline or otherwise
    improve applicable regulations and the regulatory process and to
    promote private-sector resolution of problems. In this regard, the
    Board will entertain any proposed exemptions from regulation that might
    be appropriate and resolve as expeditiously as possible petitions for
    rulemaking filed by parties. The Board will also continue to look
    independently for ways to shorten and streamline its procedures for
    bringing and prosecuting both large and small rate cases, and to make
    the environmental review process for new rail line construction cases
    more streamlined as well. And it will continue to use its processes to
    encourage private-sector dispute resolution.
    ---------------------------------------------------------------------------
        \1\ Ex Parte No. 638, Procedures to Expedite Resolution of Rail
    Rate Challenges to be Considered Under the Stand-Alone Cost
    Methodology.
        \2\ Ex Parte No. 646, Rail Rate Challenges in Small Cases.
    ---------------------------------------------------------------------------
        As noted, the Board is requesting resources for 5 additional staff
    positions in fiscal year 2005. In particular, the Board would use those
    resources to establish a new rate team, to hire an administrative law
    judge, and to add additional staff to its office that handles consumer
    complaints. Although the Board has attempted to use retirements within
    the agency to begin to realign its resources for its future needs, it
    cannot complete that realignment through retirements alone.
        The Board is seeking staff resources for three rate team personnel,
    who will help move the rate docket forward. The workload involving rail
    rates and services is expected to increase in fiscal year 2004 and
    remain stable through fiscal year 2005, particularly given the likely
    continuing expiration of long-term coal transportation contracts.
    Currently, the Board has 5 coal rate complaint cases at various States
    of adjudication and 5 petitions to reopen and reconsider in former coal
    rate complaint cases, for a total of 10 rate cases under review. These
    proceedings will require significant staff attention and additional
    resources, given the complex nature of the cases, the numerous steps
    such as motions and discovery resolution, and the tight 9-month
    statutory timeframes for completion once the record is closed. Indeed,
    the bulge in rate cases is already producing a strain on our resources,
    which have historically been geared to handle two rate cases at a time.
    (It is for this reason that we are requesting additional resources from
    Congress for one additional 3-person rate team for fiscal year 2005.)
    Additionally, the Board will continue to handle rail cases involving
    questions of whether certain rail activity cannot be regulated at the
    State or local level because such regulation is preempted by Federal
    law.
        In July and August, 2003, the Senate Committee on Commerce, Science
    and Transportation considered and reported S. 1389, The Surface
    Transportation Board Reauthorization Act of 2003. S. 1389 is a bill to
    reauthorize the Surface Transportation Board for 5 years, beginning in
    fiscal year 2004. Section 4 of S. 1389 addressed the small rate case
    issue, and directed the Board to modify its small rate case procedures
    to address many of their identified problems within 180 days.
    Subsection 4) of that bill specifically directed that, when revising
    its small rate case procedures, the Board ``may provide for an initial
    determination of such [small] rate challenges by an administrative law
    judge, with an opportunity for appeal of such determination by the full
    Board[.]'' At a subsequent hearing on rail regulatory matters held in
    October 2003, several Senate Commerce Committee members again noted the
    benefits of the Board having an Administrative Law Judge to consider
    small rate cases in the first instance, oversee discovery, and issue
    preliminary decisions in matter of months compared to years with large
    rate cases. The Administrative Law Judge would decide the cases under a
    clear standard with cases being appealable to the full Board and
    ultimately to the courts.
        The final additional staff position would provide the Board
    expertise on passenger rail service and would coordinate and resolve
    scheduling and operational issues between freight railroads and between
    those railroads and their customers. The Board's Rail Consumer
    Assistance Program is an informal mechanism for resolving disputes that
    has proven very effective, but additional resources will help it
    address the increasing number of inquires that result from it becoming
    more widely known.
        With respect to rail carrier consolidations, we are not aware of
    any major rail mergers in the immediate future. Therefore, the workload
    in this category is expected to remain somewhat stable through fiscal
    year 2005 because this category includes a broad array of control
    transactions among larger railroads and smaller railroads. Of course,
    it is impossible to know whether a major merger may be proposed during
    fiscal years 2004 or 2005. As noted, the Board continues to resolve
    issues related to past Class I rail mergers. Also, the Board will
    continue to handle other rail consolidations involving smaller
    railroads that are filed with it.
        Concerning other rail restructuring matters, rail abandonment
    decisions are expected to remain somewhat constant through fiscal year
    2005. While the number of rail abandonments has remained at this level
    for the past number of years, the increased complexity of abandonment
    filings continues to require more than one decision in certain cases.
    The Board continues to see a high volume of ``post abandonment''
    activity relating to trail use, as proponents avail themselves of the
    National Trails System Act, and also relating to offers of financial
    assistance to continue freight rail service.
        With the notable exception of the Yucca Mountain rail line
    construction project, the Board projects that its line construction
    docket will remain constant through fiscal year 2005. We emphasize that
    demands on the Board to conduct environmental reviews for such
    transactions continue to grow, and that such activities require a
    significant number of resources to complete.
        Other line transaction activity is expected to increase slightly
    through fiscal year 2005 as more carriers continue to sell unprofitable
    or marginally profitable lines as an alternative to service
    abandonment, particularly in light of the recent economic downturn. In
    the past few years, the Board has seen a number of line acquisitions by
    both small carriers and noncarriers as rail carriers restructure their
    rail systems.

                                    SUMMARY

        The Board's budget request would ensure the resources needed for
    the Board to continue to implement its responsibilities expeditiously
    and effectively as Congress intends. I would be happy to answer any
    other questions that the Committee may have about the Board's fiscal
    year 2005 budget request.
                                Attachment No. 1

                                                  SALARIES AND EXPENSES
                                                 [Dollars in thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                                               Fiscal Year  Fiscal Year
                                                                  Fiscal Year      2004         2005      Difference
                                                                  2003 Actual    Estimate     Request        From
    ----------------------------------------------------------------------------------------------------------------
    Permanent Positions.........................................          145          145          150            5
    Full-time Equivalents.......................................          137          145          150            5

    Personnel Compensation and Benefits.........................      $15,268      $16,025      $17,703       $1,678
    Travel......................................................          $41          $80          $87           $7
    Other Costs.................................................       $3,998       $3,416       $3,493          $77
                                                                 ---------------------------------------------------
          TOTAL BUDGET RESOURCES................................      $19,307      $19,521      $21,283       $1,762
    ----------------------------------------------------------------------------------------------------------------

                              CHANGES IN RESOURCES

        For personnel compensation and benefits, $17,703,000 is requested
    to support the Board's permanent positions. Included in this request is
    $144,000 to fund the annual cost of the January 2004 pay raise and
    $221,000 for the January 2005 pay raise. The request also includes
    $50,000 for lump-sum leave payments to retiring employees.
        A travel budget of $87,000 is requested primarily for on-site
    visits to railroads to finalize audits and review public accountants'
    workpapers, to physically inspect proposed rail abandonment and
    construction sites, and to verify environmental data provided by
    parties to proceedings, conduct operational reviews, meet with shippers
    regarding rail service issues and compliance, defend the Board's
    decisions in courts across the country, and generally provide
    presentations, upon request, on issues within the Board's jurisdiction.
    Due to the increased number of environmental reviews associated with
    new rail construction cases and attendance at field hearings on high-
    profiled cases, staff travel has increased and is expected to remain at
    the increased level through fiscal year 2005.
        Funding to cover other costs is requested at $3,493,000. Included
    in this number are rental payments to the General Services
    Administration (GSA) and payments for employee training, telephone
    service, postage, information technology systems support and equipment,
    miscellaneous services and supplies, and reimbursable services acquired
    from other Federal agencies. The increase in other costs is mainly
    associated with the projected increase in rental payments to GSA and an
    increased level of security for all Federal agencies. The Board has
    increased its level of physical security in light of recommendations by
    GSA and the Department of Homeland Security and has implemented a
    Business Continuity Plan along with sheltering-in-place procedures to
    provide for the physical security of its employees and the continuity
    planning and continuance of its statutory mission.
                                Attachment No. 2

                        FISCAL YEAR 2005 CONGRESSIONAL BUDGET JUSTIFICATION WORKLOAD SUMMARY \1\
    ----------------------------------------------------------------------------------------------------------------
                                                                       Actual Fiscal   Estimated \2\   Estimated \3\
                                                                         Year 2003      Fiscal Year     Fiscal Year
                                                                           Board        2004 Board      2005 Board
                            Workload Category                          Decisions and   Decisions and   Decisions and
                                                                       Court-related   Court-related   Court-related
                                                                           Work            Work            Work
    ----------------------------------------------------------------------------------------------------------------
    Rail Carrier Control Cases......................................              52              55              55
    Rail Rates and Service..........................................              70              86              86
    Rail Abandonments and Constructions.............................             512             501             501
    Other Line Transactions.........................................             186             204             204
    Other Rail Activities...........................................              33              51              47
    Non-Rail Activities.............................................              39              51              53
                                                                     -----------------------------------------------
          Total.....................................................             890             948             946
    ----------------------------------------------------------------------------------------------------------------
    \1\ At this time, the Board believes that the number of Board decisions and court-related work is the best
      measure of workload at the Board. Certain activities performed at the Board that provide direct and indirect
      support for rulemakings and decisions in specific cases are not reflected in these workload numbers. Such
      activities not reflected include: enforcement activities; rail audits and rail carrier reporting oversight;
      administration of the rail waybill sample and development of the Uniform Rail Costing System; and case-related
      correspondence and informal public assistance.
    \2\ Estimated workloads for fiscal year 2004 and 2005 are based on historical information regarding actual
      filings and best estimates of probable future filings by parties. Because the Board is principally an
      adjudicatory body, it does not directly control the level or timing of actual case filings.
    \3\ Ex Parte No. 638, Procedures to Expedite Resolution of Rail Rate Challenges to be Considered Under the Stand-
      Alone Cost Methodology.

                                     ______

                          OFFICE OF GOVERNMENT ETHICS

              Prepared Statement of Marilyn Glynn, Acting Director

        Thank you for the opportunity to submit a statement in support of
    the request of the U.S. Office of Government Ethics (OGE) for fiscal
    year 2005 resources of $11,238,000 and 80 FTEs. This request represents
    an increase of $500,000, primarily to meet expected increases in
    personnel costs.
        The Office of Government Ethics is responsible for overseeing the
    ethics program of the executive branch, a program designed to help
    prevent conflicts of interest and promote integrity in Government. OGE
    sets the requirements of the program, develops executive branch-wide
    policies, serves as a resource/consultant to agency ethics officials
    and monitors agency programs to help ensure that the agencies are
    carrying out their responsibilities effectively. OGE also plays a
    significant role in the review and certification of the financial
    disclosure forms of nominees to positions requiring Senate
    confirmation. The day-to-day activities of the program are the
    responsibility of each executive branch agency. These activities
    include initial collection and review of financial disclosure forms;
    providing advice and training to agency employees on the criminal
    conflict of interest laws and the executive branch standards of
    conduct; and investigation and administrative enforcement of the
    standards of conduct.
        The ethics program that is directed by OGE is part of the basic
    infrastructure that supports good governance within the Federal
    executive branch. The resources expended by OGE to help promote
    integrity and prevent conflicts of interest are small in comparison to
    the resources expended by investigators and prosecutors who enforce
    ethics and conflict of interest rules and laws. Moreover, our
    preventive efforts help guard against the loss of resources through
    inadvertent or deliberate misuse. We believe the resources we have
    requested are those necessary to adequately support a strong ethics
    program.

                                FISCAL YEAR 2005

        We would like to highlight some of the major programs anticipated
    for fiscal year 2005.
        During any fiscal year in which a Presidential election occurs, OGE
    anticipates a large influx of Presidential appointees, regardless of
    the outcome of an election. OGE's role in clearing Presidential
    nominees is designed to help them understand the application of the
    conflict of interest requirements to their Government service and to
    secure their agreement to taking the necessary steps to resolve
    potential conflicts of interest. Our goal is to review nominee
    statements in a timely manner to avoid any unnecessary delay in the
    nomination/confirmation process. OGE's resources are shifted from other
    programs during this period to handle the increased workload in our
    financial disclosure review systems. Once an individual is appointed,
    OGE follows through to see that any agreements made by an appointee to
    address potential conflicts of interest are carried out. In addition,
    during this period, OGE will continue to conduct a second level review
    of over 1,000 annual and termination financial disclosure statements
    filed by Presidential appointees each year.
        As a part of the change that typically occurs after a Presidential
    election, OGE also will provide ethics training through OPM, and the
    White House if requested, to incoming Presidential appointees, new
    noncareer SES and Schedule C appointees, and White House staff.
    Additionally, we expect to help agencies provide accurate post-
    employment advice to employees who are leaving the government.
        In the education and training area, OGE will develop instructor and
    participant guides to be used by departments and agencies to deliver
    their annual ethics training, as well as training evaluation
    instruments to measure what employees learned from various instructor-
    led and web-based training courses. In training ethics officials, OGE
    will develop and conduct additional instructor-led ethics training
    courses for ethics practitioners, trainers, counselors, financial
    disclosure reviewers, and enforcement officials in headquarters and the
    regions.
        To reach ethics officials outside the Washington area, OGE plans to
    offer regional symposia for approximately 240 ethics practitioners in
    the field. OGE maintains an e-mail list service to communicate with
    2,000 practitioners and enforcement personnel world-wide. OGE also will
    host the 15th Annual National Government Ethics Conference for
    approximately 700 ethics practitioners in September 2005.
        The Office has added an employee survey to its evaluations of
    individual agency ethics programs. Begun on a more limited basis this
    fiscal year, these surveys will be carried out throughout fiscal year
    2005 in approximately one-third of the 35 Federal agencies evaluated.
    The information gathered through the surveys helps provide OGE with a
    better basis on which to judge the effectiveness of the individual
    agency programs under review and the overall executive branch ethics
    program.
        OGE desk officers will maintain their day-to-day communications
    with agencies assigned to them. This continuing liaison between OGE and
    agency ethics staffs enables OGE to respond to the needs of the
    agencies in a timely and accurate manner. In addition, this interaction
    provides OGE with an early warning that an agency ethics program is
    deficient or has problems that require specialized attention.
        OGE will continue to provide international technical assistance at
    the request of the Departments of State and Justice. In fiscal year
    2005, OGE plans to participate in Global Forum IV, the Follow-up
    Mechanism for the Inter-American Convention Against Corruption and the
    evaluation mechanisms of the Council of Europe's Group of States
    Against Corruption. The United States will also be reviewed under the
    latter two mechanisms during fiscal year 2005.
        These are just some of the programs and activities envisioned for
    fiscal year 2005. We are pleased with the past success of the executive
    branch ethics program and look forward to the challenge of maintaining
    and enhancing the quality of the program.

                           NONDEPARTMENTAL WITNESSES

        [Clerk's note.--The following testimonies were received by
    the Subcommittee on Transportation, Treasury and General
    Government, and Related Agencies for inclusion in the record.
    The submitted materials relate to the fiscal year 2005 budget
    request.
        The subcommittee requested that public witnesses provide
    written testimony because, given the Senate schedule and the
    number of subcommittee hearings with Department witnesses,
    there was not enough time to schedule hearings for
    nondepartmental witnesses.]

           Prepared Statement of the International Loran Association

        On behalf of the International Loran Association (ILA), I am
    writing in conjunction with your work on the fiscal year 2005
    Department of Transportation, Treasury and Related Agencies
    Appropriations bill. I respectfully request that this submission be
    made part of your hearing record in conjunction with the subcommittee's
    work.
        The ILA is asking the committee to support $25 million in funding
    from the fiscal year 2005 Federal Aviation Administration (FAA)
    budget--the same level as requested last year--as the next increment
    necessary to continue modernization and enhancement of Loran.
        In recent years, the committee has provided about $120 million to
    modernize and upgrade Loran because it is a multimodal navigation
    system with demonstrated cost/benefits important for our national
    transportation safety and security objectives. In fact, at this
    juncture, it would cost about $100 million to decommission the system,
    approximately the same amount that will be required to complete the
    modernization. However, the most compelling reason to continue
    providing resources to complete this work is because Loran is the only
    multimodal system we have in the United States that can support the
    global positioning satellite (GPS) system in all modes of
    transportation, as well as in timing applications affecting the
    majority of our population.
        In previous years, our submissions for the hearing record have
    documented numerous security, economic and technical issues as to why
    the operation of our national infrastructure and the safety of our
    citizens should not be placed at risk by depending solely on GPS for
    vast transportation, timing and navigation needs. The Volpe Center's
    ``Vulnerability Assessment of the Transportation Infrastructure Relying
    on the Global Positioning System'' in 2001 framed those issues
    regarding overdependence on a single system, and an ever-growing body
    of evidence continues to be amassed to validate the continuation of
    Loran as the most complementary and cost effective system available to
    support GPS and eliminate national vulnerabilities. Indeed, ongoing
    studies have verified that not only is Loran the only other multimodal
    system we have, but also that Loran is the most complementary and most
    cost effective system we have.
        As you and other committee members are aware, the FAA, the U.S.
    Coast Guard (USCG), academic and industry experts have conducted an
    active Loran evaluation program spanning several years and a final
    report on that evaluation program is to be submitted to the U.S.
    Department of Transportation (DOT) on March 31, 2004. There are two
    major aspects to the report: one is the technical evaluation to ensure
    a modern or enhanced Loran system can meet the performance requirements
    of the FAA and USCG; and the other is a Loran benefit-cost study
    completed by the Volpe Center in 2003. It is fair to say that the
    technical evaluation section will be very positive, particularly
    because virtually all of the contributing studies have been
    continuously presented at numerous professional conferences and other
    technical fora. In addition, previous DOT-sponsored economic studies on
    Loran have been uniformly positive, and given the identified need for a
    national GPS backup, it is virtually assured that the economic section
    of the Loran evaluation study will be very favorable as well.
        Other recent government documents also indicate there is widespread
    acknowledgement that Loran is indeed the best system the country can
    utilize to backup and support GPS.
        For example, in April 2003, a Memorandum of Agreement (MOA)
    regarding the recapitalization, modernization, and operation of Loran
    was finalized and approved by the FAA, USCG, and DOT. This interagency
    MOA states: ``The parties recognize the multi-modal nature of the Loran
    navigation system and the necessity of managing Loran as a national
    asset in a multi-modal manner. The purpose of this agreement is to set
    forth terms by which the parties will provide service in order to
    provide a multi-modal backup to the Global Positioning System (GPS)
    based services''. In referencing the Volpe Study on GPS vulnerabilities
    cited above, the MOA states: ``both the FAA and USCG acknowledged that
    GPS is indeed vulnerable to intentional and unintentional interference
    and that backup systems are required for both the National Airspace
    System (NAS) and the Marine Transportation System (MTS) . . . The FAA
    and USCG also recognize that Congress, aviation, maritime, and other
    users regard Loran-C as a national asset that must be preserved as a
    part of the nation's critical infrastructure''.
        In January 2004, the DOT released a report for Secretary Mineta
    entitled: ``Radionavigation Systems: A Capabilities Investment
    Strategy,'' which also contained some important findings, even though
    much of the report's information was approximately 1 year old. First,
    it once again clearly identified Loran as the only multimodal backup to
    GPS and the best theoretical backup to GPS. Second, although the Loran
    report is less than 1 month away, it includes a recommendation to
    ``Complete the evaluation of enhanced Loran to validate the expectation
    that it will provide the performance to support aviation Non-Precision
    Approach (NPA) and maritime Harbor Entrance and Approach (HEA)
    operations. If enhanced Loran meets the aviation NPA and maritime HEA
    performance criteria, and is cost effective across multiple modes, the
    Federal Government should operate Loran as an element of the long-term
    radionavigation system mix''. In addition, the report looks forward and
    identifies Loran as a backup for the new aviation Automatic Dependent
    Surveillance--Broadcast (ADS-B) system and the new marine Automatic
    Identification System (AIS), both of which will be widely used in the
    future. Finally, the report suggests exploration of the collocation of
    GPS augmentation and Loran facilities, which would not only maximize
    their synergies but also optimize cost savings to the Nation.
        From an international perspective, there is also recognition
    regarding the need and benefits of Loran. Ultimately, that realization
    will provide a major economic opportunity for U.S. technology because
    of equipment standardization and market globalization, similar to what
    has occurred with GPS. For example, in August 2003 the European
    Maritime Radionavigation Forum published a study entitled: ``GNSS
    Vulnerabilities & Mitigation Measures: A Study for the European
    Maritime Radionavigation Forum,'' and among its conclusions were:
    ``There is a significant risk of losing GNSS for limited periods and in
    limited areas . . . The consequences of losing GNSS will become greater
    as reliance on it increases . . . Loran could provide an effective
    backup in Europe, at a capital cost estimated at =50m''.
        In addition, the ILA was invited to participate in a meeting in
    Japan last fall, where representatives from Japan, China, Korea,
    Russia, and the United States were asked to address the question of GPS
    vulnerabilities and how to solve the problem. Virtually the entire
    conference focused on one system: Loran.
        In summary, recognition of the various safety, security, economic,
    and political benefits that Loran can provide to the Nation has
    continued to grow rapidly, based on solid scientific and economic
    studies by our government, academia, industry, and other governments. A
    positive Loran report will be delivered to the DOT on March 31, 2004,
    and the DOT has committed to making a long-overdue Loran policy
    decision. It is now a certainty that Loran provides the Nation with the
    ability to mitigate GPS vulnerabilities in multimodal transportation
    and timing applications that play key roles in the continuing
    operations of the national infrastructure, and that the technology does
    so at a remarkably low cost.
        Loran's future, and its ability to complement GPS, depends on the
    continuation of the modernization program, which is already well
    underway. As previously documented, that modernization program will
    reduce Loran's operations and maintenance costs from approximately $27
    million a year to approximately $15 million annually, and enable
    multimodal support at a fraction of the cost other single mode system
    require. Moreover, the enhanced Loran system that will evolve from the
    modernization program will provide better performance than the single
    mode systems, and provide a national roadmap to future GPS-based
    systems that can incorporate Loran as a backup, such as ADS-B and AIS.
        As you and all committee members well understand, GPS has
    recognized vulnerabilities that could potentially affect the safety of
    tens of millions of Americans and the security of our critical national
    infrastructure. In combination with a modernized Loran system, GPS and
    Loran can together form the basis of a national infrastructure that is
    extremely robust, now and well into our future.
        For these reasons, we urge the committee to support fiscal year
    2005 funding in the FAA budget of no less than $25 million to continue
    a Loran modernization program that will help assure our Nation's
    transportation safety and infrastructure security objectives are
    achieved in a most cost-effective manner for government providers,
    private users, and taxpayers.
                                     ______

              Prepared Statement of Bernard H. Berne, M.D., Ph.D.

      OPPOSITION TO BUDGET REQUEST FOR APPROPRIATION TO FEDERAL BUILDINGS
    FUND FOR FOOD AND DRUG ADMINISTRATION CONSOLIDATION, MONTGOMERY COUNTY,
                                    MARYLAND

        I am a resident of Arlington, Virginia. I serve the Food and Drug
    Administration (FDA) as a Medical Officer and as a reviewer medical
    device approval applications. I am submitting this statement as a
    private individual.
        I ask your subcommittee to deny the administration's request to
    provide $88,710,000 to the General Services Administration's (GSA's)
    Federal Buildings Fund for the construction of a FDA Consolidation in
    Montgomery County, Maryland. This request appears on page 961 of the
    President's Budget for fiscal year 2005.
        The General Services Administration (GSA) is now designing and
    constructing this facility. GSA would use the additional funds to
    continue this wasteful project in suburban White Oak, Maryland. Please
    deny these funds for the following reasons:
    Economic Considerations
        FDA will need to pay rent to GSA if it occupies this facility. The
    rents would likely be higher than rents that GSA and FDA pay to private
    property owners, since GSA would not need to enter into competitive
    bidding processes.
        Congressional authorizing committees need to evaluate the current
    costs of the consolidation and compare them to the costs of maintaining
    FDA's current facilities. No Congressional committee has done this
    during the past 15 years.
    Lack of Need for Relocating FDA to White Oak Facility
        All or nearly all of FDA's offices that would move to White Oak are
    presently located in satisfactory leased facilities. Some, such as my
    own, are now in excellent buildings. There is no clear need or economic
    reason to relocate these offices to White Oak or to consolidate any
    part of FDA at this location.
        White Oak is an unsatisfactory location for FDA's headquarters
    consolidation. The project would promote urban sprawl.
        FDA's White Oak facility would occupy 125 acres next to a golf
    course in a suburban residential neighborhood in Montgomery County,
    Maryland. The FDA site is outside of the Capital Beltway on a largely
    forested 750-acre property surrounded by heavily congested roads and
    highways. The site is 3 miles from the nearest Metro station, and has
    only infrequent bus service.
        An FDA consolidation at White Oak would bring 6,000 FDA employees
    to this Washington area suburb. Most would need to commute for much
    longer times and distances than they presently do. White Oak is more
    than 20 miles from most present FDA facilities.
        I and thousands of other FDA employees presently commute to work by
    Metro, as our workplaces are near Metro stations. This will be
    impossible at White Oak.
        FDA employees driving to White Oak will add traffic congestion and
    air pollution to the Washington Metropolitan Area. This is especially
    unfortunate because the Washington Metropolitan Area already has the
    second worst traffic congestion of all urban areas in the United
    States. The Federal Government will need to subsidize many improvements
    to roads and public transit to accommodate the many FDA employees and
    associated businesses that would relocate from better locations to this
    distant suburb.
        FDA employee surveys have revealed widespread opposition to this
    relocation. Three years ago, a survey of those employees who would
    relocate first to White Oak showed that 70 percent opposed the move.
    Many stated that the relocation would impair FDA's ability to regulate
    drugs and medical devices.
        It is clear that the location of the facility will have long-
    lasting adverse effects on FDA's ability to recruit and retain
    qualified employees. Further, many more FDA employees will telecommute
    than presently do. They will rarely work at the new facility. This will
    greatly diminish FDA's efficiency and will contradict a major goal of
    the FDA consolidation at White Oak.
        The Washington Metropolitan area has a number of better sites at
    which FDA can consolidate. Some of these, such as the Southeast Federal
    Center in the District of Columbia, are near other Federal facilities
    and Metrorail stations.
    Legal Issues
        On February 23, 2001, I and a number of other FDA employees joined
    the Sierra Club and the Forest Conservation Council in a law suit that
    is intended to stop the White Oak project. For a number of reasons,
    FDA's occupancy of any buildings at White Oak would be illegal. The
    U.S. District Court for the District of Columbia is presently
    considering this suit.
        The White Oak facility would house the Office of the Commissioner
    of Food and Drugs, as well as most other FDA headquarters offices. This
    would violate 4 U.S.C  72, which states:

        ``All offices attached to the seat of government shall be exercised
    in the District of Columbia, and not elsewhere, except as otherwise
    expressly provided in law.''

    4 U.S.C. 72 is derived from the 1790 Act that established the District
    of Columbia as the Nation's capital. The first Congress enacted this
    law, which President George Washington signed.
        There is no law that expressly provides that FDA's headquarters
    offices shall be exercised outside of the District of Columbia.
        The FDA Revitalization Act (Public Law 101-635; 21 U.S.C.  369b),
    authorizes the Secretary of HHS to enter into contracts to acquire
    property and to construct and operate a consolidated FDA headquarters
    facility. This Act does not provide the location of the consolidated
    facility.
        I ask Congress not to appropriate funds to support an illegal
    activity. The 1790 Act had the worthy purpose of ensuring that all
    central offices of the Federal Government would consolidate in the
    Federal capital District, and not elsewhere. The consolidated FDA
    facility would be one such office that is ``attached to the seat of
    government''.
        Article 1, Section 8, of the Constitution gives Congress exclusive
    jurisdiction over the District of Columbia. Your committee should take
    no action to support the location of FDA's headquarters at a location
    that is outside of the District. Any such action would tend to vitiate
    this section of the Constitution, which 4 U.S.C.  72 is intended to
    support.
        Executive Order 12072, Aug. 16, 1978, (40 U.S.C. 490 note) states
    in Section 1-1, Subsection 101:

        ``Federal facilities and Federal use of space in urban areas shall
    serve to strengthen the nation's cities and to make them attractive
    places to live and work. Such Federal space shall conserve existing
    urban resources and encourage the development and redevelopment of
    cities.''

    White Oak is not in or near any city. An FDA consolidation at White Oak
    (which is in an ``urban area'', the Washington Metropolitan Area) would
    not strengthen any cities. The FDA facility would not encourage the
    development or redevelopment of any cities.
        Executive Order 12072, Section 1-1, Subsection 101, contains the
    word ``shall'' in several locations. FDA therefore can not legally
    locate its headquarters in suburban White Oak.
        Executive Order 12072 and several Federal statutes require that
    heads of Federal agencies consult with local city officials to obtain
    their recommendations for and objections to all proposed new Federal
    facilities. Neither GSA nor FDA officials ever consulted with officials
    of the District of Columbia or of the City of Rockville in Montgomery
    County, Maryland, concerning the White Oak facility.
        This lack of consultation violated Executive Order 12072 and
    several laws. It prevented District and Rockville officials from
    recommending alternative sites for the consolidated facility within
    their own jurisdictions and from objecting to the selection of the
    White Oak site.
        The Public Buildings Act of 1959, as amended, requires that the
    Committee on Environment and Public Works of the U.S. Senate approve
    prospectuses that describe the location and maximum costs of any large
    buildings that GSA may wish to construct before Congress can
    appropriate funds to design and construct such buildings. That
    Committee has never approved a prospectus that describes FDA's White
    Oak facility.
        Paragraph 7 of Senate Rule XVI requires that committee reports on
    general appropriations bills identify each provision ``which proposes
    an item of appropriation which is not made to carry out the provisions
    of an existing law, a treaty stipulation, or an act or resolution
    previously passed by the Senate during that session.'' If your
    committee proposes any appropriation of funds for an FDA consolidation,
    your Committee Report needs to identify this appropriation as being one
    that is not made to carry out the provisions of any existing law,
    treaty, or act or resolution that the Senate has previously passed
    during this session.
        The Treasury and General Government Appropriations Act, 2000
    (Public Law 101-58), the Consolidated Appropriations Act, 2001 (Public
    Law 106-544), the Treasury and General Government Appropriations Act,
    2002 (Public Law 107-67), the Consolidated Appropriations Resolution,
    2003 (Public Law 108-7), and the Consolidated Appropriations Act, 2004
    (Public Law 108-199) appropriated funds to GSA that could support FDA's
    consolidation in Montgomery County, Maryland. However, all of these
    Acts contain provisions that state:

        ``Provided further, That funds available to the General Services
    Administration shall not be available for expenses of any construction,
    repair, alteration, or acquisition project for which a prospectus, if
    required by the Public Buildings Act of 1959, as amended, has not been
    approved, except that necessary funds may be expended for each project
    for required expenses for the development of a proposed prospectus.''

        The Public Buildings Act of 1959, as amended, requires a prospectus
    that describes FDA's White Oak facility because the project's cost
    exceeds $1,500,000. No prospectus that described this facility had been
    approved before Public Law 101-58, Public Law 106-544, Public Law 107-
    67, and Public Law 108-199 were enacted into law. Therefore, GSA may
    only legally use the funds appropriated in these Acts for ``required
    expenses for the development of a proposed prospectus''. GSA cannot
    legally use the funds to design and construct any buildings.
        The report of the Committee on Appropriations of the House of
    Representatives (House Report 107-152, July 23, 2001), which
    accompanied the bill (H.R. 2590) that became Public Law 107-67, states
    on p. 65 under the heading: ``General Services Administration''
    ``Federal Buildings Fund'' ``Construction and Acquisition''
    ``Recommendation'' the following: ``All construction projects funded in
    this bill are subject to authorization by the Committee on
    Transportation and Infrastructure''.
        FDA's White Oak project was one of the construction projects funded
    under Public Law 107-67 (H.R. 2590). Despite this, GSA is presently
    designing and starting to construct the FDA consolidation without an
    approved prospectus and without receiving authorization by the
    Committee on Transportation and Infrastructure. GSA's actions are
    contrary to the House Appropriations Committee's statement in House
    Report 107-152, and, further, are illegal.
        Some GSA officials claim that the FDA Revitalization Act (Public
    Law 101-635) authorizes appropriations to GSA without the need for
    prospectus approvals. This claim is incorrect. Public Law 101-635,
    which amended the Federal Food, Drug and Cosmetic Act, authorized
    appropriations that permit the Secretary of HHS to enter into contracts
    to construct and operate a consolidated FDA facility.
        Public Law 101-635 specifically limits the role of the
    Administrator of General Services in the FDA consolidation to
    consultation with the Secretary of HHS. Public Law 101-635 does not
    authorize any appropriations that can permit GSA to conduct any such
    activities, nor does it authorize any appropriations to GSA's Federal
    Buildings Fund. Clearly, GSA will use any new funds illegally, just as
    it is using the previously appropriated funds.
        The National Environmental Policy Act (NEPA) of 1969 requires that
    Federal agencies compare in an Environmental Impact Statement (EIS)
    alternative locations for any large new Federal facility. However, the
    EIS for the White Oak FDA facility did not make any such comparisons.
        The EIS only compared the environmental impacts of an FDA
    consolidation at White Oak with the ``no action'' alternative.
    Following this legally inadequate comparison, GSA and FDA officials
    selected White Oak as the location for the facility.
        GSA and FDA officials therefore violated NEPA when they selected
    the White Oak site. Congress should not appropriate funds to support
    this illegal selection.
        A Federal court may prevent FDA from consolidating its facilities
    at White Oak for one or more of the above reasons. Congress should not
    provide funds for FDA to occupy the White Oak facility until the
    Federal courts decide whether the project can proceed.
        I therefore ask that your subcommittee not provide the requested
    $88,710,000 to GSA in this legislation. Thank you.
                                     ______

          Prepared Statement of the American Passenger Rail Coalition

        Chairman Shelby and Members of the Subcommittee on Transportation,
    Treasury and General Government, thank you for the opportunity to
    provide testimony on fiscal year 2005 funding for Amtrak, the Nation's
    intercity passenger railroad. My name is Harriet Parcells and I am
    Executive Director of the American Passenger Rail Coalition (APRC), a
    national association of railroad equipment suppliers and rail
    businesses.
        For fiscal year 2005, Amtrak has requested $1.79 billion. Of this
    total, nearly $800 million is for capital investments to continue the
    work taking place under the leadership of Amtrak President David Gunn
    to bring Amtrak into a state of good repair. Amtrak's request for
    operations is $570 million, $11 million less than Amtrak requested in
    fiscal year 2004 and an indication that Mr. Gunn's efforts to improve
    efficiency, reduce costs and implement management reforms at Amtrak are
    yielding positive results. APRC supports Amtrak's budget request and
    asks the subcommittee to fund Amtrak at $1.79 billion. While we
    recognize that funding constraints face the subcommittee, APRC believes
    that funding Amtrak much below $1.79 billion would jeopardize the
    substantial progress taking place at Amtrak. The administration's
    fiscal year 2005 budget of $900 million for Amtrak is nearly 50 percent
    below Amtrak's budget request and $318 million or 26 percent below
    Amtrak's current appropriation of $1.218 billion. Funding Amtrak at
    $900 million would provide virtually no funding to continue the
    important capital investments identified in Amtrak's Five Year
    Strategic Capital Plan and that Amtrak has been undertaking since 2003.
    Amtrak President David Gunn has stated that funding at $900 million
    would lead to a shutdown of the national system. APRC also supports
    strong funding for the rail safety and research and development
    programs at the Federal Railroad Administration.
                amtrak ridership is strong on trains nationwide
        Amtrak is a valued means of transportation used by million of
    Americans annually. For travel in metropolitan corridors, Amtrak
    provides a cost-effective, efficient alternative to congested highways
    and airports. For residents of rural communities, Amtrak trains are
    often the only convenient, affordable, all-weather public
    transportation available. In fiscal year 2003, 24 million passengers
    rode Amtrak trains, the highest level in Amtrak's history. Ridership
    gains occurred on routes across the system. Each month from June-
    December 2003, gains in rail ridership ranged from 7-12 percent over
    levels for the same period in 2002. Amtrak ticket revenues also rose
    each month from June-December 2003. Thanksgiving ridership was Amtrak's
    highest ever for this holiday--Amtrak carried approximately 595,000
    passengers over the 7 days from Tuesday, November 25-Monday, December
    1. Ridership on Amtrak's long-distance trains was particularly strong,
    with increases of 14 percent or more over last year.
        Some policymakers question the need for long-distance trains, yet
    the strong growth in ridership on these trains underscores the
    important mobility and economic benefits they provide, especially for
    America's small cities and rural communities (see table 1).

    TABLE 1.--AMTRAK MONTHLY RIDERSHIP GROWTH JUNE-DECEMBER FISCAL YEAR 2003
                          COMPARED TO FISCAL YEAR 2002
                               [Amount in percent]
    ------------------------------------------------------------------------
                                                Systemwide     Long-distance
                      Month                        Total          Trains
    ------------------------------------------------------------------------
    June....................................            +6.8           +13.6
    July....................................            +7.1            +9.4
    August..................................            +7.3           +14.1
    September...............................           +11.4           +22.2
    October.................................           +10.7           +30.9
    November................................           +11.7           +32.0
    December................................  ..............           +16.3
    ------------------------------------------------------------------------
    Source: Amtrak and NARP News (Jan. 2004 issue).

        California's Pacific Surfliner trains, operating between San Diego
    and Los Angeles and Santa Barbara, continue to experience record-
    breaking ridership. Two million passengers rode these trains in fiscal
    year 2003, a 25 percent increase over fiscal year 2002. Ridership on
    other major rail corridors in the State--the San Joaquin service and
    the Capitol Corridor--also had strong ridership growth. Ridership on
    the Texas Eagle rose 20 percent in fiscal year 2003 over 2002 levels.
    In the Midwest, eight trains that serve the region experienced a 16
    percent rise in ridership from May-December 2003 compared to 2002. In
    the Northeast, Acela Regional trains carried more passengers than any
    other Amtrak service in the Nation--nearly 6 million riders--up 3.7
    percent over last year. The Pennsylvanian train ridership surged 64
    percent, benefitting from a routing change that terminated the train in
    Pittsburgh rather than Chicago.
        Ridership Gains Continue in Fiscal Year 2004.--Gains in Amtrak
    ridership continued in first 4 months of fiscal year 2004 (Oct. 2003-
    Jan. 2004). Northeast Corridor ridership was up over 6 percent;
    ridership on long-distance trains was up nearly 20 percent.

          AMTRAK'S ABILITY TO CONTINUE CAPITAL INVESTMENTS IS CRUCIAL

        Amtrak President David Gunn and the Amtrak Board of Directors began
    implementing a program of capital investments in fiscal year 2003 that,
    if sustained over the next several years, will bring the national
    Amtrak system into a state of good repair. These capital investments
    are essential to improving the reliability, safety and efficiency of
    the national Amtrak system. Amtrak's accomplishments to date in making
    capital improvements are significant. In fiscal year 2003, 147,600
    concrete ties were installed in the Northeast Corridor, replacing old
    wood ties. Twenty-two miles of continuous welded track were installed
    and track bed was improved. These investments will provide a smoother
    ride for travelers and reduce track maintenance costs. Track
    improvements to a third track have increased capacity and enabled
    speeds to rise from 60 to 110 mph. Thirty-three miles of signal cables
    were replaced, 37 miles of electric catenary hardware renewed and 22
    bridges retimbered. Substantial improvements were and continue to be
    made to rolling stock. Twenty-one wrecked Amfleet and Superliner
    railcars were rebuilt and 23 food service cars were remanufactured and
    restored to service on routes around the country. One hundred and three
    railcars and locomotives went through heavy overhauls or were
    remanufactured. APRC urges Congress to provide Amtrak with sufficient
    funding in fiscal year 2005 to enable the railroad to continue these
    essential capital investments.

         RAIL CAPITAL INVESTMENTS PRODUCE U.S. JOBS AND OTHER BENEFITS

        The U.S. rail manufacturing and supply industry contributes to the
    health of the U.S. economy, with over $20 billion in annual sales
    (approximately $7 billion to U.S. intercity, commuter and transit
    passenger railroads) and over 150,000 workers employed. Capital
    investments made by Amtrak support jobs for Americans in factories and
    businesses in States across the country. Investments in transportation
    infrastructure are vital to the efficient movement of people and goods
    and a robust, competitive economy. Every billion dollars invested in
    transportation infrastructure projects creates approximately 42,000
    jobs.
        In the Pacific Northwest, investments in new rail infrastructure
    and equipment by Washington, Oregon and public and private partners to
    improve the quality and speed of rail service in the Pacific Northwest
    High Speed Rail Corridor resulted in a tripling in intercity passenger
    rail ridership over levels 10 years ago. With further investments, the
    region anticipates rail ridership to grow to 2.2 million by the year
    2018. The Midwest Regional Rail Initiative, a plan to link cities and
    communities throughout the Midwest with improved passenger rail
    service, is projected to stimulate substantial public and private
    investment and create 2,300 permanent new rail service jobs, 6,300
    construction jobs (over 10 years) and 18,200 indirect jobs. Public
    investments to bring the Acela high-speed rail service to the Northeast
    Corridor generated economic benefits for States and businesses around
    the country. Contracts were signed with over 70 suppliers in more than
    20 States.

             AIR-RAIL INTERMODAL CONNECTIONS PROVIDE MANY BENEFITS

        Intermodal transportation hubs that provide an easy transfer for
    travelers between modes--from airplanes to intercity passenger trains
    or intercity trains to local transit systems--enhance the efficiency of
    the overall transportation system and provide many benefits to
    travelers. While progress in developing intermodal connections has been
    made since enactment of the ``Intermodal Surface Transportation
    Efficiency Act of 1991'', much work remains in this area. Only a few
    U.S. airports, such as Newark Airport in New Jersey and Burbank Airport
    in California, provide an easy transfer between Amtrak trains and
    airplanes. At Newark Airport, Continental Airlines and Amtrak have
    created a code-sharing arrangement, the only one in the Nation, which
    covers rail travel for Continental passengers between Newark Airport
    and six cities on the Northeast Corridor. A study comparing travel by
    several different modes (Amtrak, NJ Transit or by car) to Newark
    Airport from nearby cities (Newark, NYC, Philadelphia, Trenton) found
    that considerable time can be saved when rail transportation is used.
    An added benefit is that adverse weather and road conditions which
    cause great time increases for auto travel generally don't impact rail.
    At Maryland's BWI Airport, travelers can easily connect between trains
    and airplanes by a bus service that operates between the airport and
    Amtrak's BWI train station. This service works well and is used by many
    travelers. In Pennsylvania, part of the plan for the new Harrisburg
    International Airport terminal is a $10 million train station, which
    will connect to the new airport terminal by a glass-enclosed moving
    sidewalk. A larger number of U.S. airports have convenient rail transit
    connections to the airport: Atlanta's Hartsfield Airport; Chicago's
    Midway and O'Hare Airports; St. Louis Lambert Field Airport; Washington
    DC's Reagan National Airport and others. These types of intermodal
    connections are commonplace throughout Europe and other parts of the
    world where airports have become true multi-modal transportation
    centers. U.S. transportation policy and funding should continue to
    encourage development of intermodal centers and easy connections
    between modes to boost the efficiency of the U.S. transportation system
    and ease travel for passengers.

      RAIL INFRASTRUCTURE BONDS TO COMPLEMENT APPROPRIATED FUNDS FOR RAIL

        The need for funding to improve railroad infrastructure greatly
    exceeds what is available through annual Federal appropriations. States
    lack adequate funding to make these investments alone. An innovative
    Federal-State partnership is needed. Several bills have been introduced
    in the Senate and the House of Representatives that would fund
    investments in rail infrastructure through tax-credit bonds or private
    activity bonds. In the Senate, two comprehensive rail authorization
    bills have been introduced. The American Rail Equity Act of 2003 (AREA)
    or S. 1505 was introduced by Senator Kay Bailey Hutchison and
    cosponsors. S. 1505 establishes a non-profit Rail Infrastructure
    Finance Corporation (RIFCO) that is authorized to issue $48 billion in
    tax-credit bonds for rail infrastructure investments over 6 years. It
    also authorizes $12 billion for Amtrak over 6 years. A second bill, the
    American Railroad Revitalization, Investment and Enhancement Act of the
    21st Century (ARRIVE 21) or S. 1961 was introduced by Senator Ernest
    Hollings and cosponsors and creates a non-profit public-private
    partnership, the Rail Investment Finance Corporation (RIFCO), that is
    authorized to issue $30 billion in tax-credit bonds over 6 years. S.
    1961 also reauthorizes Amtrak at $1.5 billion per year for 6 years. In
    the House, the Transportation and Infrastructure Committee approved
    RIDE-21 (HR 2950) which authorizes $59 billion in rail infrastructure
    improvements and establishes authority for States or State compacts to
    issue $12 billion in tax-credit bonds and $12 billion in private
    activity bonds over 10 years for investments for high-speed rail
    infrastructure. APRC strongly supports enactment of legislation that
    would establish a non-profit corporation authorized to issue bonds for
    investments in rail infrastructure. The bonds would help address the
    large unmet need for investments in rail infrastructure to improve
    passenger and freight rail service and capacity and would complement
    rail funding available through the annual appropriations process.
        Chairman Shelby and members of the subcommittee, thank you for the
    opportunity to provide testimony on the needs of our Nation's passenger
    rail system.
                                     ______

     Prepared Statement of the Coalition of Northeastern Governors (CONEG)

        As the subcommittee begins the fiscal year 2005 transportation
    appropriations process, the Coalition of Northeastern Governors (CONEG)
    is pleased to share with the subcommittee testimony on the fiscal year
    2005 Transportation and Treasury Appropriations bill. The CONEG
    Governors commend the subcommittee for its past support of funding for
    the Nation's highway, transit, and rail systems. Although we recognize
    the extensive demands being made upon Federal resources in the coming
    year, we urge the subcommittee to continue the important Federal
    partnership role that is vital to strengthening the multi-modal
    transportation system. This system is a critical underpinning to the
    productivity of the Nation's economy and the security and well-being of
    its communities.
        First, the Governors urge the subcommittee to fund the combined
    highway, transit and safety programs at levels that will continue the
    progress in recent years to improve the condition and safety of the
    Nation's highways, bridges and transit systems. These improvements,
    documented in the U.S. Department of Transportation's 2002 Conditions
    and Performance Report to Congress, were made possible by the
    substantial level of investments made by the Federal-State partnership
    in highway, bridge and transit infrastructure under the Transportation
    Equity Act for the 21st Century (TEA21). Continued and substantial
    investment in these infrastructure improvements--in both urban and
    rural areas--is necessary if the Nation's surface transportation system
    is to safely and efficiently move people and the substantial growth in
    freight movement that is projected in the coming decade. According to
    the Conditions and Performance Report, a combined Federal highway and
    transit program of $53 billion annually is needed simply to maintain
    our Nation's highways and transit systems in the current conditions.
        Within the transit program, the Governors strongly urge the
    subcommittee to provide funding levels that at least maintain the basic
    program structure and address the solvency of the mass transit account.
    Further, the Governors urge the subcommittee to continue the
    traditional 80/20 Federal-State match for the New Start Program and the
    Bus and Bus Facilities Discretionary Grant Program. These programs have
    been instrumental in ensuring that needed funds are invested to improve
    and extend transit services in both our urban and rural communities.
        Second, the Governors strongly urge the subcommittee to provide at
    least $1.8 billion in fiscal year 2005 for intercity passenger rail.
    Intercity passenger rail is a vital part of the Nation's transportation
    system, particularly in the Northeast and Mid-Atlantic region, where it
    provides essential mobility, enhances capacity of other modes, and
    provides much needed redundancy to the Nation's transportation system.
    In recent years, the Congress has imposed discipline on the management
    of Amtrak operations, with the result being greater financial
    accountability and oversight of the Federal Government's investment in
    intercity passenger rail. While the Congress, administration and States
    continue to work cooperatively to determine the future of intercity
    passenger rail and Amtrak in the Nation's transportation system, a
    funding level of $1.8 billion in fiscal year 2005 will help provide a
    period of stability for intercity passenger and commuter rail
    operations. This funding level is critically needed to maintain
    services and begin a program of essential investments in equipment and
    infrastructure to bring the system back to a state of good repair for
    reliable service. The United States Department of Transportation
    Inspector General has noted that over $1 billion in capital funds is
    needed annually just to sustain the current intercity passenger rail
    system, regardless of who operates that system. The States are already
    major investors in the current intercity passenger rail system, with
    the Northeast and Mid-Atlantic States having invested over $4 billion
    in intercity passenger rail operations and infrastructure since 1991.
        Third, the Governors urge the subcommittee to continue funding for
    investments in Intelligent Transportation Systems (ITS) that can
    maintain and enhance the capabilities and security of the Nation's
    transportation system. ITS helps States and communities along the
    densely populated Atlantic Coast region improve the safe and reliable
    operations on highway and transit systems on a daily basis. The
    Northeast's rural areas and communities also benefit significantly from
    ITS investments. The region's ITS systems, including those provided by
    TRANSCOM and the I-95 Corridor Coalition, have demonstrated their
    critical role, both in the emergency management and recovery phases,
    when security demands put added pressure on the region's transportation
    networks.
        Fourth, safety on the Nation's highways, transit and rail systems
    remains a priority of the Governors. The safety of the aging rail
    tunnels along the Northeast Corridor is a particular concern, and we
    urge the subcommittee to fund life safety improvements for the Amtrak-
    owned Baltimore and New York tunnels. The Governors also support
    maximum funding for the Section 130 Highway-Rail Crossing Program. As
    part of the Federal-State partnership to correct hazardous conditions
    on the Nation's highways, investments in highway-rail crossings can
    reduce injuries and death from accidents even as they allow higher
    train speeds and increased reliability.
        Fifth, the Governors urge the subcommittee to provide sufficient
    funding for border crossing and gateway infrastructure projects. A
    strong program--one that invests in transportation projects addressing
    both security and transportation needs--can contribute to safer, more
    efficient and secure flows of people and goods across international
    borders and through gateways.
        Sixth, the Governors also support the President's funding request
    of $20 million for the Surface Transportation Board. The Board is
    essential for oversight and effective implementation of decisions
    affecting the ongoing process of railroad consolidations that will
    affect local and regional economies across the Nation.
        Finally, the Governors support continued Federal investment in
    transportation research and development programs, particularly the
    Federal Railroad's Next Generation High Speed Rail program. This
    program enhances safety and helps stimulate the development of new
    technologies, which will benefit improved intercity rail service across
    the Nation.
        The CONEG Governors thank you, Ranking Member Patty Murray, and the
    entire subcommittee for the opportunity to share these priorities and
    appreciate your consideration of these requests.
                                     ______

          Prepared Statement of the National Treasury Employees Union

        NTEU represents 150,000 Federal employees in 29 Federal agencies
    and departments, including the men and women who work at the Internal
    Revenue Service. I appreciate the opportunity to provide the
    subcommittee with comments on the IRS budget for fiscal year 2005.
        There are several items in the administration's IRS budget that
    NTEU believes would be detrimental to the IRS' mission. The two most
    egregious items include the administration's proposal to contract out
    tax collection to private tax collection agencies, and an inadequate
    budget request that will prevent the IRS from continuing to improve its
    customer service record while bolstering enforcement efforts.

                             PRIVATE TAX COLLECTION

        The Treasury Department's fiscal year 2005 budget proposal to allow
    the IRS to use private collection agencies to collect Federal income
    taxes is risky, costly, and unnecessary. NTEU strongly opposes this
    plan. This proposal would risk exposing sensitive taxpayer information,
    would subject taxpayers to the abusive tactics of private debt
    collectors, and would cost U.S. citizens much more money than if IRS
    employees did the job.
        IRS employees are the most reliable, cost-effective means for
    collecting Federal income taxes. IRS employees can collect outstanding
    debt more cheaply than private contractors. With an appropriation of
    $296 million for compliance, the IRS could collect an additional $9.47
    billion in revenue per year. That's a $31 return per dollar spent,
    compared to only $3 revenue per dollar spent for private collection
    agencies. Furthermore, there is the potential for abusive treatment
    from private debt collectors. There is a very real risk of exposing
    sensitive taxpayer information to those who might misuse it. In this
    era of identity theft, I do not believe the Federal Government should
    engage in practices that could needlessly expose confidential taxpayer
    information.
        A February 2003 Treasury Inspector General for Taxpayer
    Administration (TIGTA) report faulted the IRS for failing to conduct
    background checks on more than 2,100 private contract employees working
    in offices in Maryland who had access to sensitive information. In 1996
    and 1997 tax years, Congress authorized a pilot program to test private
    tax collection. The 1996 program resulted in such egregious abuses by
    private debt collectors that the 1997 program was cancelled. According
    to an IRS Internal Audit Report (Ref. No. 080805, 12/19/97), the
    private debt collectors under contract to the Federal Government
    committed hundreds of violations of the Fair Debt Collection Practices
    Act--including calling a taxpayer at 4:19 a.m.
        There is widespread opposition to privatization of tax collection.
    Several taxpayer advocacy groups: the Tax Executives Institute; the
    National Association of Enrolled Agents; Citizens for Tax Justice;
    Consumer Federation of America; Consumers Union; National Consumer Law
    Center; National Consumers League; and large segments of the taxpaying
    public oppose the privatization of collection duties. Specifically,
    Global Strategy Group, Inc. conducted a poll last year that found 66
    percent of respondents disapprove of allowing the Internal Revenue
    Service (IRS) to hire private debt collection companies. When details
    of the IRS's plan were provided, the number in opposition rose to 79
    percent. The results of this poll strongly indicate that Americans
    across all political, geographic and income lines oppose this proposal.
        While the IRS is liable for damages caused by an IRS employee's
    misuse of sensitive taxpayer information, taxpayers would not have
    proper redress with the Federal Government for misuse of their
    confidential information by contractors. Instead, taxpayers would be
    left to seek damages against the private collection agency. It is plain
    and simple. This plan to privatize tax collection at the IRS will hurt
    U.S. taxpayers and will hurt IRS workers.
        Having cited these failed attempts for private tax collection, I
    would urge the subcommittee to prohibit any appropriation funds from
    being used for contracting out tax collection services to recover U.S.
    debt.

                                      RIFS

        While NTEU agrees with IRS' goal of enhancing tax compliance and
    enforcement, we don't agree with the approach of eliminating front-line
    employees in order to pay for additional compliance efforts. As the
    number of tax returns continues to grow, the number of IRS employees
    continues to shrink. As the IRS Oversight Board pointed out in its 2003
    Annual Report, the IRS workload has increased by 16 percent while at
    the same time the number of full time equivalent employees has
    decreased by 16 percent from 1999 to 2002. This is caused by a number
    of circumstances, including an increasingly complex tax code and an
    increasing number of tax returns--paper as well as electronic returns.
    This has led to a serious decline in the size of the IRS workforce as a
    way to cope with increasing budgetary demands.
        NTEU strongly encourages the subcommittee to increase the IRS
    budget by 10 percent over fiscal year 2004, as recently recommended by
    the IRS Oversight Board in its fiscal year 2005 Budget/Special Report
    (March 2004). The administration expects the IRS to do more with fewer
    resources and this is simply an unrealistic demand placed on the IRS
    workforce. If Congress wants more out of the IRS, then they are going
    to have to pay for it. The IRS Oversight Board makes a compelling case
    for increasing the IRS budget because it will ultimately mean an
    increase in Treasury revenues.
        I would encourage Congress to work with the administration to
    anticipate costly events--such as pay increases or costly changes to
    the tax code--and budget accordingly. This did not happen last year.
    For instance, NTEU encouraged the IRS to make a supplemental funding
    request for administering last summer's child tax credit refunds to
    taxpayers. To our dismay, the request was not made and IRS was forced
    to do more work without any additional resources. This places a great
    burden on an IRS workforce that is expected to provide business results
    while improving customer service. This is unrealistic and unfair.
    Improving customer service, enhancing tax return processing and
    increasing tax compliance will only occur if Congress and the
    administration support increased funding for staffing, advanced
    technology and equipment, and better training.
        The IRS is using the excuse of bolstering compliance to justify a
    recently announced reduction in force (RIF) of roughly 1,600 IRS Case
    Processing and Insolvency support employees in 92 locations across the
    country--only to turn around and hire 1,000 new employees to do the
    same work in four consolidated IRS Service Center sites. NTEU opposes
    the RIF and urges the IRS to keep its employees in the field, serving
    the local taxpayers. NTEU urges Congress to appropriate the needed
    funding to keep these employees in the field.
        Presumably, IRS intends to save money and increase efficiency with
    this move, but there is no evidence of cost savings and IRS' business
    case assumptions are faulty. IRS has failed to provide information on
    the cost of hiring and training new employees when the current
    employees already know how to do the job.
        In responding to the announcement of the RIFs, former IRS
    commissioner Donald Alexander was recently quoted as saying,
    ``Centralization is not always more efficient, especially when it moves
    support people away from those they are supporting.''
        As one of the rationales for the current centralization, the IRS
    indicates that Case Processing had not been reorganized since the
    1970's. However, several attempts have been made to centralize Case
    Processing over the years, but have failed and this function has
    remained in the field. In fact, Case Processing functions were located
    in Service Centers until the IRS reorganized 25 years ago to locate
    these functions closer to the employees who perform collection and exam
    work. Reorganizing for the sake of reorganization is a waste of time
    and money, neither of which the IRS can afford to squander.
        Case processing support employees assist Revenue Agents and Revenue
    Officers in resolving issues related to overdue taxes. One of the more
    important duties performed includes releasing liens on property once
    overdue taxes are paid so that a taxpayer can secure a loan and
    calculate interest penalty abatements.
        Insolvency employees are responsible for monitoring tax compliance
    throughout the life of the bankruptcy, including trust fund taxes and
    pyramiding of business taxes. Insolvency employees must adhere to
    strict deadlines in order to avoid violations of the automatic stay and
    possible sanctions. Failure to take timely and appropriate actions
    could result in the IRS being sued for damages and/or attorney fees.
    Centralizing Insolvency work means that the new employees will need to
    know the local rules and standing orders of the various bankruptcy
    courts that take precedence under the Bankruptcy Code. It is
    unreasonable to expect employees to be able to follow the rules of
    dozens of different States and courts, likely resulting in delays and
    errors and a greater cost to the IRS.
        The IRS has failed to provide information on how local taxpayers
    will be affected by its plan. Despite a lack of information from the
    IRS on the affect on taxpayers, NTEU believes that this RIF will indeed
    affect taxpayers nationwide.
        Federal-State disclosure agreements--and the statutes that govern
    these agreements--differ by State. Centralizing the Insolvency work
    will mean that employees in the centralized sites will need to be
    responsible for knowing and adhering to all 50 variations. It will take
    longer for cases to close if they have to be shipped to a centralized
    site and this could hurt the taxpayer who is waiting for her case to be
    closed.
        Currently, if a taxpayer has a question about the process, she can
    find one of the Case Processing employees locally and get her question
    answered. If these jobs are shipped out of State, it will be much more
    difficult for the taxpayer to get her question answered, or for the
    cases to be resolved in a timely and complete manner.
        Finally, this removes accountability at the local level. If a
    member of Congress is contacted by a taxpayer constituent with an IRS
    case processing problem, that member will be directed to some out of
    State Service Center where the new employee has no comprehension of the
    region, much less the local personnel involved in closing a case, or
    the member of Congress making the inquiry.
        NTEU agrees with the IRS that there is a great need to bolster
    enforcement efforts, but this RIF does not guarantee new or enhanced
    enforcement positions. Once again, this is a waste of time and money
    for the IRS. This is unfair to the current employees who are trained
    and successfully performing the Case Processing and Insolvency work;
    this is unfair to the taxpayers who rely on the services provided by
    their local Case Processing workers.
        IRS also has plans for a RIF of approximately 2,200 employees at
    the Memphis Submission Processing Center. NTEU strongly disagrees with
    the IRS' decision to conduct this RIF. The IRS claims that it is taking
    this action because there has been an increase in electronic filing of
    tax returns, and it no longer needs employees to process paper returns.
    However, according to the General Accounting Office (GAO-02-205), the
    IRS has fallen far short of meeting its electronic filing goals. IRS is
    using unrealistic, optimistic assumptions to project the increase in
    electronic tax return filing and then using these assumptions to
    justify the RIF.
        I commend the House of Representatives Appropriators who recognize
    the risks of reducing IRS staffing of manual submission processing. In
    House Committee Report 108-243, they have asked IRS to report back
    prior to ``initiating any premature and ill considered reductions in
    force . . .'' (see H. Rept. 108-243, IRS MANUAL SUBMISSIONS
    PROCESSING).
        NTEU recognizes that electronic filing will eventually become a
    reality of IRS' modernization efforts. But we strongly believe that any
    resulting reorganizations should occur when there is a genuine need for
    a shift to an e-filing workforce and every effort should be made to
    avoid a RIF by retraining and placement of current employees.
        These examples of reducing the IRS workforce demonstrates the need
    for Congress to commit to funding the IRS at adequate levels so the IRS
    is not made to choose between bolstering enforcement and providing the
    superior service our taxpayers expect and deserve. I hope the
    subcommittee will give serious consideration to the Oversight Board's
    recommendation and increase the IRS fiscal year 2005 budget by 10
    percent over fiscal year 2004.

                                   PAY PARITY

        The administration has proposed a completely inadequate 1.5 percent
    raise for civilian Federal workers in 2005, and a 3.5 percent pay raise
    for members of the military. NTEU supports the higher raise for all
    employees and I applaud the Senate's budget resolution calling for
    civilian-military pay parity in 2005.
        This vote--and in particular, the bipartisan nature of the vote--
    not only sends an important message to Federal employees that they are
    valued and respected but it is another important step in the
    government's continuing efforts to recruit and retain the high-quality
    employees the public wants and expects in Federal agencies.
        The Senate budget resolution is in step with a recently approved
    House resolution, which supports the concept of pay parity between
    Federal civilian and uniformed military employees. By a vote of 299-
    126, the members of the House went on record in support of equal pay
    raises for both groups of public employees in 2005. The House vote
    reflected the importance of pay parity and signaled that members of
    Congress understand the need for fair pay in the competition with
    private sector employers for the most talented workers.
        The vote by the full Senate on the pay issue preceded the rejection
    earlier this year of language supporting civilian-military pay parity
    by the House Budget Committee in its 2005 budget resolution.
        Congressional action on Federal pay reflects the role that civilian
    employees play not only serving the public in their specific agencies,
    but in the continuing fight against terrorism. They work in a variety
    of capacities that impact national security, including such roles as
    helping secure the country's borders, protecting the food supply, and
    much more. Again, I commend those Senators who voted for the pay parity
    resolution and urge the appropriators to fund civilian pay on par with
    military pay at a 3.5 percent increase for fiscal year 2005.

                                CONTRACTING OUT

        Finally, after a bipartisan compromise was reached on the fiscal
    year 2004 Omnibus Appropriations bill, the White House insisted that
    the conference committee strip language that would have provided a
    level playing field for Federal employees whose jobs are made available
    for private competition.
        One bipartisan provision that was stripped from the bill would have
    required contractors to show significant cost savings (the lesser of 10
    percent or $10 million) over the in-house competitor in order to be
    awarded a competition. Instead, agencies will now only have to take
    cost savings into consideration during public-private competitions
    since the requirement was removed from the bill language. This allows
    the agencies to outsource the work regardless of whether or not it
    saves the Federal taxpayers money--or costs the taxpayers more money.
        Another provision that was stripped from the Omnibus bill would
    have provided the Federal employees an independent and impartial venue
    to appeal an agency's contract award decision. Stripping this provision
    sends a clear message to Federal employees that the administration
    wants private contractors to retain their unfair advantage in public-
    private competitions.
        The administration further weakened the Omnibus bill by limiting
    the guarantee that all Federal employees would have the opportunity to
    submit their own best bids. The altered bill language limits the right
    of employees to come up with their own cost-saving bid to those
    employees in only the agencies funded by the Transportation-Treasury
    bill. This means, for competitions in most agencies, contractors will
    still be able to submit their best bids while Federal employees will
    not be allowed to offer their best bid.
        NTEU strongly encourages the appropriator to include legislative
    language that will level the playing field for Federal employees who
    are expected to compete against private contractors. It is simply
    unfair to give private contractors an unfair advantage in public-
    private competitions when Federal employees can do the same job with
    better and less costly results.

                                   CONCLUSION

        On behalf of the dedicated Federal employees NTEU represents, I am
    proud to submit these views for the hearing record. I encourage the
    committee to make a strong investment in the Federal workforce by
    appropriating the 10 percent increase as requested by the IRS Oversight
    Board; preventing private tax collection; prohibiting the IRS from
    moving forward with the unnecessary RIFs; providing pay parity for
    Federal workers; and giving the Federal workers a level playing field
    when competing for their jobs with private contractors.
        Without a doubt, the frontline employees are committed to working
    with management and Congress to increase efficiency and customer
    satisfaction. NTEU is committed to striking a balance between taxpayer
    satisfaction, business results and employee satisfaction. I encourage
    Congress to join us in this commitment.
                                     ______

        Prepared Statement of the Air Traffic Control Association, Inc.

                    INTRODUCTION--AVIATION AT THE CROSSROADS

        The Federal Aviation Administration is at a crossroads--and the
    future of U.S. aviation hangs in the balance.
        The administration has delivered to Congress a proposed fiscal year
    2005 budget that cuts $393 million (14 percent) from FAA's capital
    investment account, and provides less than current services funding for
    ATC system operations and maintenance. Funding for RE&D, already down
    to $117 million last year, is reduced another $2 million.
        The FAA and the new Air Traffic Organization (ATO) are attempting
    to respond to this new funding reality in the only way possible. The
    organization is getting leaner. The mantra is managing to the reduced
    level of resources, rather than responding to demand with increased
    service. Every modernization initiative must be justified by an
    immediate and measurable payback. Projects that deliver economies and
    efficiencies for the air traffic service provider will be favored over
    those that offer new, improved, and/or long-term customer benefits. And
    under the administration's proposal, long term investment in promising
    concepts and technologies is not receiving the ``mission drive focus''
    required for what FAA is predicting to be an overall increase in
    passenger traffic of 4.3 percent per year (5.2 percent increase
    internationally) over the next 10 years. The ATO already has deferred
    to future years the digital programming and data link elements of
    NEXCOM, not waiting for future funding decisions by Congress. FAA was a
    leading, global proponent of this technology and yet we are deferring a
    solution that only a few short years ago was deemed vital to address
    the imminent dearth of available radio frequencies.
        On the other hand, Homeland Security requirements and the War on
    Terrorism are placing new burdens and requirements on an already
    stressed air transportation system. If past is prologue, the current
    downturn in passenger traffic is temporary and aviation demand will
    come roaring back. Most airports already are reporting passenger
    traffic increases, and many are again experiencing congestion and
    delay. Earlier this year, under DOT order two hub carriers American and
    United agreed to a 5 percent reduction in flight schedules in order to
    cut down on delays that reached the highest level ever recorded.
    Because these cuts did not improve delays enough, DOT last week ordered
    the airlines to reduce flights another 2.5 percent. This is not a long-
    term solution to meeting passenger and airline demand for more capacity
    at one of the world's busiest airports, much less a panacea for the
    entire aviation system.
        The path U.S. aviation has been placed on with this proposed budget
    is clear: we will limp into the future with an air transportation
    system that is inefficient, at capacity, and unprepared for a tripling
    of demand in the future. The weight of increasing airline operations
    due to the greater usage of smaller regional jets, and the increasing
    burdens on aviation from the Department of Homeland Security will
    paralyze the aviation system.
        If instead we dare to envision a safe, secure, efficient, and
    capable air transportation system in the future, we must be bold in our
    approach, and we must act now. We cannot allow terrorists to scare us
    out of the skies. We must not so constrain ourselves that in seeking
    safety that we harness mobility. The answer is to be found in
    technology, investment, vigilance, and perseverance in the face of
    uncertainty--the very attributes that have carried aviation so far in
    its first century.

                       THE CHANGED FACE OF U.S. AVIATION

        The Nation has come to view aviation in a new light over the past 3
    years. No longer is air transportation predominantly about travel and
    tourism. Aircraft have been used as weapons against civilians, and we
    must do everything reasonably possible to prevent it from happening
    again. The Departments of Defense and Homeland Security rely on civil
    aviation facilities and agencies to perform their mission. Aviation is
    much more critical and important for United States and world commerce
    today. America's vision of a global economy is based on the ability of
    aviation to serve as the bridge connecting nations, cultures and
    people. This vision--that is inclusive of, but transcends security--
    must be the guiding force in developing a fresh perspective, and new
    principles to guide Federal air traffic control investment policy and
    planning.
      --We demand more of the air transportation system than ever before.--
            The Nation's aviation infrastructure must meet National Defense
            and Homeland Security needs while continuing to function as the
            economic engine that drives the National economy. Many of the
            requirements, or safety procedures dictated by the added
            requirements are new, for example upgraded surveillance
            systems; data collection, transmission, and sharing
            capabilities; reliable high speed communications networks; and
            extensive plans, procedures, and facilities for Homeland
            Security and National Defense. This means developing and
            implementing new and improved air traffic systems that deliver
            operating benefits for users and efficiencies for FAA while
            strengthening security. It also means building an air
            transportation system for the future that allows passengers and
            shippers to go anywhere, any time, and hassle free. All of this
            is a tall order. But for the safety and security of the public,
            and the viability of the National economy, we must not deliver
            less.
      --Regular, robust investment in aviation infrastructure is a National
            imperative.--The threat of terrorism has become an unfortunate
            fact of life in the world today. Continual vigilance and
            preparedness are a necessity. For aviation this means regular
            investment in developing and implementing equipment and
            technologies that can help counter ever changing, and
            increasingly sophisticated dangers. Timely, continuous
            investment in the public air transportation infrastructure is
            no less important for civil aviation. FAA expects air traffic
            demand to grow steadily over the next 10 years, with tower
            operations to increase 28 percent, instrument operations to
            increase 29 percent, and air route traffic control center
            operations to increase 34 percent. We will not meet the
            requirements of this capacity increase sufficiently under the
            administration's current budget approach.

                             MEETING THE CHALLENGE

        The Nation's air transportation system simply cannot fulfill
    National Defense and Homeland Security requirements, and accommodate
    ever increasing civil aviation demand on a diet of continually
    diminishing resources. Even with the improvements and efficiencies
    anticipated from implementation of the new Air Traffic Organization,
    the administration's funding proposal for fiscal year 2005 is
    unrealistic. FAA's mission is growing, demand is growing, and the only
    thing shrinking is the budget to fund new technology and equipment to
    handle this growth. ATCA therefore urges Congress to act upon the
    following:
      --FAA's Facilities and Equipment account must be funded at the
            authorized level.--ATCA urges the Congress to appropriate, at
            minimum, the full, authorized amount of $2.993 billion for FAA
            Facilities and Equipment (F&E) in fiscal year 2005.\1\ FAA must
            equip the aviation system for the War on Terrorism and still
            continue fielding needed air traffic system improvements. And
            just as important, FAA must begin to lay the groundwork for a
            capable future air transportation system. FAA already is behind
            the power curve installing the modernized systems that deliver
            on the promise of its Operational Evolution Plan--systems that
            are the necessary foundation for improved functionality, safety
            and efficiency. Promising projects and technologies such as
            controller pilot data link communications (CPDLC), Next
            Generation Communications System (NEXCOM), and the System Wide
            Information Management system (SWIM) are being deferred.
            Others, like the User Request Evaluation Tool (URET), the FAA
            Telecommunications Infrastructure (FTI), ADS-B programs (Safe
            Flight 21), and Terminal Doppler Weather Radar (TDWR) product
            improvements could be completed and continue delivering cost
            and efficiency benefits to FAA and users sooner if additional
            funding were applied. All of these projects are necessary, and
            will have to be completed eventually. Interrupting these
            efforts over and over again only increases the ultimate cost,
            and postpones benefits. The ATO also must have the resources to
            continue a vigorous NAS System Architecture and systems
            integration activity. Because the new organization is
            structured according to lines of business, an overarching
            planning function is necessary to assure that requirements 5 to
            10 years hence are anticipated and provided for, and that new
            elements being delivered into the system interface correctly
            and work together. Otherwise, equipment must continually be
            redesigned and retrofitted at great expense.
    ---------------------------------------------------------------------------
        \1\ Cutting funding for FAA F&E by 14 percent in fiscal year 2005
    as the administration proposes could have an unintended, fiscally
    disastrous consequence of invoking application of an enforcement
    provision in authorization law that prohibits funding for FAA
    Operations if Airport Grants and F&E appropriations are less than the
    authorized amount. Clearly, the administration's proposal is out of
    step with congressional intent that air transportation system
    modernization and improvement be a National Priority.
    ---------------------------------------------------------------------------
      --Aviation capabilities and resources of related agencies must be
            protected and leveraged.--NASA's Aeronautics research
            capability has become essential to FAA's mission, and must be
            funded adequately. DOD's $69 billion research and development
            activity must be consistently mined for concepts and core
            technologies transferable to the civil sector. Synergy and
            cooperation between Federal and civil research organizations in
            the United States, and those of friendly governments around the
            world should be investigated, enabled, and encouraged. The
            world is a different place today than yesterday. The United
            States should not be seen as ``going it alone.'' The ATC
            organizations around the world have many ideas, programs, and
            procedures that merit consideration and coordination in order
            to ensure everyone's stated goal of global interoperability.
      --The Federal Government must prepare for large funding requirements
            associated with core future technologies.--There is universal
            agreement that some core capabilities are essential to meeting
            future Homeland Security/National Defense requirements, and to
            accommodate air transportation demand we know is coming. The
            first of these key technologies is an aviation system-wide
            information network, through which all stakeholders, including
            the DOD, DHS, and law enforcement, can derive whatever data and
            information needed for the National Defense, security, and
            safe, efficient aircraft operations. The second is a capable,
            reliable data communications system connecting aircraft to the
            air traffic control system. The third is a sophisticated
            toolset enabling collaborative decision making among
            participants in the ATM system. All of these technologies are
            crucial for Defense and Homeland security missions. All will
            enhance aviation safety and security. And all can be used to
            increase operating efficiency, and overall system efficiency
            and capacity. But a clear direction to proceed with development
            and implementation, and a healthy flow of resources must be
            applied now, if these technologies are to be available to meet
            current and future demand.
      --A Federal Government-wide, aviation community-supported air
            transportation system future planning activity must be
            supported and adequately resourced.--Secretary of
            Transportation Mineta is leading an interagency effort
            (including NASA, and the Departments of Defense and Homeland
            Security) to design the Next Generation Air Transportation
            System. This activity will be carried out through a Joint
            Planning and Development Office (JPDO), with the advice of the
            FAA Research and Advisory Committee. Secretary Mineta's
            initiative should be supported, with the expectation that it
            will be well managed, adequately resourced, and that it will
            yield a product that can be the basis of community consensus
            and capable of being implemented. It is recommended that this
            effort be coordinated with other future design activities
            around the world, with the object of assuring global
            compatibility of ATM systems and a seamless future operating
            environment. The future system plan should contain a realistic
            roadmap for transforming current thinking and technology into
            the future air transportation system, with recommendations for
            policies and programs to facilitate the transition to a new
            system and equipment for all aircraft operators. ATCA urges the
            entire aviation community to support the activities of the
            JPDO.
      --The Nation's aviation research and development capability must be
            recreated and empowered.--Congress is urged to authorize and
            appropriate $500 million per year for the foreseeable future to
            establish and resource a bold, aggressive, well-managed Federal
            aviation research and development activity. Critical National
            Defense and Homeland Security needs require that FAA and NASA
            continually be on the forefront in developing and implementing
            cutting-edge surveillance, communications, and information
            technologies. There is simply no question that break-through
            concepts and technologies will be essential if we are to safely
            and efficiently accommodate a tripling of civil air traffic by
            the year 2020. Developments of this nature take 10 to 15 years
            or more to bring to fruition, so major investments in R&D
            capabilities--labs, equipment, people--must be made today.

                                   CONCLUSION

        Global aviation is facing challenges of historic proportions.
    Terrorism is a constant threat. Depressed demand as a result of 9/11
    and economic recession have left governments and aviation enterprises
    financially debilitated, and reluctant or unable to make investments in
    infrastructure and capital equipment. The U.S. aviation system has
    survived and is now growing at a pace last seen pre-9/11, yet
    investment in the future is being cut. An increased investment in FAA
    Airport Improvement Program funding cannot be viewed as a complete
    solution to addressing future capacity when the users and passengers
    are measuring our system on a curb-to-curb basis.
        The success of the Nation's air transportation system depends on
    achieving a collective commitment to secure a reliable, robust funding
    stream for air transportation system modernization, the determination
    and focus to complete projects already underway, and a forward looking
    vision. The aviation system requires total commitment and full funding
    in order to meet tomorrow's demand, and this is a commitment we must
    make today in order to be successful.
        Again, we cannot allow the terrorists to scare us out of the skies
    or to divert our financial resources away from building the safest and
    most efficient air traffic control system to meet growing demand.
    Safety and security are inextricably linked, and overcrowded skies and
    airports cannot be the result of terrorist threats, or they have won
    and most assuredly we have lost.
        We must not so constrain ourselves that in seeking safety we
    harness mobility. The answer is to be found in technology, investment,
    vigilance, and perseverance in the face of uncertainty--the very
    attributes that have carried aviation so far in its first century.
                                     ______

      Prepared Statement of the California Government and Private Sector
                       Coalition for Operation Clean Air

        Mr. Chairman and members of the subcommittee, on behalf of the
    California Government and Private Sector Coalition for Operation Clean
    Air's (OCA) Sustainable Incentive Program, we are pleased to submit
    this statement for the record in support of our fiscal year 2005
    funding request of $31,000,000 for OCA as part of a Federal match for
    the $180 million already contributed by California State and local
    agencies and the private sector for incentive programs. This request
    consists of $31,000,000 from the Department of Transportation (DOT) for
    alternative fuel vehicle funding.
        California's great San Joaquin Valley is in crisis. Home to over
    3.3 million people, its 25,000 square miles now has the unhealthiest
    air in the country. Even Los Angeles, long known as the smog capital of
    the Nation, can boast better air quality by certain standards. While
    peak concentrations of air pollutants are still greater in Los Angeles,
    for the past 4 years, the San Joaquin Valley has exceeded Los Angeles
    in violations of the ozone 8-hour Federal health standard.
        A combination of geography, topography, meteorology, tremendous
    population growth, urban sprawl and a NAFTA corridor of two major
    highways with over 5 million diesel truck miles per day, have collided
    to produce an air basin in which over 300,000 people, nearly 10 percent
    of the population, suffer from chronic breathing disorders. In Fresno
    County, at the heart of the San Joaquin Valley, more than 16 percent of
    all children suffer from asthma, a rate substantially higher than any
    other place in California. The extreme summertime heat creates smog
    even though smog-forming gases are less than half the amount in the Los
    Angeles basin. There is no prevailing wind to flush the natural
    geologic bathtub and, as a result, pollutants and particulates
    stagnate, accumulate and create unhealthy air.
        Degradation of human health is not the only consequence of poor
    quality air. In December 2003, the San Joaquin Valley Air Pollution
    Control District Board decided to become the first Air District in the
    Nation to voluntarily declare itself an ``extreme'' non-attainment
    area. This designation, if approved by USEPA, will defer until 2010 the
    date for attainment of Federal standards of air quality, but comes at a
    cost of imposing permitting on thousands of more businesses and even
    further discouraging business expansion or relocation. More Valley's
    businesses will be required to obtain permits and comply with
    increasingly burdensome regulations imposed by Federal and State law
    and the Air Pollution Control District, resulting in added cost in
    compliance, reporting and record keeping. At the same time, the area is
    burdened by chronic unemployment rates of nearly 20 percent.
    Encouraging business expansion in or relocation to the San Joaquin
    Valley to combat unemployment will be extremely difficult in the face
    of such regulatory burdens.
        The San Joaquin Valley is home to the most productive agricultural
    land in the world. Over 350 crops are produced commercially on 28,000
    farms encompassing more than 5 million irrigated acres. While the
    agricultural industry has made great strides at considerable expense to
    replace old diesel engines and manage fugitive dust and other
    emissions, farming does contribute to the problem. However, it is a $14
    billion industry that forms the backbone of the Valley's economy, and
    its vitality is crucial.
        Industry alone is not the source of the Valley's poor air quality.
    Population growth rates exceeding those in the rest of the State and
    most of the Nation, in an area without effective mass transit, where
    cheap land has led to a landscape of suburbia and sprawl, results in
    excessive over-reliance on the automobile. Trucking has increased
    dramatically with the increase in population, and Federal free trade
    policies. Other factors such as fireplace burning in the winter, open
    field agricultural burning because of lack of sufficient alternatives,
    and wild fires resulting from lack of controlled burning in the nearby
    foothills and mountains all contribute to the problem.
        Despite the challenges listed above, much progress has been made.
    The State has spent nearly $80 million on improvement and compliance
    programs. Local government and private industry have spent over $100
    million on technology and compliance. As specific examples, over one
    half of the diesel operated irrigation pumps used by agriculture have
    been replaced with cleaner engines. The City of Tulare has converted
    its entire fleet of vehicles to natural gas as have several other
    private fleet operators. A $45 million Federally financed comprehensive
    study of ozone and particulate matter is nearing completion. As a
    result, the number of 1-hour EPA health standard exceedences has been
    reduced by 40 percent since 1989.
        But much more needs to be done. The District estimates that daily
    emissions must be reduced by 300 tons to achieve attainment. There is
    no single or short-term quick fix. The entire Valley (an area the size
    of the State of Connecticut) is part of the problem and the entire
    Valley will need to be part of the solution.
        The Department of Transportation is an important partner in
    achieving air quality improvement. The Federal Clean Air Act requires
    that transportation plans be consistent with State Implementation
    Plans. Mobile sources are the single largest contributor to the San
    Joaquin Valley's air pollution problem. Depending upon the season,
    mobile sources contribute up to 60 percent of the emission inventory in
    the Valley. Heavy-duty vehicles make up half of these emissions.
        California and the San Joaquin Valley bear the emissions burden
    associated with the significant volume of goods that flow into and out
    of the country through vehicular traffic. It is estimated that 6
    million truck-miles a day are traveled in the Valley. The emissions
    associated with these activities are projected to grow significantly
    with port expansions and upcoming changes associated with the
    implementation of the North American Free Trade Agreement (NAFTA) that
    will allow, for the first time, foreign trucks with less rigorous
    emission controls to travel through the San Joaquin Valley.
        Finally, heavy-duty mobile source emissions reductions are some of
    the most cost-effective emission reduction programs currently
    available. The cost-effectiveness of emission reductions achieved
    through clean heavy-duty projects that are requested through the
    Department of Transportation is approximately $13,650/ton of emission
    reduced. In many cases this is one-half of the cost associated with
    similar emission reductions achieved through the regulation of
    industrial sources of pollution. If our request is fully funded, it
    will provide up to 11,000 tones of emissions reductions over the 12
    year life of the projects.
        Operation Clean Air is a coalition of business, government, health
    care, and environmental groups throughout the eight county San Joaquin
    Valley Air Pollution Control District. Its goal is to clean the
    Valley's air and increase its economic prosperity. The coalition seeks
    to catalogue efforts that have produced positive effects and identify
    those strategies that could produce even greater effects if supported
    by sufficient resources. At the heart of its efforts will be an array
    of sustainable, voluntary practices and activities that can and will be
    undertaken by all of the residents of the San Joaquin Valley, both
    public and private, to improve air quality.
        This unique public-private partnership has invested considerable
    resources in this project to date, and will continue to do so, but
    Federal funding is both imperative and justified to help address what
    is essentially an unfunded Federal mandate.
        For fiscal year 2004, our Coalition is seeking funding of
    $31,000,000 from the Department of Transportation (DOT) for alternative
    fuel vehicles throughout the San Joaquin Valley Air Basin. We are also
    seeking funding for alternative fuels infrastructure through other
    avenues, which will allow accelerated introduction of alternatively
    fueled vehicles in municipal fleets, public school fleets, and private
    fleets. The widespread use of lower-emitting motor vehicles will
    provide significant improvement to air quality in the San Joaquin
    Valley while furthering the goals of the Department of Transportation
    to reduce emissions from public fleets. Development of alternative fuel
    infrastructure will augment the low-emission vehicle program by
    providing much needed compressed natural gas (CNG) and liquefied
    natural gas (CNG) fueling facilities.
        Thank you very much your consideration of our requests.
                                     ______

     Prepared Statement of the California Industry and Government Central
                    California Ozone Study (CCOS) Coalition

        Mr. Chairman and members of the subcommittee, on behalf of the
    California Industry and Government Central California Ozone Study
    (CCOS) Coalition, we are pleased to submit this statement for the
    record in support of our fiscal year 2005 funding request of $500,000
    from the Department of Transportation (DOT) for CCOS as part of a
    Federal match for the $9.4 million already contributed by California
    State and local agencies and the private sector. We greatly appreciate
    your past support for this study ($250,000 in fiscal year 2004) as it
    is necessary in order for the State of California to address the very
    significant challenges it faces as it seeks to comply with air
    pollution requirements of the Federal Clean Air Act.
        Most of central California does not attain Federal health-based
    standards for ozone and particulate matter. The San Joaquin Valley has
    recently requested redesignation to extreme and is committed to
    updating their 1-hour ozone State Implementation Plan (SIP) in 2004,
    based on new technical data. In addition, the San Joaquin Valley,
    Sacramento Valley, and San Francisco Bay Area exceed the new Federal 8-
    hour ozone standard. SIPs for the 8-hour standard will be due in the
    2007 timeframe--and must include an evaluation of the impact of
    transported air pollution on downwind areas such as the Mountain
    Counties. Photochemical air quality modeling will be necessary to
    prepare SIPs that are approvable by the U.S. Environmental Protection
    Agency.
        The Central California Ozone Study (CCOS) is designed to enable
    central California to meet Clean Air Act requirements for ozone SIPs as
    well as advance fundamental science for use nationwide. The CCOS field
    measurement program was conducted during the summer of 2000 in
    conjunction with the California Regional PM10/
    PM2.5 Air Quality Study (CRPAQS), a major study of the
    origin, nature, and extent of excessive levels of fine particles in
    central California. This enabled leveraging of the efforts of the
    particulate matter study in that some equipment and personnel served
    dual functions to reduce the net cost. From a technical standpoint,
    carrying out both studies concurrently was a unique opportunity to
    address the integration of particulate matter and ozone control
    efforts. CCOS was also cost-effective since it builds on other
    successful efforts including the 1990 San Joaquin Valley Ozone Study.
        CCOS includes an ozone field study, data analysis, modeling
    performance evaluations, and a retrospective look at previous SIP
    modeling. The CCOS study area extends over central and most of northern
    California. The goal of the CCOS is to better understand the nature of
    the ozone problem across the region, providing a strong scientific
    foundation for preparing the next round of State and Federal attainment
    plans. The study includes five main components:
      --Designing the field study;
      --Conducting an intensive field monitoring study from June 1 to
            September 30, 2000;
      --Developing an emission inventory to support modeling;
      --Developing and evaluating a photochemical model for the region; and
      --Evaluating emission control strategies for upcoming ozone
            attainment plans.
        The CCOS is directed by Policy and Technical Committees consisting
    of representatives from Federal, State, and local governments, as well
    as private industry. These committees, which managed the San Joaquin
    Valley Ozone Study and are currently managing the California Regional
    PM10/PM2.5 Air Quality Study, are landmark
    examples of collaborative environmental management. The proven methods
    and established teamwork provide a solid foundation for CCOS. The
    sponsors of CCOS, representing State, local government, and industry,
    have contributed approximately $9.4 million for the field study. The
    Federal Government has contributed $4,874,000 to support some data
    analysis and modeling. In addition, CCOS sponsors are providing $2
    million of in-kind support. The Policy Committee is seeking Federal co-
    funding of an additional $2.5 million to complete the remaining data
    analysis and modeling. California is an ideal natural laboratory for
    studies that address these issues, given the scale and diversity of the
    various ground surfaces in the region (crops, woodlands, forests, urban
    and suburban areas).
        There is a national need to address national data gaps and
    California should not bear the entire cost of addressing these gaps.
    National data gaps include issues relating to the integration of
    particulate matter and ozone control strategies. In addition, new
    national ambient air quality standards will require air quality
    assessments for time periods of greater duration, and the impact of
    weekend travel activities on air quality will play a part in the
    ability to simulate air quality for longer durations. That is why,
    concurrent with the CCOS air quality field study, a $600,000 traffic
    activity study was conducted for the purpose of gathering detailed,
    hourly travel activity patterns during the field study. It is also why
    the CCOS allocated an additional $250,000 to develop a link-based
    digital map of roadways throughout the domain (using state-of-science
    Geographic Information System, or GIS, software) that included the
    activity patterns from the traffic study on specific roadway segments.
    However, due to the scarcity of weekend data in the transportation
    community and travel demand models, these projects were not able to
    address the spatial change in travel patterns during a weekend. In
    addition to the weekend activity issue, developing mobile source
    emissions inputs for longer-term air quality modeling studies will
    require more efficient mobile source emissions processing, including
    better use of GIS software and technology.
        For fiscal year 2005, our Coalition is seeking funding of $500,000
    from DOT through highway research funds. The CCOS would use the
    $500,000 requested for fiscal year 2005, in conjunction with other
    funding, to study and integrate travel activity patterns into modeling
    inputs. The CCOS would also use a fiscal year 2005 earmark to develop
    more efficient mobile source emissions processing tools and improve the
    consistency and linkages between travel demand models used in the
    transportation community and emissions factor models used for
    conformity purposes in the air quality community. DOT is a key
    stakeholder because Federal law requires that transportation plans be
    in conformity with SIPs. The motor vehicle emission budgets established
    in SIPs must be met and be consistent with the emissions in
    transportation plans. Billions of dollars in Federal transportation
    funds are at risk if conformity is not demonstrated for new
    transportation plans. As a result, transportation and air agencies must
    be collaborative partners on SIPs and transportation plans. These plans
    are linked because motor vehicle emissions are a dominant element of
    SIPs in California as well as nationwide. Determining the emission and
    air quality impacts of motor vehicles is a major part of the CCOS
    effort.
        Thank you very much for your consideration of our request.
                                     ______

                       Prepared Statement of Easter Seals
        Chairman Shelby, Ranking Member Murray and members of the
    subcommittee, Easter Seals appreciates this opportunity to share the
    successes and needs of Easter Seals Project ACTION.

                            PROJECT ACTION OVERVIEW

        The Transportation appropriations process initiated Project ACTION
    in 1988 by providing funding to the Federal Transit Administration to
    undertake this effort with Easter Seals. We are indeed grateful for
    that initiative and the ongoing strong support of this subcommittee in
    subsequent years.
        Following its initial round of appropriations, Congress authorized
    assistance to Project ACTION in 1990 with the passage of ISTEA and
    reauthorized the project in 1997 as part of TEA21. The strong interest
    and support of all members of Congress has been greatly appreciated by
    Easter Seals as it has pursued project ACTION's goals and objectives.
        Since the project's inception, Easter Seals has administered the
    project through a cooperative agreement with the Federal Transit
    Administration. Through steadfast appropriations support, Easter Seals
    Project ACTION has become the Nation's leading resource on accessible
    public transportation for people with disabilities. The current project
    authorization level is $3 million, and Easter Seals is pleased to
    request the appropriation of that sum for fiscal 2005.
        The strength of Easter Seals Project ACTION is its continued
    effectiveness in meeting the congressional mandate to work with both
    the transit and disability communities to create solutions that improve
    access to transportation for people with disabilities of all ages and
    to assist transit providers in complying with transportation provisions
    in the Americans with Disabilities Act (ADA).
        The activities of the project are guided by input from a 19 member
    national steering committee that includes representatives from
    transportation and disability organizations. Easter Seals Project
    ACTION has worked effectively with the Department of Transportation
    under four Presidents, and numerous Department of Transportation (DOT)
    Secretaries and Federal Transit Administration (FTA) Administrators.
    Today, Project ACTION is working closely with Secretary Mineta and FTA
    Administrator Dorn and their teams. Secretary Mineta, who worked on the
    original authorization of Project ACTION, has worked closely with us
    since taking over DOT.
        Easter Seals Project ACTION was also heavily featured in the
    President's New Freedom Initiative Progress Report released in 2004.
    This demonstrates how closely the administration is working with
    Project ACTION to reach our shared goal of a safe, accessible,
    reliable, efficient and affordable transportation for and by citizens
    with disabilities at the local, State, regional and national levels
    throughout the United States.

                    SUPPORT FOR EASTER SEALS PROJECT ACTION

        Easter Seals Project ACTION's successes are diverse and the value
    of the Project to both the transit and disability communities can be
    well documented. For instance, Barry Barker, Executive Director of the
    Transit Authority of River City (Louisville, KY) states that, ``Easter
    Seals Project ACTION's support has enhanced our ability to maximize the
    quality of service we provide to all of our customers. The project
    helps us provide our customers with the mobility necessary to fully
    participate in the community.''
        Maureen McCloskey, National Advocacy Director of the Paralyzed
    Veterans of America states that, ``The forum that Easter Seals Project
    ACTION has provided has created a dynamic dialogue between the
    disability and transit communities that has resulted in increased
    access to transportation for people with disabilities.''

           EASTER SEALS PROJECT ACTION WORKING AT THE COMMUNITY LEVEL

        Among the programs pursued by the project in the recent period have
    been efforts aimed at increasing community capacity to meet the
    transportation needs of people with disabilities. For instance, in
    2001, Easter Seals Project ACTION initiated the first Mobility Planning
    Services (MPS) Institute. The latest Institute took place in November
    of 2003 and approximately 25 communities took part in the 2-day event.
    This was the second group of communities to go through the MPS
    training. The first group of 20 communities remains active and working
    with Project ACTION to continue their work at the community level. To
    participate in the Institute, each community had to identify a
    leadership team to attend the training. The leadership team had to
    consist of representatives from transit providers, disability service
    providers and disability advocacy organizations. This team approach
    will assure that all stakeholders are involved in implementing MPS. The
    greatest success so far of the MPS concept has been that it provides
    the disability community and the transportation industry an opportunity
    to develop tools for working together where in the past there had often
    been a lack of communication and in some cases even animosity. By
    implementing MPS, communities do a better job of meeting the
    transportation needs of people with disabilities and therefore better
    meet the transportation needs of all residents. Communities that
    participate in MPS receive ongoing in-depth technical assistance from
    Project ACTION staff ranging from access to Project ACTION materials to
    on-site training and facilitation by Project ACTION staff.

             EASTER SEALS PROJECT ACTION WORKING AT THE STATE LEVEL

        Project ACTION is partnering with the FTA on several initiatives
    designed to increase the capacity of States to support accessible
    transportation for people with disabilities.
        The first initiative is a series of regional dialogues being held
    throughout the country. These dialogues built on the success of 2002's
    successful National Dialogue on Accessible Transportation. The goal of
    these events was to bring people with disabilities and transit
    providers together at the regional level to foster communication that
    will hopefully lead to jointly developed solutions to unique barriers
    to accessible transportation identified together in each region.
        Project ACTION is also working with FTA to support the success of
    the multi Federal Department ``United We Ride'' initiative. Project
    ACTION helped facilitate a national meeting in March of Governor
    appointed representatives from State Departments of Labor,
    Transportation, Education and Health and Human Services. Forty-six
    States and territories participated in this forum that was one of five
    elements of an FTA effort to bring together Federal and State agencies
    to help identify, plan and alleviate barriers to human service
    transportation coordination. Project ACTION is assisted in the
    dissemination of the FTA developed Framework for Action planning
    process guide to help States and communities build and operate
    coordinated transportation systems and has already begun to provide
    technical assistance on its use throughout the country.

           EASTER SEALS PROJECT ACTION WORKING AT THE NATIONAL LEVEL

        Easter Seals Project ACTION actively works with both the disability
    and transit communities to determine existing needs for products and
    training. Easter Seals Project ACTION also convenes special topic
    meetings to address concerns and identify strategies on issues
    identified by various stakeholders. This year's special topic meetings
    will focus on the development of a ``One System for All'', concept that
    emerged from the Project's National Dialogue conducted last Summer. The
    meeting will involve a small group of disability and transit advocates
    to further develop the concept and also begin to address the design and
    provision of technical assistance and other resources necessary to
    advance the availability of seamless community transportation systems
    for people with and without disabilities. Another special topic meeting
    will bring together travel trainers to develop a curriculum for the
    further training of these specialists that enhance the participation of
    people with disabilities using fixed route transportation. Convening
    special topic meetings enable Easter Seals Project ACTION the
    flexibility to address emerging issues as they arise.
        Some of the materials that Easter Seals Project ACTION has
    developed during the past year include:
      --A collection of ``success stories'' that share, in the own words of
            people with disabilities, stories about their successful use of
            transportation and the positive difference it made in their
            lives;
      --New resources and guidance on good practices for conducting
            physical functional assessments for determining paratransit
            eligibility;
      --A collection of innovative practices in operating paratransit;
      --A redesigned resource called ``You Can Ride,'' a reference guide on
            how to use public transportation for people who can't read;
            and,
      --All resource materials available from Easter Seals Project ACTION
            activities are available free of charge through the Project
            ACTION catalog.
        As mentioned, Project ACTION staff also are involved in
    continuously providing technical assistance to transit providers,
    nonprofit human service organizations, people with disabilities, and
    the general public. The forms of technical assistance provided are
    provided based on the determination of what would be the most helpful
    in the situation being addressed. Assistance from Project ACTION ranges
    from the delivery of basic information in the form of brochures from
    our national clearinghouse to telephone, e-mail, participation in the
    training program and on single or ongoing on-site work.

                CONTINUING NEED FOR EASTER SEALS PROJECT ACTION

        Access to transportation is a vital issue for people with
    disabilities. For many people with disabilities, a lack of accessible,
    affordable pubic transportation is the primary barrier to employment,
    education and participation in community life. In his New Freedom
    Initiative, President Bush recognized the importance of accessible
    transportation for people with disabilities, and has proposed an
    increase in Federal support for promoting innovative and alternative
    transportation solutions for people with disabilities. As these
    proposals are implemented, it will become increasingly important that
    the resources and skills, relationships and knowledge that Easter Seals
    Project ACTION has fostered remain strong. Should the appropriations
    process support this New Freedom Initiative, Project ACTION is
    committed to working with DOT on implementation.
        There is a growing need for outreach by Project ACTION to specific
    populations. While Project ACTION has historically worked with rural
    communities to help address their transportation issues, the lack of
    access for rural residents with disabilities is still unacceptable.
    Easter Seals national headquarters and Project ACTION are working
    together to coordinate efforts to better serve rural residents with
    disabilities in a variety of service areas including transportation.
    Further, as the population ages, there is also a need to provide
    develop and provide additional specific resources and assistance to
    transit providers and older passengers. Since most people will
    experience some level of disability as they age and require accessible
    transportation, Project ACTION's resources will again be invaluable as
    transit providers struggle to meet the needs of this new wave of
    riders.

                              FISCAL 2005 REQUEST

        In order to continue the outstanding work of Easter Seals Project
    ACTION, Easter Seals national headquarters respectfully requests that
    $3 million be allocated in fiscal 2005 to the Department of
    Transportation for project activities.
        Mr. Chairman, thank you for the opportunity to present this
    testimony to the subcommittee. Your efforts have improved the
    accessibility of transportation for persons with disabilities and the
    ability of the transportation community to provide good service to all
    Americans. Easter Seals Project ACTION looks forward to continuing to
    work with you toward the pursuit of these objectives.
                                     ______

      Prepared Statement of the American Public Transportation Association

        Mr. Chairman and members of the subcommittee, on behalf of the
    American Public Transportation Association (APTA), thank you for the
    opportunity to provide written testimony on the need for investment in
    Federal Transit Administration (FTA) programs under the Transportation,
    Treasury and General Government Appropriations bill for fiscal year
    2005.

                                   ABOUT APTA

        APTA's 1,500 public and private member organizations serve the
    public by providing safe, efficient, and economical public
    transportation service, and by working to ensure that those services
    and products support national economic, energy, environmental, and
    community goals.
        APTA member organizations include public transit systems and
    commuter railroads; design, construction and finance firms; product and
    service providers; academic institutions; and State associations and
    departments of transportation. More than 90 percent of the people who
    use public transportation in the United States and Canada are served by
    APTA member systems.

                                    OVERVIEW

        Mr. Chairman, the fiscal year 2005 Transportation, Treasury and
    General Government appropriations bill provides an opportunity to
    advance key national goals through increased Federal investment in the
    Nation's surface transportation infrastructure, including public
    transportation. A study conducted by Wirthlin Worldwide in February
    2004, found that most Americans (80 percent) see quality of life
    benefits from increased investment in public transportation, and 76
    percent of those surveyed support public funding for the expansion and
    improvement of public transportation. Clearly, Americans support
    Federal policies that create good, high-paying jobs, especially U.S.
    jobs that cannot be exported. Investment in our national public
    transportation and highway systems creates jobs--47,500 per $1 billion
    of Federal investment. This investment does more than create jobs, it
    helps improve the economy by reducing congestion, promoting energy
    conservation, and providing transportation options to workers and tens
    of millions of other Americans.
        As a Nation, we need to maintain and improve the transportation
    system that has served this country so well. Congress has made a
    substantial investment in public transit systems around the country,
    and those systems serve tens of millions of customers each day; but
    much needs to be done to maintain and increase the return on that
    investment. With ridership at record levels, the American Association
    of State Highway and Transportation Officials (AASHTO) estimates that
    an annual capital investment of more than $44 billion is needed to
    adequately maintain, improve and expand public transportation across
    America.
        Demand for surface transportation options--including modern, safe,
    and efficient public transportation service--is at an all-time high.
    New transit service is being added in areas around the country,
    including Houston, Minneapolis, Phoenix, and Charlotte. More and more
    communities are voting for new and expanded transit service every year.
    Demand for transit options is a product of growing frustration with
    increased congestion that negatively affects our quality of life by
    wasting time and money, and a desire for mobility options. The Wirthlin
    Worldwide poll also demonstrates that voters support public
    transportation regardless of whether they live in urban, suburban,
    small urban or rural communities, and that they are more likely to vote
    for Congressional candidates who support such investment.
        Similarly, as the population ages, older Americans will need more
    and better transit service. As driving becomes less of an option for
    many older Americans, they as well as persons with disabilities are
    seeking good public transportation options so that they can continue to
    fully participate in society. Yet many older Americans and people with
    disabilities live in areas where public transportation services are
    limited or non-existent, despite the fact that access to good transit
    service can mean the difference between living independently and moving
    into assisted living. Nearly two-thirds of residents in urban, small
    urban and rural communities have few if any transportation options--41
    percent have no access to transit, another 25 percent live in areas
    with below-average transit services. Clearly, our Nation's small-town
    and rural areas have real and growing transportation needs.

                      FISCAL YEAR 2005 TRANSIT INVESTMENT

        APTA believes it is crucial to provide significant investment in
    the Nation's transit and highway infrastructure in the fiscal year 2005
    appropriations process. That investment advances key national goals by
    producing jobs, providing more mobility options to all Americans,
    improving the environment and reducing dependence on foreign oil, and
    by providing a solid return on the investment.
        APTA's recommendations for reauthorization of the Transportation
    Equity Act for the 21st Century (TEA21) propose to grow the transit
    Federal transit program to $14 billion by fiscal year 2009. The Senate
    has passed a TEA21 reauthorization bill that would authorize $8.65
    billion for transit in fiscal year 2005, and we urge the subcommittee
    to invest no less than that amount for the Federal transit program in
    fiscal year 2005.
        Mr. Chairman, in that regard we thank you for your outstanding
    leadership as chairman of the Senate Banking Committee in crafting the
    transit portion of that legislation, which addresses critical public
    transportation investment needs.

      PUBLIC TRANSPORTATION INVESTMENT CREATES JOBS AND GROWS THE ECONOMY

        Americans are growing increasingly concerned about jobs. An
    Associated Press poll taken March 19-21 showed that 35 percent of
    Americans view economic conditions as the most important factor on
    which they will vote. A Washington Post poll taken April 15-18 shows
    that the economy and jobs are the most important issues that 26 percent
    of voters want to hear about in the upcoming election, more than any
    other topic. Polls by Newsweek and Harris this year have produced
    similar results for the last several months. Jobs are the No. 1 concern
    of Americans.
        Policy makers know that increased investment in our Nation's
    transit and highway transportation infrastructure will help the economy
    and will produce jobs. The Department of Transportation has
    demonstrated that for every $1 billion in Federal highway and transit
    investment, 47,500 jobs are created or sustained. This view is shared
    by Senate Environment and Public Works Committee Chairman James Inhofe
    (R-OK), who stated upon passage of SAFETEA that the bill ``will create
    nearly 2.8 million job opportunities for the American people.'' He went
    on to call TEA21 reauthorization the ``biggest job creation bill of
    this Congress.''
        The jobs that investment in public transportation can create are
    high-paying, stable, and cannot be exported. The jobs created are not
    just those needed to operate new and expanded transit service, which
    are significant; but also in the private manufacturing sector, which
    supports and supplies the public transportation industry. For instance,
    transit buses are built in, among other places, Anniston, Alabama;
    Wichita, Kansas; Brownsville, Texas; Lamar, Colorado; St. Cloud,
    Minnesota; Hayward, California; Imlay City, Michigan; Pembina, North
    Dakota; and Oriskany, New York. Engines for those buses may be built in
    Detroit or Columbus, Indiana. Spending on transit also benefits
    hundreds of other private sector companies around the United States
    that build rail cars, fareboxes, vehicle parts and equipment or provide
    software, engineering, and construction services for the transit
    industry. According to a Cambridge Systematics Inc. study, for every
    $10 spent on transit capital projects, $30 in business sales is
    generated. Every $10 invested in transit operations results in $32 in
    private business sales.
        Mr. Chairman, public transportation serves another important
    economic purpose: alleviating highway congestion. According to the
    Texas Transportation Institute's ``2003 Urban Mobility Report'',
    congestion costs $69.5 billion annually--more than 3.6 billion hours of
    delay and 5.7 billion gallons of excess fuel consumed. The report says
    without public transportation, there would be 1 billion more hours (30
    percent) more delay. The average driver is losing more than 1\1/2\
    weeks of work (62 hours) each year sitting in gridlock. The average
    cost of congestion per peak road traveler is $1,160 a year. All of that
    congestion holds up more than 64 percent of the Nation's freight that
    moves by truck on highways, which represents annual value to the
    economy of more than $5 trillion. As the Free Congress Foundation's
    Paul Weyrich and Bill Lind demonstrate in their study, ``How Transit
    Benefits People Who Do Not Ride It'', public transportation, by
    alleviating congestion, brings real benefits not just to those who use
    it, but also to those who do not use it.
        But public transportation does not just improve the economy by
    taking cars off the road--it provides transportation options to low-
    income workers who cannot afford to drive to work. According to the
    Surface Transportation Policy Project, the proportion of household
    expenditures devoted to transportation has grown from 14 percent in
    1960 to almost 20 percent today. A recently published Bureau of
    Transportation Statistics Issue Brief found that Americans who commute
    by car or truck spent about $1,280 per year in 1999, while those who
    were able to use public transportation to get to and from work spent
    just $765 per year. Clearly public transportation provides real and
    needed savings for the many entry-level workers coming into the
    workforce who are so critical for the Nation's economy.

                       PUBLIC TRANSPORTATION IS IN DEMAND

        Last November voters in several communities, including Denver,
    Houston, Grand Rapids and Kansas City, approved by large margins new
    local taxes to provide new and expanded public transportation services.
    These were just a few of efforts across the country to increase funding
    for transportation infrastructure, and follows successful actions in
    other cities over the past 5 years to expand transit service, including
    Phoenix, Charlotte, Dallas and Minneapolis.
        That these referenda have been approved should come as no surprise.
    Polls have consistently shown that the American public not only
    supports increased public transportation services but also supports
    providing the resources to pay for it. As mentioned earlier, the recent
    Wirthlin Worldwide study showed that 80 percent of Americans surveyed
    see quality of life benefits from increased investment in public
    transportation; 76 percent support public funding for the expansion and
    improvement of public transportation; two-thirds support pro-public
    transportation Congressional candidates; and a majority (52 percent to
    41 percent) of Americans believe transportation investment is
    preferable to tax cuts to stimulate the economy. These findings hold
    true across areas of all sizes--urban, suburban, small town and rural.
    A poll taken in spring 2003 by APTA and the American Automobile
    Association (AAA) showed that 95 percent of those surveyed said traffic
    congestion, including commutes to and from work, had grown worse over
    the last 3 years, with 92 percent believing it was either very
    important (71 percent) or somewhat important (21 percent) for their
    community to have both good roads and viable alternatives to driving.
        The Wirthlin Worldwide poll demonstrates that support for public
    transportation has increased dramatically not only in our biggest
    cities, but in smaller urban communities and rural areas as well, where
    40 percent of America's rural residents have no access to public
    transportation, and another 28 percent have substandard access. It is
    estimated that rural America has 30 million non-drivers, including
    senior citizens, the disabled and low-income families, all of whom need
    transportation options. According to a survey of APTA members, bus
    trips in areas with populations less than 100,000 increased from 323
    million to 426 million in a recent 5-year span.
        While demand for new and expanded service is increasing, the
    resources required to simply maintain the present level of service are
    immense. A 2002 AASHTO report estimates that $44 billion is needed
    annually to meet current transit capital needs for new projects and
    improvements to existing systems as well to expand the availability of
    transit service to more Americans.

                PUBLIC TRANSPORTATION PROVIDES MOBILITY OPTIONS

        Public transportation provides mobility options to persons who
    choose not to, or cannot, drive because of age or a disability. For
    many in this population, public transportation may be the only option
    to living a fully independent and productive life. For many Americans,
    public transportation can be the difference between staying in their
    own homes or moving into an assisted living community.
        According to the AARP's Beyond 50.03: A Report to the Nation on
    Independent Living and Disability, released in August 2003, as people
    move from their 70's into their 80's, the percentage of licensed
    drivers falls to 50 percent from just over 90 percent. With the baby-
    boom generation approaching retirement age, this means the population
    of elderly Americans who do not have a driver's license will soon grow
    significantly.
        Persons with disabilities face similar mobility problems. Many
    cannot drive or afford vehicles that are fitted to their needs. Public
    transportation can provide them the options they need to stay active
    and independent. However, according to AARP's report, 32 percent of
    people with disabilities over 65 report that inadequate transportation
    is a problem. The report states further that while public
    transportation is more economically efficient in areas with high
    population density, many older Americans with disabilities live
    ``outside of central cities in communities where public transportation
    is found least often.'' This is becoming a growing problem, and it is
    clear that we need to begin to address the important transportation
    needs in these areas.

                   PUBLIC TRANSPORTATION PROVIDES GOOD VALUE

        Unlike other modal transportation projects funded through the
    Department of Transportation, major capital transit projects funded by
    the FTA are subject to a rigorous Federal review process. A
    comprehensive alternatives analysis process is undergone, with various
    transportation alternatives weighed and considered. The overall review
    process typically involves 5 or more years of planning, environmental
    studies and technical analysis. The projects must be included both in
    State and local transportation programs and plans. To qualify for
    project approval and a full funding grant agreement, project sponsors
    must demonstrate not only financial capacity to construct the project
    but also to maintain and operate the service once put in place. Much of
    the process turns on ridership and project cost estimates. In that
    regard, we are pleased to note that ridership and project cost and
    benefit estimates for recent new start and bus rapid transit projects
    have been very accurate, and we will continue to work with the FTA and
    our members to make sure that forecasting is as accurate as possible.
    The result of this rigorous process is that the completed transit
    projects provide real value and an excellent return on the dollar,
    often in areas not typically recognized: increased value and income for
    property owners; expanded markets, rising productivity and increased
    revenues for business and commercial owners/occupants; and enhanced tax
    revenues for local governments--from rising land values, expanded
    development and an upsurge in business transactions. While we support
    this rigorous review process and the excellent projects that result
    from it, we remain concerned that it does not apply to other
    transportation projects under the jurisdiction of the Department of
    Transportation. We think it would be good public policy to have all
    major Federally funded transportation projects subject to similar
    Federal review processes.

                          PRESIDENT'S BUDGET PROPOSAL

        The President's fiscal year 2005 budget proposal proposes to freeze
    funding for Federal transit programs at the fiscal year 2004 level of
    $7.266 billion. In its proposal for a 6-year authorization bill, which
    was submitted to Congress 9 months earlier, the administration had
    proposed to fund Federal transit programs at $7.369 billion in fiscal
    year 2005, $103 million more than the amount for transit in the fiscal
    year 2005 budget proposal.
        Mr. Chairman, now is not the time to shortchange investment in
    public transportation! While the administration continues to advocate
    for policies that will support a healthy economy and produce more jobs,
    its budget proposal for transit does not adequately address the need to
    improve our Nation's transit systems, and create jobs in the process.
    We again emphasize the 47,500 jobs created by every $1 billion invested
    in the public transportation infrastructure or the $30 million in
    private business sales that are generated for every $10 million
    invested in transit.
        Mr. Chairman, we strongly believe that growth of the Federal
    investment in public transportation can help advance many of the
    Nation's key goals, and that freezing Federal funding for transit
    simply defers the growing backlog of unmet transit capital needs. We
    urge the subcommittee to fund the Federal transit program in fiscal
    year 2005 at no less than $8.65 billion, the amount provided in SAFETEA
    (S. 1072), the Senate-passed TEA21 reauthorization bill.

                                   CONCLUSION

        Public transportation should and can play a key role in meeting the
    goals of the administration and Congress in providing jobs and economic
    development, energy independence, and mobility options for millions of
    American. Mr. Chairman, we look forward to working with the
    subcommittee as it takes up the fiscal year 2005 appropriations bills,
    and urge you to invest in surface transportation programs at the
    highest levels possible.
                                     ______

     Prepared Statement of the National Association of Railroad Passengers

        Thank you for the opportunity to submit this statement. We support
    the Amtrak request for $1.798 billion. We also support efforts to make
    the Federal Government a true funding partner with States to permit
    development of high speed rail corridors, for which many States already
    have well-advanced plans. Finally, we strongly favor Federal support
    for the CREATE/Chicago Project to modernize Chicago's railroad
    infrastructure, and we support continuing efforts to bring to fruition
    a North Station/South Station Rail Link in Boston.

                  $900 MILLION IS A SHUTDOWN BUDGET FOR AMTRAK

        Secretary of Transportation Norman Y. Mineta has made clear his
    agreement that $900 million would be a shutdown budget. At his
    interest-group budget briefing on February 2, I asked him about a
    seeming disconnect between the administration's budget recommendation
    and Amtrak President & CEO David L. Gunn's statement last fall that
    $900 million is a shutdown budget that ``won't work.'' Mineta
    responded, ``Gunn is right on the numbers'' but we are sending a
    message about the importance of our reforms. The following table
    illustrates the problem with $900 million:

                            [In millions of dollars]
    ------------------------------------------------------------------------
                                                                      Amount
    ------------------------------------------------------------------------
    Operating......................................................      570
    Debt Service...................................................      262
    Environmental..................................................       22
                                                                    --------
          Total....................................................      854
    ------------------------------------------------------------------------
    NOTE.--Amtrak has taken on no new commercial debt since David Gunn's
      May, 2002, arrival, and has no plans to. The cost of debt service
      peaks in Fiscal 2005 and declines thereafter. Most of the
      environmental portion of Amtrak's capital budget involves work that
      Amtrak is legally obligated to undertake, so could not be set aside in
      favor of fleet or infrastructure work that otherwise would be
      considered more vital to the system's continued, viable operation.

        Gunn in February said Amtrak has ``a strategy of moving resources
    from emergency repairs to programmed maintenance.'' This obviously
    makes for more reliable service, while maximizing revenues (fewer en-
    route problems means satisfied customers) and reducing maintenance
    costs. However, much of the programmed maintenance is considered
    capital, so a maintenance budget at or close to zero forces either an
    immediate shutdown or an immediate downward spiral in service quality.
        But this means the system would collapse on zero capital, and 2,000
    employees would be let go. That's essentially what the administration's
    $900 million would require.

                            PASSENGER RAIL SECURITY

        We agree that rail security has been underfunded and join with
    those noting the huge gap between Federal spending on aviation security
    and on railroad security--$11 billion versus $115 million, according to
    one representative at today's House subcommittee hearing. We understand
    that the Bush Administration's Transportation Security Administration
    request for fiscal year 2005 is $5.3 billion, of which all but $147
    million is for air security.
        The most obvious needs in rail security relate to infrastructure--
    especially bridges, tunnels, stations and yards--and training for
    front-line personnel.
        Infrastructure.--Issues in the Northeast Corridor are well-known.
    At major stations nationwide, items for consideration include: an
    increased police presence with K-9 units, video surveillance at key
    points of entry and exit, vapor detectors, coordinated plans for first
    responders in case of an event.
        Attention must also be paid, as Amtrak notes, to ``non-public
    locations, such as loading docks, adjacent yards and buildings.''
        Consider this recent news item regarding a major commuter railroad:

        ``Train yards in New Haven and Bridgeport have major security
    problems 2 months after Federal Homeland Security chief Tom Ridge asked
    rail operators to be on a heightened state of alert following the Spain
    train bombings that killed 191 people, WTNH-TV reported Thursday. A
    reporter and cameraman walked into the New Haven rail facility at 3
    a.m. on a recent day and found no security or police guarding the
    Metro-North trains that carry nearly 40,000 Connecticut commuters into
    New York each weekday.
        ``No one stopped the news team, which was able to walk around the
    rail yard for about two hours, the station reported. The reporter, Alan
    Cohn, climbed aboard one of the engines . . . The television station
    found a similar lack of security at the Bridgeport rail yard . . . It's
    the job of Metro-North and Metropolitan Transit Authority police to
    patrol [these] rail yards. Metro-North President Peter Cannito promised
    that changes would be made.''

        This report raises the obvious question: how secure are other rail
    yards?
        There is also a Federal interest in the security level of the
    Nation's vast, privately-owned railroad system which is important both
    to Amtrak's national network and to freight transportation. For
    example, loss of major Mississippi River bridges, especially south of
    Memphis where the number of crossings is small, could wreak havoc with
    freight commerce.
        Personnel.--Our understanding is that Israel, the U.K., and Germany
    are nations where training front line staff has actually deterred
    bombers and saved lives. This has been a sensitive issue in the United
    States. Their approach needs to be studied to see what aspects of this
    work could usefully be transferred. This does not mean ``pre-boarding''
    interviews; that is not feasible for reasons discussed below. But
    Amtrak's on-board employees in many cases have several hours or more of
    intermittent contact with passengers and thus the possibility--with the
    right training--of identifying potential wrongdoers.
        What is not realistic.--Many Americans begin their thinking about
    rail passenger security by citing baggage (and shoe!) X-ray procedures
    they experience at airports but obviously not at train stations. Amtrak
    (and most commuter railroads) have two extremes: places like New York's
    Pennsylvania Station where passenger volumes and proximity to commuter
    trains would make anything approaching airline-style security both
    impractical and largely ineffective. Conversely, many small stations
    have such small passenger volumes as to make any security equipment
    seem wasteful. As Mesa Airlines CEO Jonathan Ornstein recently noted
    (in a March 9 Washington Post report about holes in security at small
    airports), ``When there are more TSA people than passengers, you have
    to ask yourself, does that make sense?''
        We note with approval that TSA seems to agree. For example, TSA
    Undersecretary Asa Hutchinson said that the device that sniffs for
    explosives and is in a month-long test at New Carrollton, Maryland, is
    not permanent but simply to gain knowledge for TSA ``so that in the
    event there is a specific threat or a specific need, we have the
    knowledge, the capability to put inspections in place in a particular
    threat environment.''

                        THE PUBLIC WANTS THE RAIL CHOICE

        Amtrak's ridership reports starting around May show strong
    increases--a further sign both that Gunn is succeeding in stabilizing
    the railroad, and that people want the service. For the first 5 months
    of fiscal year 2005 (October-February), ridership increases on the
    long-distance trains ranged from 6 percent to 34 percent, with only two
    routes below 10 percent. Short-distance route changes ranged from -3
    percent to +22 percent, with 7 of 16 routes showing double-digit
    percentage increases. (Actually, the New York-Pittsburgh route was up
    104 percent but this is not exactly an apples-to-apples comparison.)
    Two routes showed slight declines.
        In March, systemwide ridership was up 3.2 percent and revenues were
    up 5.8 percent versus 1 year ago.

                              THE NATIONAL NETWORK

        We reiterate our strong belief that funding Amtrak's national
    network is a Federal responsibility, and that implementation of any
    ``reform'' which requires a multiplicity of States to provide operating
    grants is tantamount to shutting down the system. The suggestion--heard
    more than once from Secretary Mineta--that a train could run ``closed
    door'' through non-paying States is not workable because, almost
    without exception, revenues lost from skipping any State would far
    exceed the negligible cost savings. The Empire Builder in crossing the
    thin northern tip of Idaho might conceivably skip Sandpoint, Idaho,
    with minimal damage but it's hard to think of any other benign example.
        Similarly, we do not believe a ``route closing commission'' could
    shed any significant new light. The system is already so skeletal that
    deletion of any surviving route would mean wholesale elimination of
    service to major cities and States. Indeed, as we have testified
    previously, we favor an expansion of the network.
        Amtrak's Sunset Limited is often cited by Amtrak's critics as
    wasteful because it would be cheaper to fly passengers from Orlando to
    Los Angeles. However, relatively few passengers travel that entire
    distance. Other city-pairs the route serves do not have direct flights,
    or affordable flights, or in some cases any flights. In addition, some
    passengers are physically unable to fly. And elimination of the Sunset
    Ltd. would create a domino effect as the loss of connecting passengers
    and ability to share facility costs with the Sunset would unravel the
    economics of the Texas Eagle, City of New Orleans, and Crescent.
        The large subsidy-per-passenger figures sometimes cited for given
    Amtrak long-distance routes include ``fully allocated'' costs. These
    are misleading because they often are interpreted to mean that
    discontinuance of a given route would reduce Amtrak's operating grant
    requirement by the product of the number of passengers times the fully
    allocated loss per passenger. Using the Silver Star fiscal year 2002
    figures at page 471 of the House subcommittee's April 10, 2003, hearing
    record, the math would be $189 times 252,240.
        The product does not represent an avoidable cost, since many
    allocated costs will not disappear but simply get re-allocated to
    surviving routes. Obvious example: a share of the Amtrak president's
    salary. Also, a high proportion of long-distance-train passengers make
    connections with other trains, so discontinuing one train negatively
    impacts revenues on other trains.
        This helps explain why ``FRA-defined train contribution'' figures
    were developed, by Federal Railroad Administration working with Amtrak
    when they were implementing the agreements under which DOT approves
    funds before Amtrak gets them. In the case of the Silver Star, the FRA
    defined contribution is actually positive: $12 per passenger or 2 cents
    per passenger-mile. (Measures stated in terms of passenger-mile are
    normally used in intercity travel statistics because they take into
    account the dramatic variations in trip lengths.)
        Thank you for considering our views. Please let us know if we can
    provide further information that would be helpful to the committee's
    work.

                 Prepared Statement of Signature Flight Support

                 THE EFFECTS OF CLOSING DCA TO GENERAL AVIATION

        Ronald Reagan Washington National Airport was closed to general
    aviation (``GA'') on September 11, 2001 and has not reopened since. It
    is the only airport in the country that has been shut down to general
    aviation. Following the September 11 attacks, the FAA also closed the
    three small general aviation airports within 15 miles of Washington:
    Potomac Airfield, Washington Executive Airport and College Park Airport
    (``DC-3 airports''). Although the DC-3 airports have been allowed to
    re-open, they are subject to unique tight restrictions and cannot land
    any incoming traffic. No other airports in the country are subject to
    comparable restrictions.
        General aviation businesses that were operating at Reagan National
    and the smaller DC-3 airports have suffered substantial losses as a
    result of these closures and restrictions, which is entirely the result
    of government edicts. The use of their property has been ``taken'' by
    the Federal Government. They should be compensated for these losses.
        Prior to 9/11, as the sole provider of ground support services for
    general aviation at Reagan National, Signature Flight Support handled
    an average of 175 flights per day, and employed 55 aviation service
    professionals. Two employees now handle approximately 20 flights per
    month. During the last 6 months, virtually all of these flights have
    been government officials. The flights primarily are aircraft belonging
    to the Bureau of Immigration and Customs Enforcement, the Drug
    Enforcement Agency, the FBI, NASA, and miscellaneous dignitaries.
        Although Signature's rent has been abated by the Metropolitan
    Washington Airports Authority, Signature has suffered substantial
    losses to revenues and workforce. In the 2\1/2\ years since closure,
    Signature Flight Support alone has lost after tax profits, offset by
    modest gains at our Washington Dulles and Baltimore facilities, in
    excess of $10 million.

                     COMPENSATION IS NEEDED AND APPROPRIATE

        The Fifth Amendment to the Constitution provides that no ``private
    property shall be taken for public use without just compensation.'' The
    closure to general aviation and its effect on Signature is legally
    known as a regulatory taking. The general aviation shutdown has left
    Signature with a facility and a business that cannot possibly be used
    for any other purpose. Given this situation, the Federal Government
    should compensate Signature and other similarly affected business for
    the losses that have resulted. Compensation should be paid for the lost
    profits and actual losses incurred since the closure of Reagan National
    to general aviation.
        Congress immediately recognized the need for compensation in the
    wake of 9/11, when it passed the 2001 Emergency Supplemental, which
    included $40 million to the Metropolitan Washington Airports Authority
    to compensate its concessionaires for the temporary closure and reduced
    commercial flight schedule at Reagan National immediately after 9/11.
    However, this fund compensated businesses only for the period
    immediately following 9/11; no funds were made available to businesses
    that continued to suffer substantial losses at Washington area
    airports. These losses were uniquely suffered at these airports. This
    failure can and should be addressed this year. Funding for these losses
    has now been fully authorized.
        Last year, Congress recognized the importance of compensating
    businesses for the significant losses suffered post 9/11 as a result of
    the closure of general aviation. The FAA reauthorization bill, The
    Vision 100--Century of Aviation Reauthorization, provides for the
    reimbursement of losses incurred by general aviation entities. The bill
    was enacted last December.
        The compensation provision specifically states, ``the Secretary of
    Transportation may make grants to reimburse . . . general aviation
    entities for the security costs incurred and revenue foregone as a
    result of the restrictions imposed by the Federal Government following
    the terrorist attacks on the United States that occurred on September
    11, 2001.\1\ Item 1 is ``general aviation entities that operate at
    Ronald Reagan Washington National Airport.'' \2\ The statute authorizes
    that $100,000,000 to be appropriated for reimbursements to carry out
    the section. This year, Congress should follow through by making this
    authorization a reality, particularly for the highest priority
    category, which is the only category where general aviation has been
    totally banned since 9/11.
    ---------------------------------------------------------------------------
        \1\ Public Law No. 108-176 (H. Res. 2115) (December 12, 2003).
        \2\ Public Law No. 108-176 (H. Res. 2115) (December 12, 2003).
    ---------------------------------------------------------------------------
        A provision should be included in the Fiscal 2005 Transportation
    Appropriations legislation that compensates those businesses that have
    suffered losses as a result of the termination of general aviation
    activity at Reagan National Airport. This provision should provide for
    a minimum of $10 million, the approximate amount lost by Signature
    Flight Support since the closure of Reagan National on 9/11.

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page
    Air Traffic Control Association, Inc., Prepared Statement of the.   555
    American:
        Passenger Rail Coalition, Prepared Statement of the..........   548
        Public Transportation Association, Prepared Statement of the.   564

    Bennett, Senator Robert F., U.S. Senator from Utah:
        Questions Submitted by.....................................106, 377
        Statements of................................................7, 282
    Berne, Bernard H., M.D., Ph.D., Prepared Statement of............   545
    Blakey, Marion C., Administrator, Federal Aviation
      Administration, Department of Transportation...................   397
        Prepared Statement of........................................   406
        Statement of.................................................   402
    Bloch, Scott J., Special Counsel, U.S. Office of Special Counsel,
      Prepared Statement of..........................................   524
    Bonasso, Samuel G., Deputy Administrator, Research and Special
      Programs Administration, Department of Transportation, Prepared
      Statement of...................................................   511
    Brownback, Senator Sam, U.S. Senator from Kansas, Questions
      Submitted by...................................................   461
    Byrd, Senator Robert C., U.S. Senator from West Virginia,
      Questions Submitted by.......................................151, 393

    California:
        Government and Private Sector Coalition for Operation Clean
          Air, Prepared Statement of the.............................   559
        Industry and Government Central California Ozone Study (CCOS)
          Coalition, Prepared Statement of the.......................   560
    Coalition of Northeastern Governors (CONEG), Prepared Statement
      of the.........................................................   550

    Dorgan, Senator Byron L., U.S. Senator from North Dakota:
        Questions Submitted by.....................................111, 394
        Statements of..............................................283, 401
    Durbin, Senator Richard J., U.S. Senator from Illinois:
        Prepared Statement of........................................   402
        Questions Submitted by................................110, 269, 469

    Easter Seals, Prepared Statement of..............................   562
    Everson, Mark O., Commissioner, Internal Revenue Service,
      Department of the Treasury.....................................   155
        Prepared Statement of........................................   163
        Statement of.................................................   161

    Federal Aviation Administration, Questions Submitted to the......   456
    Fox, William J., Director, Financial Crimes Enforcement Network,
      Department of the Treasury, Prepared Statement of..............   513

    Gardiner, Pamela J., Acting Treasury Inspector General for Tax
      Administration, Department of the Treasury.....................   155
        Prepared Statement of........................................   174
        Statement of.................................................   172
    Glynn, Marilyn, Acting Director, Office of Government Ethics,
      Prepared Statement of..........................................   539

    Internal Revenue Service:
        Oversight Board, Prepared Statement of the...................   203
        Questions Submitted to the...................................   210
    International Loran Association, Prepared Statement of the.......   543

    Jacquez, Albert S., Administrator, Saint Lawrence Seaway
      Development Corporation, Prepared Statement of.................   477
    James, Kay Coles, Director, Office of Personnel Management,
      Prepared Statement of..........................................   495

    Kohl, Senator Herb, U.S. Senator from Wisconsin, Questions
      Submitted by...................................................   467
    Kowalewski, Richard, Deputy Director, Bureau of Transportation
      Statistics, Department of Transportation, Prepared Statement of   509

    Libertucci, Arthur J., Administrator, Alcohol and Tobacco Tax and
      Trade Bureau, Department of the Treasury, Prepared Statement of   520

    McFarland, Patrick E., Inspector General, Office of Personnel
      Management, Prepared Statement of..............................   498
    McPhie, Neil Anthony Gordon, Acting Chairman, Merit Systems
      Protection Board, Prepared Statement of........................   483
    Mead, Ken, Inspector General, Office of the Inspector General,
      Department of Transportation:
        Prepared Statement of........................................   415
        Statement of.................................................   411
    Mineta, Hon. Norman Y., Secretary, Office of the Secretary,
      Department of Transportation...................................     1
        Prepared Statement of........................................     9
        Statement of.................................................     7
    Moravec, F. Joseph, Commissioner, Public Buildings Service,
      General Services Administration, Prepared Statement of.........   500
    Murray, Senator Patty, U.S. Senator from Washington:
        Prepared Statements of..................................5, 120, 159
        Questions Submitted by......................148, 249, 271, 377, 463
        Statements of......................................3, 119, 279, 399

    National:
        Association of Railroad Passengers, Prepared Statement of the   568
        Treasury Employees Union, Prepared Statement of the..........   552
    Nober, Roger, Chairman, Surface Transportation Board, Prepared
      Statement of...................................................   534

    Office of the Inspector General, Department of Transportation,
      Questions Submitted to the.....................................   470

    Perry, Stephen A., Administrator, General Services
      Administration, Prepared Statement of..........................   501
    Potter, John, Postmaster General and CEO, United States Postal
      Service........................................................   115
        Prepared Statement of........................................   123
        Statement of.................................................   121

    Reid, Senator Harry, U.S. Senator from Nevada:
        Prepared Statement of........................................   159
        Statement of.................................................   158
    Roffee, Lawrence W., Executive Director, U.S. Access Board,
      Prepared Statement of..........................................   487

    Sandberg, Annette M., Administrator, Federal Motor Carrier Safety
      Administration, Department of Transportation, Prepared
      Statement of...................................................   505
    Shelby, Senator Richard C., U.S. Senator from Alabama:
        Opening Statements of...................................1, 115, 277
        Prepared Statement of........................................   118
        Questions Submitted by.............32, 142, 210, 270, 311, 456, 470
    Signature Flight Support, Prepared Statement of..................   571
    Snow, Hon. John, Secretary, Office of the Secretary, Department
      of the Treasury................................................   277
        Prepared Statement of........................................   285
        Statement of.................................................   283
    Stevens, Senator Ted, U.S. Senator from Alaska:
        Prepared Statement of........................................   133
        Statements of...............................................29, 133

    Treasury Inspector General for Tax Administration, Questions
      Submitted to the...............................................   270

    Walters, John P., Director, Office of National Drug Control
      Policy, Prepared Statement of..................................   530
    Weintraub, Ellen L., Vice Chair, Federal Election Commission,
      Prepared Statement of..........................................   527

                                 SUBJECT INDEX

                                  ----------

                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

                                                                       Page
    Accuracy of Tax Return Preparation...............................   180
    Actuarial Software Program.......................................   247
    Additional Committee Questions...................................   210
    Addressing:
        Fraud at All Income Levels...................................   187
        Non-compliance...............................................   162
    Background.......................................................   252
    Bank Secrecy Act Enforcement.....................................   238
    Board Cites Complexity as Fundamental Flaw.......................   207
    Business Systems Modernization (BSM)......................157, 166, 195
        At the IRS...................................................   171
        Cost Overruns................................................   198
        Management.................................................199, 247
    Commitment to Enforcement Funding................................   192
    Competitive Sourcing.............................................   261
    Corporate Tax Shelters...........................................   181
    Customer:
        Account Data Engine (CADE)...................................   200
            Cost Overrun (From the Original Estimate)................   201
        Service...............................................178, 264, 274
    Days of ``Outmanned and Outgunned'' IRS Must End.................   204
    Delinquent Tax Inventory.........................................   193
    Earned Income Tax Credit.........................................   185
        Certification Pilot..........................................   186
    Effective Enforcement............................................   169
    Electronic Filing................................................   253
    Enforcement Priorities...........................................   182
    Failure To Collect Delinquent Taxes............................249, 273
    Fuel Tax Evasion...............................................188, 229
    Future Staffing Requirements.....................................   246
    Health Insurance Tax Credit Administration.......................   166
    Improving:
        Accuracy of Return Preparation...............................   180
        Service......................................................   167
    Information Systems..............................................   166
    IRS:
        Actions in Regard to the PRIME...............................   202
        Enforcement:
            Activities...............................................   162
            Funding..................................................   156
            Priorities...............................................   183
        Must Stay the Course on Customer Service.....................   204
        Reorganization...............................................   256
        Service and Staffing Levels..................................   190
        Staffing.....................................................   183
    Modernization..................................................270, 271
        Critical to Tax Administration...............................   206
    Performance of the Contractor....................................   203
    Phase:
        I of Consolidation Strategy..................................   253
        II of Consolidation Strategy.................................   254
    President's Fiscal Year 2005 Budget Seeks Increase in Enforcement   163
    Problems with IRS Business Systems Modernization (BSM)...........   259
    Processing:
        Assistance, and Management...................................   164
        Paper Returns................................................   253
    Program Performance..............................................   167
    Questions Submitted to the:
        Internal Revenue Service.....................................   210
        Treasury Inspector General for Tax Administration............   270
    Report...........................................................   252
    Resources:
        For Tax Administration.......................................   192
        Necessary to Complete Modernization..........................   197
    Return on Enforcement Investment.................................   191
    Systems Modernization............................................   175
    Tax:
        Assistance Program--Illinois.................................   269
        Cheating: Alarming Trends....................................   205
        Evasion/IRS Collection.......................................   269
        Gap..........................................................   187
        Law:
            Accuracy.................................................   194
            Enforcement..............................................   164
                Budget Priorities and Resource Allocation............   246
                Funding..............................................   190
    Taxpayer Impact..................................................   254
    The:
        Administration's Fiscal Year 2005 Budget Request.............   206
        IRS Oversight Board Budget Recommendation....................   203
    2004 Filing Season...............................................   171
    Workforce:
        And Facility Realignment.....................................   245
        Impact.......................................................   254
        Realignment................................................189, 193

                            Office of the Secretary

    Access to Overseas Markets.......................................   296
    Additional Committee Questions...................................   310
    Administration of EITC...........................................   306
    Alcohol and Tobacco Tax and Trade Bureau.........................   375
    Are There More Riggs Banks Out There?............................   386
    Competitive Sourcing.............................................   378
    Coordination with Homeland Security............................293, 303
    Departmental Offices.............................................   311
    Designation:
        Information..................................................   309
        Of Charities.................................................   308
    DSCIP............................................................   320
    Earned Income Tax Credit (EITC)..................................   304
    Economy and Jobs.................................................   290
    Ensuring Professionalism, Excellence, Integrity and
      Accountability in Management of Treasury.......................   288
    Fighting the War on Terror and Safeguarding our Financial Systems   287
    FinCEN...........................................................   339
    Foundation for Success--The President's Management Agenda........   289
    Has Progress in Saudi Arabia Triggered Progress in Other Arab
      Nations?.......................................................   382
    IRS:
        Enforcement Increase.........................................   390
        Information Technology Investment............................   298
        Staffing Reductions..........................................   387
    Is Treasury Requesting Enough Foot Soldiers in the War on
      Terrorist Financing?...........................................   384
    Licensing Information Resources..................................   301
    Maintaining Public Trust and Confidence in our Economic and
      Financial Systems..............................................   286
    Mint/BEP Merger Proposal.........................................   353
    Newly-Created Jobs Will Not Go To Those Who Are Being Laid-Off/
      Job Training...................................................   377
    Office of:
        Foreign Assets Control (OFAC)..............................299, 391
            Resources................................................   301
        Terrorism and Financial Intelligence.........................   321
    Outsourcing......................................................   293
        And Job Displacement.........................................   295
    Private Collection Agencies......................................   306
    Progress on Stemming the Use of Charities to Funnel Cash to
      Terrorist Organizations........................................   380
    Promoting Prosperous and Stable U.S. and World Economies.........   286
    Proposed Merger of the U.S. Mint and the Bureau of Engraving and
      Printing.......................................................   392
    Protection of Taxpayer Rights....................................   307
    Public Policy on Tax Code........................................   303
    Resource Information.............................................   301
    Return on Investment.............................................   298
    Tax Code Definitions.............................................   305
    Terrorist:
        Financing..................................................291, 327
        Use of Charity Organizations.................................   308
    The President's Six-Point Economic Growth Plan...................   289
    Treasury Budget Increase.........................................   297
    Treasury's Terrorist Financing Initiative Needs Deadlines and
      Milestones.....................................................   386
    What Accomplishments Are Hoped For in Next G-8 Summit?...........   387
    Will:
        The Budget Boost Actually Improve Financial Crimes Network
          Enforcement's (FinCEN's) Performance?......................   385
        Treasury Ban Non-Cooperating Nations From the Banking Sector?   384

                          DEPARTMENT OF TRANSPORTATION

                        Federal Aviation Administration

    Additional Committee Questions...................................   456
    Advanced Technologies and Oceanic Procedures...................456, 463
    Air Traffic:
        MOU's........................................................   404
        Organization.................................................   404
    Aircraft Maintenance.............................................   401
    Balancing Investments............................................   458
    Baseline Review of WAAS and STARS................................   464
    Capacity.......................................................405, 408
    Center Weather Service Units (CWSU)..............................   461
    Chicago:
        Midway and O'Hare Airports...................................   470
        O'Hare International Airport.................................   469
    Chief Financial Officer (CFO)....................................   404
    Contract Towers..................................................   458
    Controller Retirements...........................................   458
    Controllers-in-charge............................................   458
    Cost:
        Accounting...................................................   404
        Control......................................................   410
    FAA:
        Acquisition Policy...........................................   456
        Policy on Airspace Violations................................   468
    Flight:
        Delays.......................................................   399
        Plan.........................................................   403
    General Aviation.................................................   462
    Glass Beads......................................................   460
    Global Positioning System........................................   457
    Harmonization of U.S. and European Modernization Plans...........   459
    International Leadership and Global Harmonization................   409
    Joint Planning and Development Office............................   466
    LORAN............................................................   467
    Organizational Excellence........................................   409
    Pay Performance..................................................   398
    Pay-for-performance..............................................   404
    Problems with Modernization......................................   398
    Reliable Cost Information........................................   461
    Repair Stations..................................................   405
    Revenue Diversion................................................   463
    Rulemaking Authority.............................................   467
    Safety.........................................................405, 406
    Security at the Auburn Tracon....................................   467
    Standard Terminal Automation Replacement System..................   457
    Termination of Long-term Procurement Projects....................   466
    The:
        FAA's Flight Plan, 2004-2008.................................   406
        New SeaTac Tower.............................................   465

                        Office of the Inspector General

    Abating a Trend of Operating Cost Growth.........................   421
    Accountability...................................................   449
    Acquisition Program..............................................   414
    Additional Committee Questions...................................   456
    Airport:
        Funding Issues...............................................   430
        Revenue Diversion............................................   473
    Airports.......................................................415, 420
    Aviation Safety Issues...........................................   420
    Being Positioned for a Rebound in Air Traffic....................   432
    Bringing Fiscal Discipline and Accountability to FAA
      Modernization Efforts..........................................   425
    Capital Account..................................................   414
    Career Staffing Problem..........................................   444
    Controller Retirements....................................413, 441, 442
    Cost Accounting..................................................   414
    Explanation for Increase in Operational Errors...................   474
    F&E..............................................................   438
    FAA's Operations Account.........................................   435
    Fixed Price......................................................   438
    Flight Delays....................................................   450
    Global Communication, Navigation, and Surveillance Systems.......   455
    Is:
        The FAA's Oceanic Program in Trouble?........................   473
        There Adequate Security at the Auburn TRACON?................   474
    Labor Distribution...............................................   448
    Laser Runway Lighting............................................   443
    Maintenance Workforce............................................   440
    Major Acquisitions...............................................   418
    Modernizing NAS..................................................   437
    MOU's..........................................................413, 436
    Network of Systems...............................................   439
    Oceanic Air Traffic Contractor Cost..............................   447
    OJT Training.....................................................   414
    Operating Costs..................................................   417
    Passenger Enplanements...........................................   412
    Personnel Costs..................................................   436
    Review of Business Case Analysis.................................   446
    Safety...............................................412, 416, 435, 451
        And Capacity.................................................   439
    SeaTac...........................................................   454
    Training of New Controllers......................................   444

                            Office of the Secretary

    Accessibility for All America Program............................    72
    Additional Committee Questions...................................    32
    Air Traffic Control:
        Maintenance Staffing Levels..................................    27
        Training.....................................................   112
    Airline Stabilization Act........................................   105
    Amtrak.................................................23, 25, 110, 112
    At the:
        Contractor's Facility........................................    22
        Fleet Anchorage..............................................    21
    Attorneys in DOT.................................................    70
    Authorization of DOT Programs and Fees...........................   104
    Aviation:
        Data Systems.................................................    68
        Delays.......................................................   110
    Board of Contract Appeals........................................53, 73
    Charges to the Modes by OST......................................    48
    CIO Charges to the Modes.........................................    90
    Commercial Driver's License Program..............................    23
    Common Access Architecture.......................................    77
    Competitive Sourcing.............................................    92
    Contracting Out:
        FAA Functions................................................    19
        Federal Jobs.................................................    26
    Critical IT Systems..............................................    89
    Decision of the Federal Arbitrator...............................    27
    Delphi...........................................................88, 91
    Details to the Office of the Secretary...........................    47
    Disadvantaged Business Enterprise................................    90
    DOT:
        Investment Review Board......................................    81
        Rent.........................................................   103
    During Tow Preparations & Tow Evolutions.........................    22
    E-Government.....................................................    85
    Electronic:
        Business Practices...........................................    93
        Grants.......................................................    92
        Rulemaking...................................................    93
    Employee Training and Development................................    69
    Enterprise Architecture..........................................    79
    Environmental Reviews for Alaskan Highway Projects...............    29
    Essential Air Service............................................    67
        Cost-sharing.................................................   111
        Funding......................................................   111
    Federal:
        Personnel Payroll System.....................................    74
        Transit Administration:
            Administrative Expenses..................................12, 32
            Reorganization...........................................    32
    Full Funding Grant:
        Agreement Commitment Authority...............................    38
        Agreements...................................................    20
    Funding:
        For:
            Air Traffic:
                Control Modernization................................    16
                Controllers..........................................    12
            FAA Capital Programs.....................................    22
            Railroads and Amtrak.....................................     8
            Surface Transportation...................................     8
            The Federal Aviation Administration......................     9
        Levels for OST Offices.......................................    47
    Highway:
        Funding......................................................    19
        Safety.......................................................    18
    Human Resources Information System...............................    94
    Immediate Office of the:
        Deputy Secretary.............................................    50
        Secretary....................................................    49
    Impaired Driving.................................................    14
    Intelligent Transportation Systems Advisory Committee............    39
    IT:
        Capital Planning.............................................    82
        Consolidation................................................    84
        Modernization................................................    86
        Procurement..................................................    87
        Security.....................................................76, 83
    Leveraged Lease Transactions.....................................   111
    Maritime Guaranteed Loans (Title XI).............................    40
    Minority Business Outreach.......................................    99
    Motor:
        Carrier:
            Compliance Reviews.......................................    38
            Safety:
                Audits...............................................    38
                Compliance Reviews...................................    24
        Fuel Tax Evasion.............................................13, 33
    NATCA: Pay for Performance.......................................    32
    Need for Full Complement of Technicians..........................    27
    New DOT Headquarters Building....................................   101
    Office of:
        Civil Rights.................................................    95
        Intelligence and Security....................................54, 73
        Public Affairs...............................................    61
        Small and Disadvantaged Business Utilization.................    53
        The:
            Assistant:
                General Counsel for Aviation Enforcement and
                  Proceedings........................................    69
                Secretary for:
                    Administration...................................60, 95
                    Aviation and International Affairs...............    74
                    Budget and Programs..............................    59
                    Governmental Affairs.............................    57
            Chief Information Officer................................56, 75
            Executive Secretariat....................................    51
            General Counsel..........................................    58
            Under Secretary for Transportation Policy................    52
    OST:
        Safety Performance Goals.....................................    63
        Staffing.....................................................    45
        Travel Costs.................................................    47
    Overflight Fees..................................................    65
    Oversight of:
        Highway Construction Projects................................    15
        Mega-projects................................................    37
    Presidential and Political Appointees............................    40
    Programmatic Priorities..........................................    22
    Proposals to:
        Consolidate OST Budget Activities............................    48
        Reorganize:
            Modal Offices............................................    48
            OST Offices..............................................    48
    SAFETEA Funding Levels...........................................    17
    Safety Belt Laws.................................................    15
    Section 508 Compliance...........................................    83
    Ship Disposal....................................................21, 39
    Short Sea Shipping...............................................    31
    State Support for Passenger Rail Service.........................    13
    TCI Response Center..............................................    88
    Third Runway at SeaTac International Airport.....................    28
    Transportation:
        Of Diagnostic and Infectious Medical Specimens...............   106
        Planning, Research and Development...........................    63
    Workforce Recruitment............................................    91
    Working Capital Fund.............................................   103

                          UNITED STATES POSTAL SERVICE

    Additional Committee Questions...................................   142
    Appropriations Request...........................................   129
    Biohazard Detection Systems......................................   130
    Civil Service Retirement System................................135, 138
    Competition: E-Commerce..........................................   134
    Consolidation of Rural Post Offices and Closure of Small Post
      Office.........................................................   148
    Consumer Access..................................................   138
    Cost Reductions................................................128, 143
    Delivery Growth..................................................   140
    Detecting Biohazards in the Mail.................................   142
    E-commerce Initiatives...........................................   144
    Emergency Preparedness...........................................   125
        Expenses.....................................................   147
    Facility Issues..................................................   136
    Financial Transparency...........................................   139
    Performance Goals................................................   127
    Post Office Consolidation........................................   131
    Postal:
        Facility Construction........................................   148
        Reform/Regulatory Board Issues...............................   149
    Postmaster Vacancies.............................................   151
    Public-Private Partnership.......................................   146
    Retail Stores Revenue............................................   146
    Revenue:
        Forecast.....................................................   145
        Foregone.....................................................   135
            Reimbursement............................................   150
    Sponsorships.....................................................   140
    Universal Service................................................   141
    Vertical Improved Mail...........................................   131