[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)


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                                                        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.
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    \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.
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                                 ______
                                 
  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

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