    [Senate Hearing 109-330]
    [From the U.S. Government Publishing Office]

                                                     S. Hrg. 109-330, Pt. 7

                                                            Senate Hearings

                                     Before the Committee on Appropriations

    _______________________________________________________________________

    Departments of:
            --Transportation
            --Treasury
            --the Judiciary
            --Housing and Urban Development
            --and Related Agencies Appropriations

                                                                Fiscal Year
                                                                       2007

                                             109th CONGRESS, SECOND SESSION
                                                                  H.R. 5576

    PART 7
            AMTRAK
            DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
            DEPARTMENT OF THE TREASURY
            DEPARTMENT OF TRANSPORTATION
            NONDEPARTMENTAL WITNESSES

      Departments of Transportation, Treasury, the Judiciary, Housing and
      Urban Development, and Related Agencies Appropriations, 2007 (H.R.
                                 5576)--Part 7

    27-572 PDF

    2007

                                                     S. Hrg. 109-330, Pt. 7

      DEPARTMENTS OF TRANSPORTATION, TREASURY, THE JUDICIARY, HOUSING AND
    URBAN DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR
                                      2007

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

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                           ONE HUNDRED NINTH CONGRESS

                                 SECOND SESSION

                                       on

                                   H.R. 5576

      AN ACT MAKING APPROPRIATIONS FOR THE DEPARTMENTS OF TRANSPORTATION,
    TREASURY, AND HOUSING AND URBAN DEVELOPMENT, THE JUDICIARY, DISTRICT OF
    COLUMBIA, AND INDEPENDENT AGENCIES FOR THE FISCAL YEAR ENDING SEPTEMBER
                        30, 2007, AND FOR OTHER PURPOSES

                                   __________

                                     PART 7

                                     Amtrak
                  Department of Housing and Urban Development
                           Department of the Treasury
                          Department of Transportation
                           Nondepartmental Witnesses

                                   __________

             Printed for the use of the Committee on Appropriations

     Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                                   index.html

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                          COMMITTEE ON APPROPRIATIONS

                      THAD COCHRAN, Mississippi, Chairman
    TED STEVENS, Alaska                  ROBERT C. BYRD, West Virginia
    ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
    PETE V. DOMENICI, New Mexico         PATRICK J. LEAHY, Vermont
    CHRISTOPHER S. BOND, Missouri        TOM HARKIN, Iowa
    MITCH McCONNELL, Kentucky            BARBARA A. MIKULSKI, Maryland
    CONRAD BURNS, Montana                HARRY REID, Nevada
    RICHARD C. SHELBY, Alabama           HERB KOHL, Wisconsin
    JUDD GREGG, New Hampshire            PATTY MURRAY, Washington
    ROBERT F. BENNETT, Utah              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
    WAYNE ALLARD, Colorado
                        J. Keith Kennedy, Staff Director
                  Terrence E. Sauvain, Minority Staff Director
                                     ------

     Subcommittee on Transportation, Treasury, the Judiciary, Housing and
                    Urban Development, and Related Agencies

                    CHRISTOPHER S. BOND, Missouri, Chairman
    RICHARD C. SHELBY, Alabama           PATTY MURRAY, Washington
    ARLEN SPECTER, Pennsylvania          ROBERT C. BYRD, West Virginia
    ROBERT F. BENNETT, Utah              BARBARA A. MIKULSKI, Maryland
    KAY BAILEY HUTCHISON, Texas          HARRY REID, Nevada
    MIKE DeWINE, Ohio                    HERB KOHL, Wisconsin
    SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
    TED STEVENS, Alaska                  BYRON L. DORGAN, North Dakota
    PETE V. DOMENICI, New Mexico         PATRICK J. LEAHY, Vermont
    CONRAD BURNS, Montana                TOM HARKIN, Iowa
    THAD COCHRAN, Mississippi (ex
        officio)

                               Professional Staff

                                  Jon Kamarck
                                    Cheh Kim
                                  Josh Manley
                                Matthew McCardle
                                  Rachel Jones
                                  Ellen Stein
                            Peter Rogoff (Minority)
                       Diana Gourlay Hamilton (Minority)
                           William Simpson (Minority)
                         Meaghan L. McCarthy (Minority)
                           Rachel Milberg (Minority)

                        Administrative Support

                               Person's name deg.

                                C O N T E N T S

                                  ----------

                            Thursday, March 2, 2006

                                                                       Page
    Department of Housing and Urban Development: Office of the
      Secretary......................................................     1

                            Thursday, March 16, 2006

    Department of Transportation: Office of the Secretary............    51
    Amtrak...........................................................    84
    Department of Transportation:
        Federal Railroad Administration..............................    88
        Office of Inspector General..................................    91

                            Thursday, April 6, 2006

    Department of the Treasury:
        Office of the Secretary......................................   105
        Office of Terrorism and Financial Intelligence...............   123

                            Thursday, April 27, 2006

    Department of the Treasury: Internal Revenue Service.............   203

                             Thursday, May 4, 2006

    Department of Transportation: Federal Aviation Administration....   329

    Material Submitted by Agencies Not Appearing for Formal Hearings:
        The Judicial Conference of the United States.................   371
        Administrative Office of the U.S. Courts.....................   383
        United States Sentencing Commission..........................   390
        Federal Judicial Center......................................   394
        United States Court of Appeals for the Federal Circuit.......   396
        United States Court of International Trade...................   396
        U.S. Office of Government Ethics.............................   398
        United States Postal Service.................................   400
        United States Tax Court......................................   403
        U.S. Consumer Product Safety Commission......................   406
        Federal Deposit Insurance Corporation........................   408
        Office of Management and Budget..............................   416
        Surface Transportation Board.................................   418
        Federal Election Commission..................................   421
        Morris K. Udall Foundation...................................   424
        Neighborhood Reinvestment Corporation dba NeighborWorks
          America....................................................   426
        Federal Maritime Commission..................................   433
        National Transportation Safety Board.........................   436
        Office of Personnel Management.............................439, 441
        U.S. Merit Systems Protection Board..........................   445
        U.S. Election Assistance Commission..........................   447
        Selective Service System.....................................   453
    Nondepartmental Witnesses........................................   457

      DEPARTMENTS OF TRANSPORTATION, TREASURY, THE JUDICIARY, HOUSING AND
    URBAN DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR
                                      2007

                                  ----------

                            THURSDAY, MARCH 2, 2006

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:32 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Christopher S. Bond (chairman)
    presiding.
        Present: Senators Bond, Murray, Kohl, Dorgan, and Leahy.

                  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                            Office of the Secretary

    STATEMENT OF HON. ALPHONSO JACKSON, SECRETARY

                opening statement of senator christopher s. bond

        Senator Bond. Good morning. The Senate Appropriations
    Subcommittee on Transportation, Treasury, Judiciary, HUD, and
    Related Agencies will come to order, and it is a pleasure once
    again to welcome an old friend, Secretary Alphonso Jackson, and
    extend our sincere thanks for appearing before us today to
    testify on the Department of Housing and Urban Development's
    fiscal year 2007 budget request.
        Mr. Secretary, we are looking forward to your comments on
    both the fiscal year 2007 budget as well as HUD's
    responsibilities with regard to the overwhelming disaster and
    rebuilding issues facing the gulf coast because of Hurricane
    Katrina and related storms.
        HUD's budget request proposes some $33.65 billion for
    fiscal year 2007, a decrease of $621 million, or 2 percent,
    from the 2006 funding level. Unfortunately, this request does
    not reflect the true extent to which many important housing and
    community development programs are compromised. In particular,
    because of needed increases to section 8 funding, funding for
    many widely supported programs, such as CDBG, public housing
    capital funding, HOPE VI, section 202 for the elderly, and
    section 811 housing for the disabled has been slashed. In
    addition, the budget includes a $2 billion rescission of excess
    section 8 funds, which we are waiting to see where and how they
    would be available, also existing FHA single-family mortgage
    insurance program that is marred by a shrinking share of the
    homeownership market, and increased default rates.
        In addition to the very difficult decisions posed by the
    HUD fiscal year 2007 budget, the subcommittee will also have to
    face substantial shortfalls in many other accounts, including,
    for example, a $400 million gap in proposed Amtrak funding, not
    enough to support Amtrak's funding needs, and I am not even
    sure that flat funding would meet the needs in 2007.
        Another example of the difficult decisions is the
    administration proposes to cut $765 million from the airport
    improvement program, which is critical to maintaining and
    improving infrastructure in our airports.
        These are just two examples. You have got enough headaches.
    But these are the range of headaches that we have in the budget
    that we have been given, and we face huge challenges in
    balancing the decisions for all our programs in a very tight
    funding year with HUD, as always, representing one of our
    largest challenges. And that is why we are always glad to see
    you here, Mr. Secretary.
        I know you have worked hard to defend these programs, and
    your work is greatly appreciated. You have been able to
    convince OMB of the importance of the section 8 program, which
    is adequately funded, even though I am not happy with the
    mandate that you have to push section 8 into a block grant
    assistance program. If anybody wants to talk about that, we
    will be happy to explain to them what we think are the very
    real and perhaps insurmountable problems with that.

                                      CDBG

        I am disappointed the CDBG level has been reduced by $1.15
    billion, but I am gratified that HUD was able to keep it, and
    keep it within this subcommittee, even at what is a
    significantly smaller budget for 2007. And, again, we
    appreciate the great leadership you have shown in helping OMB
    come to some slightly more reasonable judgments and requests.
        I think it is critical that HUD maintains the section 8 in
    public housing, CDBG, and HOME, flagship areas, along with FHA
    mortgage insurance that is necessary if HUD is to continue to
    play its role as a leader in housing and community development
    activities. And it requires adequate funding and your
    responsibility for these programs.

                         PUBLIC HOUSING OPERATING FUND

        The OMB continues to undermine many important programs
    which are critical to housing and community development needs.
    I am very much concerned that the public housing operating fund
    is flat-funded at $3.56 billion. We are moving toward
    implementation of an asset-based management of public housing.
    Unfortunately, the funding level does not meet the needs of
    these new operating requirements, nor does the funding address
    HUD's inclination to micromanage how PHAs will have to meet
    these new requirements.
        If you cut the budget significantly of any Government
    entity, the least you could do is give them the flexibility to
    use the funds how they can best be utilized. And this is very
    difficult for you or me or any of us in Washington to tell a
    PHA in Washington or Missouri or Texas what their problems are
    and how they are going to use their funds.

                                    HOPE VI

        Once again, OMB has gone after one of the programs I
    started, HOPE VI. They propose rescinding all of the 2006
    funding even though it is being used. They propose eliminating
    HOPE VI in 2007 and reducing the Public Housing Capital Fund by
    some $261 million. If enacted, these proposals would
    substantially diminish the effectiveness of every program that
    is designed to address the capital needs of PHAs.
        More troubling, in support of eliminating HOPE VI, the
    administration argues PHAs can use their Capital Fund for bond
    collateral or debt service of loans in support of rehab and
    construction. Nevertheless, if at the same time capital funds
    are reduced or eliminated, the administration is undermining
    its justification for eliminating HOPE VI because lenders
    simply will not lend, and if they do, the cost of any bonds or
    debt will increase. So that OMB policy just makes no sense.

                               REDUCTION IN CDBG

        Also, obviously, I am concerned over the reduction in CDBG.
    As you and I and my colleagues know, this is supported by every
    mayor and Governor in the Nation and reflects the important
    principles of deferring to State and local decisionmaking and
    how to address local housing and community development needs
    instead of relying on some cubicle in the basement of the Old
    Executive Office Building in Washington. This is an important
    program, and I am troubled by OMB's continuing efforts to
    whittle this program to nothing.
        I do not have time to highlight all of my concerns with the
    budget. We will be having lots of correspondence and telephone
    calls with you over many, many more problems, but I do note the
    budget undermines funding for section 202 elderly and section
    811 disabled housing. Both programs are very important in
    addressing the needs of our most vulnerable and needy citizens.
    The elderly housing program is especially important since we
    know the need for elderly housing will skyrocket for the
    foreseeable future due to the aging of not only my generation
    but the baby boomers coming along behind.
        And then, once again, this committee has strongly supported
    the Lead Hazard Reduction program and the Rural Housing and
    Economic Development programs. These were our programs. They
    met an important need, and OMB went after them again. Certainly
    they have my attention. They cut everything that I have worked
    with my colleagues to put into the HUD portfolio because I
    think based on our examination and discussions they make sense.
        Nevertheless, I know you have tried very hard, Mr.
    Secretary, to fund many of these programs, but I think there is
    still hope, and we appreciate your good work. You deserve great
    credit, and I thank you for fighting for a balance in the
    funding of HUD programs against what I consider to be the worst
    instincts of the budget geeks in the basement of OMB.
    Nevertheless--and if there are any OMB people here, we will
    discuss that at greater length, if you wish to. The
    subcommittee needs to find more funds for HUD programs. We
    should not be trying to balance the budget and eliminate the
    deficit on the backs of our communities and most vulnerable
    citizens.
        I am an infrastructure Republican, and many of these
    programs are not only critical to recipients, communities, and
    States, but are critical in the creation of jobs, helping
    leverage new private and public investments in our vital
    communities and increasing their tax base. I think they are
    good investments for the Federal Government. They are
    investments I strongly support.

                                 FUTURE OF FHA

        Finally, let me share with you my concern over the FHA
    single-family mortgage program. It is imploding. FHA's share of
    the market dropped 40 percent in fiscal year 2005. In
    particular, FHA home sales dropped to 4.3 percent in 2005
    compared with 7.6 percent in 2004, despite overall home sales
    being up 7 percent in 2005. In addition, FHA endorsements
    dropped 46.7 percent in 2005, while insurance-in-force dropped
    13 percent. Finally, and most troubling, default rates
    increased to 6.36 percent in fiscal year 2005, a 0.2 percent
    increase over the previous year.
        Over the last several years, in every HUD budget hearing, I
    have raised concerns about the viability and the future of
    HUD's FHA single-family mortgage insurance program. In every
    instance, my warnings and questions have been ignored, and I
    have been advised that the future is bright. The future is not
    bright unless you consider a burning trash dump bright. It may
    be time to close out FHA mortgage insurance for single families
    in deference to the marketplace or re-establish FHA as a
    private government corporation.
        I know that HUD plans to submit legislation to grow FHA
    receipts by increasing its ability to attract homebuyers with
    better credit ratings as well as balancing these new receipts
    to help families with poor credit risk become homeowners.

                               PREPARED STATEMENT

        I think we first need to understand whether the FHA single-
    family mortgage insurance program is needed in today's market,
    and if so, how it is needed. I am concerned that HUD's new FHA
    model may be designed to take on more risks, not only risks
    associated with poor credit homeowners but the risk of lenders
    who face losses and who under the HUD proposal will be able to
    pass the risk of these losses onto FHA.
        I appreciate your time today, Mr. Secretary, and now it is
    a pleasure to turn to my ranking member and partner on this
    subcommittee, Senator Murray.
        [The statement follows:]

               Prepared Statement of Senator Christopher S. Bond

        The Senate Appropriations Subcommittee on Transportation, Treasury,
    the Judiciary, HUD and Related Agencies will come to order. We welcome
    Secretary Alphonso Jackson and thank him for appearing before us today
    to testify on the Department of Housing and Urban Development's fiscal
    year 2007 budget request. Mr. Secretary, I look forward to your
    comments on both the fiscal year 2007 budget as well as HUD's
    responsibilities with regard to the overwhelming disaster and
    rebuilding issues facing the Gulf Coast because of Hurricane Katrina
    and related storms.
        HUD's budget request proposes some $33.65 billion for fiscal year
    2007, a decrease of some $621 million, or some 2 percent, from the
    fiscal year 2006 funding level of $34.27 billion. Unfortunately, this
    funding request does not reflect the true extent to which many
    important housing and community development programs are compromised.
    In particular, because of needed increases to section 8 funding,
    funding for many widely supported programs, such as CDBG, Public
    Housing Capital funding, HOPE VI, section 202 Elderly and section 811
    housing for the disabled, has been slashed. In addition, the budget
    includes a $2 billion rescission of excess section 8 funds which are
    unlikely to be available as well as an existing FHA Single Family
    Mortgage Insurance program that is marred by a shrinking share of the
    homeownership market and increased default rates.
        In addition to the very difficult decisions posed by the HUD fiscal
    year 2007 budget, this subcommittee will also have to face substantial
    shortfalls in many of its other accounts, including, for example, a
    shortfall of some $400 million in the proposed Amtrak funding level for
    fiscal year 2007. This proposed funding level is clearly not enough to
    support Amtrak's funding needs and I am not sure that even flat funding
    will meet Amtrak's anticipated expenses in fiscal year 2007. Another
    harsh example of the difficult decisions faced by this subcommittee is
    the administration's proposed cut of $765 million in fiscal year 2007
    to the Airport Improvement Program. This program is critical to
    maintaining and improving the infrastructure of our Nation's airports.
    And these are only two examples of a number of significant funding hits
    taken by programs within our jurisdiction. Consequently, this
    subcommittee is facing huge challenges in balancing the funding
    decisions for all our programs in a very tight funding year with HUD
    representing one of our largest challenges.
        I am pleased, Mr. Secretary, that you have convinced the
    administration of the importance of the section 8 program which is
    adequately funded for the year even if I am dismayed by your continuing
    support of the administration's proposal to block grant section 8
    assistance. And while I am disappointed that CDBG has been reduced by
    some $1.15 billion from the fiscal year 2006 level, I am gratified that
    it continues to be funded within HUD and in this subcommittee even at a
    proposed paltry $3.03 billion for fiscal year 2007. I think it is
    critical that HUD maintain section 8 and Public Housing, CDBG and HOME,
    and FHA mortgage insurance--these are the 3 flagship areas of housing
    and community development assistance and HUD's role as the Nation's
    leader in housing and community development activities depends on
    adequate funding and responsibility for these programs.
        Nevertheless, this administration continues to undermine many
    important programs within HUD which are critical to the housing and
    community development needs of our States and communities, especially
    our low-income communities.
        First, I am concerned that the Public Housing Operating fund is
    flat funded at $3.56 billion. We are moving toward the implementation
    of asset-based management of public housing. Unfortunately, the
    administration's funding level does not meet the needs of these new
    operating requirements; nor does the funding address HUD's inclination
    to micromanage how PHAs will have to meet these new requirements.
    Moreover, the administration has proposed rescinding all fiscal year
    2006 HOPE VI funding, eliminating the HOPE VI program for fiscal year
    2007 and reducing the Public Housing Capital Fund by some $261 million.
    These proposals, if enacted, will substantially diminish the
    effectiveness of every program that is designed to address the capital
    needs of PHAs. More troubling, in support of eliminating HOPE VI, the
    administration argues that PHAs can use their Capital Fund for bond
    collateral or for the debt service of loans in support of
    rehabilitation and construction. Nevertheless, if capital funds are
    reduced or eliminated, the administration is undermining its
    justification for eliminating HOPE VI because lenders simply will not
    lend and, if they do, the cost of any bonds or debt will increase.
    Overall, this administration policy makes little or no sense.
        I am also concerned over the proposed reduction to CDBG by some
    $1.15 billion in fiscal year 2007. This account is supported by every
    mayor and governor in the Nation and reflects the important principle
    of deferring to State and local decisionmaking in how to address local
    housing and community development needs, instead of relying on some
    nameless bureaucrat in a cubical in Washington. This is an important
    program and I am troubled by the administration's continuing efforts to
    whittle this program into almost nothing.
        I am not going to highlight my every concern with HUD's budget--I
    will note, however, that the budget undermines funding for the section
    202 elderly housing program and the section 811 housing for the
    disabled program. Both programs are very important since they address
    the needs of our most vulnerable and needy citizens. The elderly
    housing program is especially important since we know the need for
    elderly housing will skyrocket for the foreseeable future due to the
    aging of the baby boomer population. In addition, the fiscal year 2007
    budget eliminates the Lead Hazard Reduction program and the Rural
    Housing and Economic Development program, both of which I helped to
    author and both of which meet specific and real needs in our
    communities.
        Nevertheless, Mr. Secretary, I think you have tried hard to push
    for the HUD budget and to fund many of these programs--perhaps not all
    the programs, but I think there is still hope for you. In any event,
    you deserve credit for fighting for a balance in the funding of HUD's
    programs against what I consider to be the worst instincts of the
    budget geeks in the basement of OMB. Nevertheless, this subcommittee
    needs to find more funds for HUD's programs. We should not be trying to
    balance the cost of the deficit on the backs of our communities and
    most vulnerable citizens. I am an infrastructure Republican and many of
    these programs are not only critical to recipients, communities and
    States but are critical in the creation of jobs, in helping to leverage
    new private and public investments and in increasing the tax base of
    our communities. This is a good investment for the Federal Government
    and it is an investment I support.
        Finally, I want to express my concerns over the FHA Single Family
    Mortgage Insurance program. This program is imploding. FHA's share of
    the market dropped 40 percent in fiscal year 2005. In particular, FHA
    home sales dropped to 4.3 percent in 2005 compared with 7.6 percent in
    2004, despite overall home sales being up 7 percent in 2005. In
    addition, FHA endorsements dropped 46.7 percent in fiscal year 2005
    while insurance-in-force dropped 13 percent. Finally, default rates
    increased to 6.36 percent in fiscal year 2005, compared to 6.13 percent
    in fiscal year 2004.
        Over the last several years, in every HUD budget hearing, I have
    raised concerns about the viability and future of HUD's FHA Single
    Family Mortgage Insurance program. In every case, I have been ignored
    and advised that the future is bright. The future is not bright unless
    you consider a burning trash dump bright. It may be time to close out
    the FHA Mortgage Insurance program in deference to the marketplace or
    re-establish FHA as a private government corporation.
        I know HUD plans to submit legislation to grow FHA receipts by
    increasing its ability to attract homebuyers with better credit ratings
    as well as balancing these new receipts to help families with poor
    credit risks become homeowners. I think we first need to understand
    whether the FHA Single Family Mortgage Insurance program is needed in
    today's market, and, if so, how it is needed. I am concerned that HUD's
    new FHA model may be designed to take on more risks--not only the risks
    associated with poor credit homeowners but the risks of lenders who
    face losses and who, under the HUD proposal, will be able to pass the
    risks of these losses on to FHA.
        Mr. Secretary, I appreciate your time today and I now turn to my
    ranking member and partner on this subcommittee, Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Well, thank you very much, Mr. Chairman,
    and, Mr. Secretary, I welcome you here. I hope we have a
    productive hearing, although it sounded to me like listening to
    the statement from the chairman that maybe we should have OMB
    in front of us. That might be more productive.
        Senator Bond. I might lose my temper.
        Senator Murray. All right. Well, thank you again, Mr.
    Secretary, for being here today. It has been more than 6 months
    since Hurricane Katrina reminded all of us of the ongoing
    poverty that grips so many American families today. After the
    storm, millions of us gathered around our television sets and
    saw vulnerable Americans struggling for their dignity and
    struggling for their lives.
        One of the little-known facts about Hurricane Katrina was
    that public housing authorities across the country made heroic
    efforts to find housing, to relocate hurricane victims, and I
    want to commend them today for their hard work and their
    compassion.
        But the sad fact is that every one of those public housing
    authorities already had long waiting lists of local families
    who had been waiting years for housing to become available.
    That means the efforts to house Katrina victims pushed other
    poor families further down a very long waiting list. Those
    families who were pushed down the list were in most cases no
    less poor, no less desperate, and in some cases, no less
    homeless than the Katrina victims. And the vast majority of
    them are still waiting for an available unit today.
        We should not be in a position where, if we respond to a
    disaster, our only choice is to hurt families who have been
    waiting years for housing. But that is the position we find
    ourselves in today, and there is one reason why: years of
    misguided housing budgets. And now we are once again working on
    a new budget for the coming fiscal year, and we should not make
    the same mistakes again.
        Unfortunately, that is exactly what the President's budget
    would do. HUD has a very critical mission: to promote
    homeownership, ensure safe rental housing, house the homeless,
    rejuvenate desolate communities, and provide hope to a great
    many struggling Americans.
        We are talking about the impoverished elderly. We are
    talking about disabled citizens who have very unique housing
    needs. We are talking about the working poor who are climbing
    the economic ladder.
        Now, I have often said that budgets are about priorities,
    and it is clear that the Bush administration's priorities are
    not with the missions of the Department of Housing and Urban
    Development. The President's budget for the coming fiscal year
    proposes to increase discretionary spending by 3.2 percent, but
    within that total, HUD is singled out for a cut of 1.8 percent.
    The Community Development Block Grant is slated for a cut of
    more than $1 billion.

                                    HOPE VI

        All funds for the HOPE VI program that the chairman
    mentioned, a program designed to demolish and replace our most
    decrepit public housing units, is proposed for elimination in
    the Bush budget. In fact, the administration budget goes even
    further and calls on Congress to eliminate the funding that we
    have already appropriated for this program in 2006. Housing for
    the elderly is cut by 26 percent, while housing for the
    disabled is cut by 50 percent.
        These proposed cuts come at a time when every study tells
    us that these populations are growing, and growing rapidly.
        One thing that has been very clear to every American this
    winter is the fact that utility costs have risen dramatically.
    It seems that everyone knows that except for the Bush
    administration. While utility costs have risen dramatically for
    public housing authorities across America, the Bush
    administration wants to freeze operating funds for public
    housing authorities for the fifth year in a row.
        Funding for the public housing capital fund, which is
    intended to keep over 13,000 public housing properties from
    falling into dilapidated, decrepit, and inhumane conditions, is
    singled out for an 11 percent cut.
        As I said earlier, the President's budget proposes to
    increase discretionary spending by 3.2 percent, but all of the
    rhetoric and public housing statements and his OMB Director
    have sought to divide this budget into three separate
    categories: funding for defense, funding for homeland security,
    and funding for everything else. That implication is pretty
    clear. In the view of the Bush administration, programs in that
    third category, programs that educate our children, prevent
    disease, house the underprivileged, are the least worthy of
    public funds.
        Within this third category, the President proposes to cut
    overall spending by a half percent, but for HUD, which falls
    entirely into this third category, the administration is
    proposing a much larger cut of 1.8 percent.
        The message to me is clear: The non-defense, non-homeland
    security portion of the budget is a low priority for this
    President, and funding for HUD's work is an even lower
    priority.
        Now, it is worth noting that while the administration is
    proposing to cut the HUD budget by more than $620 million, they
    are proposing to boost spending for exploration systems in NASA
    by more than $860 million. Now, like a lot of my colleagues, I
    do support the overall goal of space exploration. I think it is
    great. But when it comes to sending an astronaut to Mars or
    housing our elderly and disabled neighbors here on Earth, there
    is no doubt where my priorities lie.
        Mr. Chairman, last year, with your strong support, we were
    able to fend off many of the painful cuts that were included in
    the President's budget for HUD. Unfortunately, we were handed
    an allocation by a budget resolution that I did not support
    that resulted in our having to accept some of those proposed
    cuts. Last year, our appropriations bill did cut Community
    Development Block Grant program by more than $0.5 billion. We
    did cut HOPE VI program by 31 percent.
        Now, I am a member of the Budget Committee--as you used to
    be, Mr. Chairman, and we miss you there.
        We do need you back.

                               PREPARED STATEMENT

        If we are presented, however, with a budget resolution that
    continues to cut the Community Development Block Grant program,
    I want you to know I am going to be the first Senator out of
    the box offering amendments to restore those cuts.
        I hope that together you and I can work toward ensuring
    that we get a budget resolution this time that will allow us to
    reject those ill-conceived proposals so we can keep faith with
    the people who need HUD assistance the most.
        Thank you very much, Mr. Chairman, and thank you, Mr.
    Secretary.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        Thank you, Mr. Chairman and welcome Secretary Jackson.
        It's been more than 6 months since Hurricane Katrina reminded all
    of us of the ongoing poverty that grips so many American families.
        After the storm, millions of us gathered around our television sets
    and saw vulnerable Americans struggling for their dignity and
    struggling for their lives.
        One of the little known facts about Hurricane Katrina was that
    public housing authorities across the country made heroic efforts to
    find housing to relocate hurricane victims. I want to commend them for
    their hard work and compassion.
        But the sad fact is that every one of those public housing
    authorities already had long waiting lists of local families who had
    been waiting years for housing to become available.
        That means the efforts to house Katrina victims pushed other poor
    families further down a long waiting list.
        Those families who were pushed down the list were, in most cases,
    no less poor, no less desperate and, in some cases, no less homeless,
    than the Katrina victims. And the vast majority of them are still
    waiting for an available unit today.
        We shouldn't be a in a position where--if we respond to a
    disaster--our only choice is to hurt families who have been waiting
    years for housing.
        But that's the position we find ourselves in today--and there is
    one reason why--years of misguided housing budgets.
        And now, we're once again working on a new budget for the coming
    fiscal year. We should not make the same mistakes again.
        Unfortunately, that's exactly what the President's budget would do.
        HUD has a critical mission--to promote home ownership, ensure safe
    rental housing, house the homeless, rejuvenate desolate communities,
    and provide hope to a great many struggling Americans.
      --We are talking about the impoverished elderly.
      --We are talking about disabled citizens who have unique housing
            needs.
      --We are talking about helping the working poor climb the economic
            ladder.
        I have often said that budgets are about priorities. And it is
    clear that the Bush Administration's priorities are not with the
    missions of the Department of Housing and Urban Development.
        The President's budget for the coming fiscal year proposes to
    increase discretionary spending by 3.2 percent. But within that total,
    HUD is singled out for a cut of 1.8 percent.
        The Community Development Block Grant--or CDBG--program, is slated
    for a cut of more than a billion dollars.
        All funds for the HOPE VI program--a program designed to demolish
    and replacing our most decrepit public housing units--is proposed for
    elimination in the Bush budget.
        In fact, the administration's budget goes even further and calls on
    the Congress to eliminate the funding that we have already appropriated
    for this program in 2006.
        Housing for the elderly is cut by 26 percent, while housing for the
    disabled is cut by 50 percent. These proposed cuts come at a time when
    every study tells us that these populations are growing--and growing
    rapidly.
        One thing that has been clear to every American this winter is the
    fact that utility costs have risen dramatically. It seems that everyone
    knows that--except for the Bush Administration.
        While utility costs have risen dramatically for public housing
    authorities across America, the Bush Administration wants to freeze
    operating funds for public housing authorities for the fifth year in a
    row.
        Funding for the Public Housing Capital Fund--which is intended to
    keep over 13,000 public housing properties from falling into
    dilapidated, decrepit and inhumane conditions--is singled out for an 11
    percent cut.
        As I said earlier, the President's budget proposes to increase
    discretionary spending by 3.2 percent, but all of the rhetoric and
    public statements by the President and his OMB Director have sought to
    divide this budget into three separate categories:
      --funding for Defense;
      --funding for homeland security, and
      --funding for everything else.
        Their implication is clear.
        In the view of the Bush Administration, programs in this third
    category--programs that educate our children, prevent disease, or house
    the underprivileged--are the least worthy of public funds.
        Within this third category, the President proposes to cut overall
    spending by 0.5 percent. But for HUD, which falls entirely into this
    third category, this administration is proposing a much larger cut of
    1.8 percent.
        The message is clear:
      --the non-defense, non-homeland security portion of the budget is a
            low priority for the President,
      --and funding for HUD's work is an even lower priority.
        It is worth noting that, while the administration is proposing to
    cut the HUD budget by more than $620 million, they are proposing to
    boost spending for Exploration Systems in NASA by more than $860
    million.
        Like many of my colleagues, I support the overall goal of space
    exploration. But when it comes to sending an astronaut to Mars or
    housing our elderly and disabled neighbors here on earth, there's no
    doubt where my priorities lie.
        Mr. Chairman, last year, with your strong support, we were able to
    fend off many of the more painful cuts included in President Bush's
    budget for HUD.
        Unfortunately we were handed an allocation by a budget resolution
    that I did not support that resulted in our having to accept some of
    his proposed cuts.
        Last year, our appropriations bill did cut the Community
    Development Block Grant program by more than half a billion dollars. We
    did cut the HOPE VI program by 31 percent.
        I am a member of the Budget Committee, as you used to be, Mr.
    Chairman. If we are presented with a budget resolution that continues
    to cut the Community Development Block Grant program, I am going to be
    the first Senator out of the box offering amendments to restore those
    cuts.
        I hope that, together, you and I can work together toward ensuring
    that a budget resolution is adopted that will allow us to reject these
    ill-conceived proposals so that we can keep faith with the people who
    need HUD assistance the most.
        Thank you, Mr. Chairman.

        Senator Bond. Thank you very much, Senator Murray.
        Now, Mr. Secretary, if you would begin.

                       STATEMENT OF HON. ALPHONSO JACKSON

        Secretary Jackson. Thank you very much. Good morning,
    Chairman Bond and Ranking Member Murray, and other
    distinguished members of the committee. I thank you for the
    opportunity to be here to discuss the President's proposed
    budget of fiscal year 2007. It is a good budget, and I
    encourage you to give it your support.
        The President is very concerned about helping all Americans
    have access to affordable housing that is decent and dignified,
    and his $33.6 billion budget request for HUD demonstrates that
    concern.
        At the same time, the President understands that fiscal
    restraint is necessary if we want to reduce the deficit and
    keep the economy growing as it has been and help everybody by
    creating more jobs and higher wages.
        I want to highlight how the President's budget will help
    HUD achieve the mission Congress has assigned to us,
    particularly in three areas: helping more Americans own their
    own homes, especially folks who always thought homeownership
    was out of reach; helping those not ready or willing to own
    their own home to find decent rental housing; and reforming the
    way the Federal Government supports community development by
    better focusing block grant resources toward the most needy,
    while beginning to consolidate community development programs
    under one umbrella at HUD.
        First, Mr. Chairman, is helping more Americans achieve the
    dream of homeownership.
        If Congress will enact HUD's proposed changes to the
    National Housing Act, the FHA will make its mortgage insurance
    more flexible so that more Americans can qualify for mortgages
    without paying sub-prime rates. This will help more low-income
    families own and keep their homes.

                           FHA FORECLOSURE MORATORIUM

        Speaking of FHA, I am pleased to say that HUD has just
    announced a further extension of the FHA foreclosure moratorium
    for victims of Hurricane Katrina. Borrowers with FHA loans now
    have until March 31 to show that they have made long-term
    payment arrangements with their banks. If they do, they will
    have foreclosure protection until the end of June. And this is
    in addition to HUD's agreement to make interest-free loans to
    hurricane-affected families to pay their FHA-insured mortgages
    for a year.

                                  HOME PROGRAM

        The President's budget includes $1.9 billion for the HOME
    Investment Partnerships program. In the past, every HOME dollar
    allocated has attracted $3.60 in private sector investments.
        Under that program, the President has proposed that the
    American Dream Downpayment Initiative, what we call ``ADDI,''
    be funded at $100 million. Though it is a new program, ADDI
    funds have already assisted 13,845 low-income families to
    become first-time homebuyers.

                         HOMEOWNERSHIP VOUCHER PROGRAM

        Another young but important program helping low-income and
    minority families become homeowners is the Homeownership
    Voucher program, which allows families on section 8 rental
    assistance to use their vouchers to pay a mortgage on their own
    home for up to 10 years. The program has already helped 5,000
    low-income families own a home in the last 4 years, and we
    expect to have helped 3,000 more by the end of fiscal year
    2007.

                               HOUSING COUNSELING

        The President has proposed $45 million for housing
    counseling. This is a proven method for helping low-income
    families to prepare themselves for the responsibilities of
    homeownership, avoid predatory lending practices, and avoid
    foreclosure. This program, in continuing partnership with many
    faith-based and community organizations, would be able to
    assist approximately 600,000 families in 2007 if the
    President's proposal is adopted.
        Second, Mr. Chairman, is helping other low-income families
    find decent, dignified, and affordable rental housing.

                HOUSING CHOICE VOUCHER RENTAL ASSISTANCE PROGRAM

        HUD's largest program, at $16 billion, is the Housing
    Choice Voucher Rental Assistance program. Because of
    unsustainable cost increases, Congress wisely changed this to a
    dollar-based system. But for the new system to work better,
    Congress needs to pass legislation to allow the PHAs to design
    their own rent policies. That is why the administration is
    asking Congress to pass Senator Wayne Allard's State and Local
    Housing Flexibility Act, Senate Bill 771. And I want to thank
    the Senator for his leadership on this important issue.
        HUD continues its work to help communities remove
    unnecessary regulatory barriers to the development of low-
    income housing--through America's Affordable Communities
    Initiative and its Regulatory Barriers Clearinghouse.
        The 2007 budget also proposes funding an additional 3,000
    housing units for the elderly and persons with disabilities.
    All expiring rental assistance contracts are being renewed, and
    all construction that is in the pipeline already is still
    eligible for amendment funds if their construction costs
    increase.
        In order to help more Native Americans become homeowners,
    the President proposes increasing the section 184 loan
    guarantees program by more than 100 percent, over fiscal year
    2006, to $251 million. He also wants to increase funding to
    support housing for persons with HIV/AIDS to $300 million,
    enough to provide assistance to an estimated 75,000 households.
    Our budget request includes a provision that would allow us to
    allocate these funds more fairly based on housing cost
    differences across the country.

                              HOMELESS ASSISTANCE

        The administration also remains committed to helping the
    homeless. HUD has aggressively pursued policies to move the
    homeless into permanent housing. This budget proposes to
    increase the amount for homeless assistance to $1.5 billion,
    enough to house more than 160,000 individuals.

                                      CDBG

        Third, Mr. Chairman, is laying the groundwork for reform of
    the way Federal resources are used to support community
    development. A key part of HUD's mission is to strengthen
    communities so that they can be better places to live, work,
    and raise families. HUD is committed to developing better
    performance measures for the Community Development Block Grant
    program, but we need a better way to target the CDBG funds to
    those most in need. So HUD will propose a new formula for the
    CDBG allocation very soon to you. Also, since the Community
    Development Block Grant program is staying at HUD, the
    President's proposed budget consolidates three other similar
    programs within HUD into the CDBG, laying the groundwork for
    further governmentwide consolidation later after HUD proves
    that the reforms are working well.
        In conclusion, Mr. Chairman, the administration's budget
    provides ample resources for promoting homeownership, fair and
    affordable housing, and community development--the key elements
    of the mission that Congress has assigned to HUD.

                               PREPARED STATEMENT

        This is a good budget, Mr. Chairman and ranking member, and
    I respectfully urge you to ask Congress to adopt it.
        I thank you for this opportunity to speak before you today
    on the 2007 budget, and I am now available for questions that
    you might have.
        [The statement follows:]

                     Prepared Statement of Alphonso Jackson

        Chairman Bond, Ranking Member Murray, distinguished Senators of the
    subcommittee, the President's proposed fiscal year 2007 budget truly
    reflects his intent to address our Nation's housing, economic, and
    community development requirements. HUD's $33.6 billion fiscal year
    2007 budget seeks to build on our success and lend a compassionate hand
    to Americans in need, while using taxpayer money more wisely and
    reforming several HUD programs.
        Over the past 5 years, HUD has successfully implemented the
    President's agenda to spur on economic and community development by
    promoting homeownership, particularly among the lowest-income
    Americans; increased access to affordable rental housing, while
    combating all forms of discriminatory housing practices; and made a
    commitment to focus community development dollars better on those most
    in need by increasing local control. At the same time, HUD has improved
    the operational efficiency of the Department. The President's fiscal
    year 2007 budget request will allow the Department to build upon those
    successes by advancing the core mission given to HUD by Congress.

        HOW HUD WILL PROMOTE ECONOMIC AND COMMUNITY DEVELOPMENT THROUGH
                                 HOMEOWNERSHIP

        The President's vision for an ownership society correctly focuses
    on the reality that the ownership of private property helps human
    beings prosper. There is ample evidence to prove the President's
    assertion that ownership promotes financial independence, the
    accumulation of wealth, and healthier communities. Chief among the
    things a person can own is his own home.
        Under President Bush's leadership, this administration has achieved
    new records in the rate of homeownership. Today, nearly 70 percent of
    the Nation and more than 51 percent of minorities own their homes.
    Despite achieving the highest homeownership rate in American history,
    minorities remain less likely than non-Hispanic whites to own their
    homes. To close this gap, President Bush challenged the Nation to
    create 5.5 million minority homeowners by the end of the decade, and to
    date 2.6 million minority families have joined the ranks of homeowners.
    While President Bush is pleased with the progress made, there is more
    to be done.
        The President's proposed budget will help HUD to further that
    mission by transforming the Federal Housing Administration (FHA) so
    that it can expand homeownership opportunities for low- and moderate-
    income families; spur Fannie Mae and Freddie Mac to lead the market to
    create more affordable homeownership opportunities; help more of the
    lowest-income Americans make a downpayment through the HOME Investment
    Partnerships program (HOME) and the American Dream Downpayment
    Initiative (ADDI); transition more Americans from HUD assisted rental
    housing to homeownership through the Homeownership Voucher program;
    and, through our rapidly-growing partnership with faith-based and
    community organizations, increase the level of housing counseling that
    has been so useful in helping families prepare for homeownership, avoid
    predatory lending practices, and avoid default on their homes.
        FHA Product Transformation.--HUD proposes to amend the National
    Housing Act, which was created in 1934 to create the FHA and its
    mortgage insurance programs. The National Housing Act has not been
    updated in over 70 years. Existing statutory requirements prevent FHA
    from updating its products; this lack of flexibility has allowed a
    resurgence of high-cost loans similar to those that predominated in
    1934, such as interest-only and short-term balloon loans.
        The original purpose of the National Housing Act was to encourage
    lenders to offer loans that were less risky for consumers. If Congress
    will enact changes to the National Housing Act to allow FHA flexibility
    to offer insurance for loans of different term, cash requirement, and
    amortization, then FHA could make it possible for additional buyers to
    enter the market, thus aiding both consumers and the lending industry.
    This is a top legislative priority for me this year and I look forward
    to working with Congress to see it enacted.
        Using HOME and ADDI to Help More Low-income Families Own Their Own
    Homes.--For many low-income Americans, the single greatest obstacle to
    homeownership is the cash requirement for downpayment and closing
    costs.
        The HOME Investment Partnerships program, the largest Federal block
    grant program of its kind, completed nearly 72,000 units of affordable
    housing in 2005, often in partnership with nonprofits, States, and
    local governments. The administration proposes to increase the HOME
    program to $1.9 billion in 2007. Each HOME dollar allocated typically
    attracts $3.60 from private sector investments.
        Within the HOME allocation, ADDI funds have assisted 13,845
    families to become first-time homebuyers, at an average subsidy amount
    of $7,431. More than 47 percent of those assisted are minority
    homeowners. We have requested $100 million for fiscal year 2007 to
    further enhance homeownership in America through ADDI.
        Homeownership Voucher Program.--I am very proud to report that
    during this program's first 4 years, over 5,000 low-income families
    have been moved from the section 8 rental program rolls into the ranks
    of homeownership. By the end of fiscal year 2007, the program will
    provide homeownership opportunities for approximately 8,000 families.
        Counseling Our Way to Greater Homeownership.--Housing counseling is
    an extremely important tool to help Americans purchase and keep their
    homes. The fiscal year 2007 budget proposes $45 million for housing
    counseling in order to prepare families for homeownership, help them
    avoid predatory lending practices, and help current homeowners avoid
    default. In partnership with faith-based and community organizations,
    HUD will assist approximately 600,000 families to become homeowners or
    avoid foreclosure in fiscal year 2007. More than ever, potential
    homebuyers need assistance to make smart homeownership choices. Housing
    counseling is the most cost-effective way to educate individuals and
    arm them with the knowledge to make informed financial choices and
    avoid high risk, high cost loans, and possible default and foreclosure.
               how hud will increase access to affordable housing
        While homeownership is one of President Bush's top priorities, the
    President realizes that it is not a viable option for everyone. The
    largest component of HUD's budget promotes decent, safe, and affordable
    housing for families and individuals who may not want to become
    homeowners or who may not yet be ready to purchase a home.
        Promoting Local Control and Flexibility--Section 8.--HUD's Housing
    Choice Voucher program is HUD's largest program at $16 billion
    annually. The program provides approximately 2 million low-income
    families with subsidies that help them obtain decent, safe, sanitary,
    and affordable homes.
        In response to unsustainable cost increases, Congress recently
    converted the previous ``unit-based'' allocation system to a ``dollar-
    based'' system. This made sense, but for the dollar-based system to
    work effectively, program requirements need to be simplified, and
    Public Housing Authorities (PHAs) need to be given greater flexibility.
        The State and Local Housing Flexibility Act (SLHFA) introduced last
    year in both the House and the Senate would, among other things, give
    PHAs the flexibility to serve more people and better address local
    needs. If Congress passes SLHFA, local PHAs will be able to design
    their own tenant rent policies, and, in turn, they can reduce the
    number of erroneous payments, use their dollars more flexibly, and
    create incentives to work.
        The administration's plan will eliminate many of the complex forms
    that are currently required to comply with program rules--saving both
    time and money. Furthermore, the administration's proposal will result
    in benefits and rewards for a PHA's decision to utilize good
    management. Enactment of this bill is one of my top priorities this
    year, and I stand ready to work closely with this committee and the
    Congress to make that happen.
        Making Improvements to Public Housing.--For fiscal year 2007, the
    Department will continue its efforts to improve public housing by
    moving toward project-based management, and mandating financial
    accountability. Project-based management will provide the information
    on individual properties, allowing managers to compare high and low
    cost properties and intervene as necessary.
        Public Housing's Capital Fund Financing Program.--The Department
    continues its successful implementation of the Public Housing Capital
    Fund Financing Program. This program allows PHAs to borrow from banks
    or issue bonds using future Capital Fund grants as collateral or debt
    service, subject to annual appropriations. In this way, PHAs are able
    to leverage the Capital Funds to make improvements. The President's
    fiscal year 2007 budget request includes $2.2 billion for the Capital
    Fund, which will cover the accrual needs of PHAs. The President's
    budget holds the Operating Subsidy funds level at $3.6 billion.
        Implementation of Harvard Cost Study.--In 1998, Congress directed
    HUD to undertake the Harvard Cost Study, a review of public housing
    costs analyzing how PHAs manage their units. The Department will
    continue its scheduled implementation of the congressionally mandated
    formula for allocating subsidies for public housing operations, and
    will implement the formula by fiscal year 2007. The proposed State and
    Local Housing Flexibility Act would help PHAs' administration of public
    housing through its flexibility and simplification of tenant rent
    policies. The implementation will include transitioning the management
    of public housing to an asset-based model similar to how private sector
    multifamily housing is managed. Project based accounting is scheduled
    to be implemented in fiscal year 2007, and asset based management by
    fiscal year 2011.
        Management Accountability of Public Housing.--The Department
    continues to place great emphasis on the physical condition of public
    housing properties, and the financial status and management
    capabilities of PHAs. The Department will continue providing technical
    assistance to PHAs and rating the effectiveness of PHAs through the
    Public Housing Assessment System (PHAS). PHAs with consistently failing
    scores may be subject to an administrative or judicial receivership.
    The Department will continue to utilize other tools such as Cooperative
    Endeavor Agreements with local officials, Memoranda of Agreements, and
    increased oversight, in order to correct long-standing deficiencies
    with PHAs. Over the past 5 years, the physical condition of public
    housing units has improved significantly.
        America's Affordable Communities Initiative.--Unnecessary,
    excessive or exclusionary Federal, State, and local regulations
    severely limit housing affordability by increasing costs as much as 35
    percent. They also limit the ability of housing providers to build
    affordable multifamily housing and perform cost-effective housing
    rehabilitation. The Department believes that regulatory barrier removal
    must be an essential component of any national housing strategy to
    address the needs of low- and moderate-income families, and is
    committed to working with States and local communities to do so. The
    Department established ``America's Affordable Communities Initiative:
    Bringing Homes Within Reach through Regulatory Reform'' in fiscal year
    2003. This has encouraged efforts at the local level to review and
    reform regulatory barriers and other impediments to expanding housing
    affordability.
        Through the Regulatory Barriers Clearinghouse, the Department
    maintains and disseminates important information to local governments
    and housing providers about regulatory barriers and new strategies
    developed by other communities. All proposed HUD rules, regulations,
    notices, and mortgagee letters are now carefully reviewed to ensure
    they enhance rather than restrict housing affordability.
        Indian Housing Loan Guarantee Fund.--The U.S. Government holds much
    of the land in Indian country in trust. Land held in trust for a tribe
    cannot be mortgaged, and land held in trust for an individual must
    receive Federal approval before a lien is placed on the property. As a
    result, Native Americans historically have had limited access to
    private mortgage capital. The section 184 program addresses this lack
    of mortgage capital in Indian country by authorizing HUD to guarantee
    loans made by private lenders to Native Americans. The President's
    budget proposes $251 million in section 184 loan guarantees for
    homeownership in tribal areas, which represents a more than 100 percent
    increase over fiscal year 2006.
        Elderly and Persons with Disabilities.--The fiscal year 2007 budget
    proposes funding for approximately 3,000 additional housing units for
    the elderly and persons with disabilities. While still expanding the
    program, the budget reflects a decrease in the rate of growth from the
    2006 level, where over 7,000 new units were funded. This decrease
    recognizes that there are already a large number of projects in the
    pipeline. Importantly, however, all expiring rental assistance
    contracts are being renewed, and amendment funds are available for
    qualifying increased costs of construction projects already in the
    pipeline. Funds will also be available to provide supportive services
    through the Service Coordinator Program and for the conversion of
    existing elderly housing projects through the Assisted Living
    Conversion Program. Funds are also available to support the existing
    Mainstream Voucher Program fully.
        HUD has constructed almost 27,000 units specifically for persons
    with disabilities. Including the funding for fiscal year 2005, HUD has
    314 projects in varying stages of development in the construction
    pipeline.
        HUD has constructed almost 400,000 units specifically for the
    elderly. Including the funding for fiscal year 2005, HUD has 342
    projects (about $1.6 billion) in varying stages of development in the
    construction pipeline. Moreover, HUD serves an additional 675,000
    elderly families under other HUD rental assistance programs such as
    section 8 and Public Housing.
        Housing for Ex-offenders Returning to Society.--Every year, more
    than 600,000 inmates complete their sentences and are returned to the
    community. Approximately two-thirds of prisoners are re-arrested within
    3 years of their release and nearly half of them return to prison
    during that same period. Individuals released from prison face
    significant barriers upon re-entering their communities, such as lack
    of job skills and housing. To confront this problem, the President
    proposed a 4-year Prisoner Re-entry Initiative in his 2004 State of the
    Union address, designed to harness the experience of faith-based and
    community organizations to help individuals leaving prison make a
    successful transition to community life and long-term employment. The
    President's 2007 budget provides a total of $59 million for the
    Prisoner Re-entry Initiative, including $24.8 million in the HUD
    request for housing needs for this population.
        Youthbuild.--The President's 2007 budget again calls for the
    transfer of the Youthbuild program, which supports competitive grants
    to train disadvantaged youth, from the HUD to the Department of Labor
    (DOL), as recommended by the White House Task Force for Disadvantaged
    Youth. On July 22, 2005, the Secretaries of Labor and HUD jointly
    transmitted legislation to the Congress to accomplish this transfer.
    Shifting this program to DOL will promote greater coordination of the
    program with Job Corps and the other employment and training programs
    the Department of Labor oversees.
        Housing Opportunities for Persons With AIDS (HOPWA).--The HOPWA
    program provides formula grants to States and localities for housing
    assistance for low-income persons living with HIV/AIDS. The program
    helps maintain stable housing arrangements that improve access to
    health care and other needed support. The program also provides
    competitive grants to government agencies and nonprofit organizations.
    In fiscal year 2007, the President is proposing an increase in HOPWA
    funding to $300 million, which will support an estimated 28 competitive
    grants and will provide formula funding to an estimated 124
    jurisdictions. These resources will provide housing assistance to an
    estimated 75,025 households. In addition, the fiscal year 2007 budget
    request includes a proposal that would allow HUD to change the formula
    so that the distribution of funds is more equitable because it
    recognizes housing cost differences across the country.

                   HOW HUD WILL REFORM COMMUNITY DEVELOPMENT

        A key component of HUD's strategic goals is to strengthen
    communities, ensuring better places to live, work, and raise a family.
    HUD is committed to producing a better means of measuring the
    performance of community development efforts, specifically within the
    Community Development Block Grant program. Allocating these funds more
    efficiently will help further reinvigorate our communities.
        Laying the Groundwork for Reform of CDBG, Focusing Block Grants
    According to Unmet Needs.--The Community Development Block Grant (CDBG)
    program serves low- and moderate-income families in cities and urban
    counties, States, and insular areas across the United States through a
    variety of housing, community, and economic development activities. The
    fiscal year 2007 budget proposes to reform the CDBG program to
    contribute more effectively to local community and economic progress.
    Formula changes will be proposed to direct more of the program's base
    funding to communities that cannot meet their own needs; bonus funds
    will reward communities that demonstrate the greatest progress in
    expanding opportunity for their residents. Other Federal programs that
    support local development will operate in coordination with CDBG within
    a new, broader framework of clear goals, crosscutting performance
    indicators, and common standards for awarding of bonus funding and
    measuring community progress. HUD programs that duplicate the purposes
    of CDBG--Brownfields Redevelopment, Rural Housing and Economic
    Development, and section 108 Loan Guarantees--will be consolidated
    within CDBG as part of this reform. This is another top legislative
    priority for me, and I look forward to working closely with you to
    achieve it.
        Block Grants for Native American Communities.--The needs of this
    country's Native American population continue to be addressed through
    HUD's programs. The fiscal year 2007 budget proposes to increase the
    funding of the Native American Housing Block Grant program to $626
    million.
        Healthy Homes and Lead Hazard Control.--Today, the Department
    estimates that 26 million fewer homes have lead-based paint compared to
    1990 when the program began. Ten years ago, there was no Federal
    funding for local lead hazard control work in privately owned housing;
    today, the HUD program is active in over 250 jurisdictions across the
    country. The President is proposing $115 million for this program.
        Faith-Based and Community Initiative.--HUD continues its successful
    efforts to increase participation by faith-based and community
    organizations (FBCOs) in HUD programs. Due to a variety of efforts,
    more faith-based and other community organizations are extending their
    reach when helping society's most vulnerable citizens. The Center
    continues to provide outreach and technical assistance to FBCOs,
    through its grant writing workshops, its Unlocking Doors Affordable
    Housing initiative, and other outreach efforts. I am proud to report
    that the Center's outreach and technical assistance efforts have helped
    all groups compete on a level playing field for HUD assistance,
    regardless of whether they are faith-based or secular. According to the
    White House's 2004 data collection numbers, faith-based organizations
    have successfully competed for and won 23.3 percent of eligible HUD
    funding--a higher percentage than in any other department of the
    Federal Government.

                        HOW HUD WILL COMBAT HOMELESSNESS

        In addition to pursuing other agency goals, HUD remains committed
    to the goal of ending chronic homelessness. The chronically homeless
    live in shelters or on the streets for long periods, often suffering
    from mental illness or substance abuse problems, and absorb a
    disproportionately large amount of social and medical services and
    expenditures. The fiscal year 2007 budget proposal includes an increase
    to $1.5 billion from $1.3 billion in 2006 for Homeless Assistance. This
    increase supports the administration's long-term goal of ending chronic
    homelessness by dedicating up to $200 million for the Samaritan
    Initiative that bolsters communities' efforts to produce supportive
    housing for the chronically homeless. Through the Continuum of Care
    grant competition, HUD has aggressively pursued policies to move all
    homeless families and individuals into permanent housing. This overall
    funding level in 2007 will house 160,000 individuals and families
    through this program.
        This year, in addition, I am pleased to chair the U.S. Interagency
    Council on Homelessness, where the Federal agencies are working
    together toward this goal.
        The administration again proposes to consolidate HUD's three
    Homeless Assistance Grants programs into one simplified program that
    will give local communities greater control to direct these funds to
    their priority needs.

             HOW HUD WILL CONTINUE TO FIGHT HOUSING DISCRIMINATION

        The Bush Administration is committed to vigorous enforcement of
    fair housing laws, in order to ensure that equal access to housing is
    available to every American. Fair housing enforcement activities are
    pivotal in achieving the administration's goal to increase minority
    homeownership by 5.5 million by 2010. For 2007, the President's budget
    proposes approximately $45 million to support Fair Housing and Equal
    Opportunity activities to help ensure that Americans have equal access
    to housing of their choice. These activities include education and
    outreach, as well as administrative and enforcement efforts by State
    and local agencies and nonprofit fair housing organizations.
    Additionally, the requested amount would support the Department's
    ongoing efforts to address fair housing concerns in areas affected by
    Hurricanes Katrina and Rita. The efforts would include bilingual public
    service announcements, printed advertisements, and training events. The
    Department would provide technical assistance to builders, architects,
    and housing providers on accessibility requirements through
    Accessibility FIRST to ensure that newly constructed housing units are
    accessible to persons with disabilities.

                HOW HUD WILL INCREASE ITS OPERATIONAL EFFICIENCY

        HUD made significant strides in financial management this year. We
    are particularly proud of our achievements in:
        Financial Performance.--Successfully accelerating the close of our
    operational books and audit of our financial records within 45 days of
    the end of the fiscal year, HUD earned an unqualified audit opinion on
    its 2004 and 2005 financial statements, giving the Department an
    unqualified or clean audit opinion on its financial statements for the
    past 6 consecutive fiscal years. The financial auditors also determined
    that HUD made significant progress in strengthening internal controls.
    The auditor downgraded two long-standing material weaknesses--one
    dating from 1990.
        Continuing progress on the implementation of the final phases of
    the FHA Subsidiary Ledger Project contributed to HUD's ability to
    accelerate the preparation of auditable financial statements, and
    eliminate longstanding material internal control and financial systems
    weaknesses. HUD will complete the FHA Subsidiary Ledger Project in
    fiscal year 2007 and continue to pursue its goal for modernizing the
    Department's core financial system by fiscal year 2008, through the HUD
    Integrated Financial Management Improvement Project.
        Electronic Government.--HUD continues its E-Government
    transformation in order to meet public expectations and government
    performance mandates by: increasing access to information and services
    using the Internet; eliminating duplicative and redundant systems by
    leveraging and integrating with existing Federal-wide services;
    acquiring or developing systems within expected costs and schedules
    that can be shared and used to simplify business processes; ensuring
    the protection of personal data; and providing increased security to
    guard against intrusion and improve reliability. HUD has executed plans
    to improve its information technology capital planning, project
    management, and security environment, along with modernizing HUD's IT
    systems infrastructure. HUD's future focus will be on modernizing its
    core financial systems applications and business systems applications
    in its largest program areas--rental housing assistance, single-family
    housing mortgage insurance, and discretionary grants, as well as
    establishing integration from our procurement data system to the
    Federal Procurement Data System (FPDS). In 2005, HUD successfully
    implemented two new systems: (1) a Human Capital support system and (2)
    a cross-match system with HHS to assist PHAs in verifying tenant
    incomes to assure eligibility for the program and accuracy in computing
    tenant rent contributions.
        Eliminating Improper Payments.--HUD has reduced its gross annual
    improper rental assistance payments by 61 percent since 2000. In 2003,
    improper payments were reduced to $1.6 billion from the 2000 level of
    $3.2 billion. In 2004, improper payments were further reduced to $1.25
    billion. In October 2005, HUD provided local PHAs with an electronic
    tool to verify tenants' income with the Department of Health and Human
    Services' National Directory of New Hires. This new tool will further
    improve the accuracy of eligibility determination for the rental
    assistance program and the proper calculation of the tenant's portion
    of the rent and the amount of Federal subsidy to be allocated. While
    the estimated improper rental housing assistance payments in fiscal
    year 2004 were substantially reduced from prior year estimates, they
    still represented 5.6 percent of total program payments. Through
    continuous corrective actions, HUD's goal is to reduce that improper
    payment rate to 3 percent of total payments during fiscal year 2007.
        In conclusion, Mr. Chairman, the President's proposed fiscal year
    2007 budget makes good progress toward successfully realigning Federal
    Government priorities according to our Nation's current needs. The HUD
    portion of that budget will help promote economic and community
    development through increased opportunities for homeownership and
    affordable rental housing, free from discrimination; it will also lay
    the groundwork for reform by focusing community development funding
    more carefully toward those most in need; and it will enable HUD to
    continue along the path to greater Departmental efficiency and
    effectiveness.
        I thank you for the opportunity to articulate the President's
    fiscal year 2007 agenda for HUD. This is a good budget, Mr. Chairman,
    and I respectfully urge the Congress to adopt it. I am now available to
    answer any questions that you or other Senators may have.

        Senator Bond. Thank you very much, Mr. Secretary, and as I
    said, we have a lot of questions. We have touched on some of
    them.
        The PHA formula funding is flat-funded, but the estimates
    currently project that HUD's operating budget proposal will
    fund these agencies at about 80 percent of their eligibility
    under the formula for 2007. How can you expect agencies to
    operate safe and decent housing when they receive 80 cents on
    each dollar they expect from the Federal Government? And what
    kind of shortfalls is this liable to produce?
        Secretary Jackson. Mr. Chairman, that is a fair question. I
    think if we can pass the reforms that we have asked, that will
    be increased. But if we keep it at the present state that we
    have, you are correct. I think that the agreement that we have
    had with the industry is the best approach to go to asset
    management; that is, we have a lot of public housing
    authorities today that have assets that are underused, and in
    many cases not used at all. If we go to total asset management
    and those units are not used, you are paying only for the used
    units. Today, I think it is very important that we look at it
    in that manner. We have not been looking at it that way. And
    that was one of the reasons when we were doing the negotiation
    and I talked to many of the people in the industry and they
    were unsatisfied, I told our staff to go back to the table and
    try to address the needs that had been denoted to us by the
    people in the industry.
        And I think having come out of the industry for a period of
    time, I am very sensitive to their needs, and I think that
    clearly if the reforms are passed and adopted, we will have
    substantial monies to cover the program. If not, then, yes, we
    will have a shortfall.
        Senator Bond. Well, as I understand, during the negotiated
    rulemaking the Department acknowledged that implementing the
    rule would require an additional $250 million in funding, and
    since then, the implementation of the rule seems to have become
    increasingly complex and costly. You know, granted, there needs
    to be a new system, but how can we expect a reasonable and
    ordered implementation of the rule as we move to asset-based
    management when there is a cut and in the face of the
    transition costs which have been acknowledged by HUD?
        Secretary Jackson. We have acknowledged there is a concern,
    and, again, speaking with the industry, I sent our staff back
    to the table to make the transition as smooth as possible so
    that we would not have this kind of effect that you have just
    said.
        We felt that we had come to an agreement, and I still think
    we have come to an agreement, by delaying some implementation
    by some housing authorities and letting others start
    implementation when we set the program to start.
        I believe we have addressed the issues that the industry
    wanted to--said was very significant, and I am a little
    perplexed in talking to some of my industry colleagues when
    they say that we have not, because I specifically said to the
    staff, ``Get in the room and resolve this'', because I, too,
    felt deeply that that specific issue had to be addressed.

                             ASSET-BASED MANAGEMENT

        Senator Bond. Well, there is another issue that just
    strikes me as being a real problem. HUD is behind schedule, I
    gather, in developing the criteria for asset-based management,
    and when October 1 rolls around, PHAs scheduled to lose
    subsidies will not be able to use the stop-loss provisions of
    the rule, which would limit their loss to 5 percent, if they
    comply with the asset management requirements. I understand
    that HUD has indicated that the criteria should be completed by
    mid-2007, and PHAs in compliance will have their funding
    restored retroactively according to stop-loss rules.
        But how do you do that? How do you plan for a year when you
    are going to get a shortfall and you are going to be shorted at
    the front, and you do not know what you are going to--if you
    are going to come out a winner in the end? It seems to me that
    by saying, hey, you start operating on October 1, and maybe by
    March 1 we will tell you how much money you are going to get,
    as a former chief executive of a small operation, I would have
    found that extremely difficult to handle.
        Secretary Jackson. I think your assessment under normal
    circumstances is correct, but one of the things that I think is
    very important is I asked the industry--because I have tried to
    be extremely open and accessible to the industry if that was
    acceptable. They said to date it was acceptable. That is why we
    extended the ability for the stop-loss gap to go into effect.
        Now, if it is not, then I am a little baffled and
    surprised, and I would suggest that as chairman, you and I sit
    with the industry because I would not have made--I would not
    have gone forward with this unless clearly the industry had
    accepted this.
        Senator Bond. I think maybe your team selects some, and our
    guys and gals will select some, and maybe we will have
    everybody sit in the same room so that they tell you the same
    things they are telling us, because somebody is getting the
    wrong story.
        Secretary Jackson. I think you are correct, Mr. Chairman.
    And I am a little baffled.
        Senator Bond. I think this one is----
        Secretary Jackson. You know, I think----
        Senator Bond. They are telling you one thing and us
    another. I would like to find out where the truth lies.
        Secretary Jackson. I have asked the staff to go back and
    make tremendous concessions, because I believe that when we did
    the meetings for the operation perspective, that the industry
    operated in good faith and down the road somewhere we stopped
    operating in good faith, and I sent them back to the table.
        Now, I feel that--I have personally talked to the major
    entities in the industry, and I thought we had resolved this,
    and I do not question you because I have a great deal of
    respect----
        Senator Bond. Well, it is not a question--I am not
    questioning what you are telling me or what my staff is telling
    me. But we are getting two very different signals.
        Secretary Jackson. I agree.
        Senator Bond. So we need to get together and have the group
    that we are trying to serve tell both you and us what the truth
    is.
        Secretary Jackson. I would be happy to do that, sir.

                              BLOCK GRANT VOUCHERS

        Senator Bond. Vouchering the block grant, as I said, I have
    got a minimum amount of high enthusiasm for that proposal.
    Maybe it could work if there is an adequate commitment of
    future funding and if it included special protections for
    extremely low-income families. But there is no guarantee of it.
        I would be interested in why the Department does not
    include the current law requirement that 75 percent of the
    vouchers go to extremely low-income families at or below 30
    percent of area median income. And what is your response to the
    claim that there would be more homeless families without this
    requirement?
        Secretary Jackson. Again, I think that is a fair question.
    I think we do adhere to that 75 percent of the vouchers should
    go to, at this point as the present law is written, the
    households below 30 percent or less of area median income. I
    don't think, Mr. Chairman, that in the present state of the
    program we can change the quality of making sure that more
    people have accessibility to the voucher. The extended time
    that people stay on that voucher has been increased
    tremendously since 1998. Before that, it was nearly 3 years.
    Today it is about 8 years. So we do not have the turnover that
    we had before.
        I truly believe that if we give the authority to the
    housing authority in a block grant, as we did before 1998--we
    did not have unit-based costs before 1998. They gave us an
    allocation. And I can tell you both in St. Louis, both in the
    District of Columbia, and both in Dallas, I dealt with
    allocations and I was able to house more people at a quicker
    rate than we are doing today.
        To me, there are no incentives for a housing authority to
    ask people or to help people get off section 8, because they
    are going to get their administrative costs regardless of what
    they do, whether they lease up or do not lease up those units.
        So I believe that if we go back to where we were before
    1998, we will see aggressive housing authorities moving,
    serving more people, and the voucher will turn over much
    quicker. And, you know, again, you know, I hear the argument
    that is being made by housing authorities. But I am just sorry,
    Mr. Chairman and ranking member, I do not buy the argument. I
    ran three housing authorities, and I know what it takes. And
    the three housing authorities I ran all did very well, as you
    know, in St. Louis, and we served a lot of people. But I think
    we should give housing authorities incentives to serve more
    people and turn the vouchers over much quicker than what they
    are doing. And at this stage, they have no incentives to do
    that, and that is why the lines for section 8 vouchers are
    longer and longer and longer, and getting longer. And I don't
    know whether we are creating more homeless people, but I can
    tell you that the lines are getting longer.
        Senator Bond. Senator Murray.

                                   CDBG CUTS

        Senator Murray. Mr. Secretary, I read through your formal
    opening statement, and reading that statement, you would never
    know that you are proposing a cut to CDBG of $1.15 billion or
    about 27 percent. What your statement says is ``Allocating
    these funds more efficiently will help further reinvigorate our
    communities.'' Can you tell us how cutting available resources
    by $1.15 billion next year helps reinvigorate our communities?
        Secretary Jackson. Senator Murray, I perceive us cutting
    about $635 million out of the block grant program as it stands
    today, not $1.2 billion. I do believe this, that the block
    grant program has served a very vital purpose. That is why I
    was such a great advocate of it. But I am also convinced that
    you have very wealthy communities that have pockets of poverty
    that they should be taking care of. When I look at the block
    grant program, I think we should zero in on those communities
    that have been in distressed conditions, that really need our
    help, both economically, housing, infrastructure-wise, and gear
    our money toward those persons to help them move forward. And
    if they are moving forward, continue to help them until they
    come to the level that they do not need our help.
        That has not been the case with the Community Development
    Block Grant Program, and I must admit that.
        Now, to say that it has not done good in many places, I
    could not say that because that would be very hypocritical
    because I am a great proponent of it and I served as chairman
    of two community development agencies, but I do think the money
    can be zeroed in, and if the reforms are adopted, I think we
    have substantial money to address the needs of those
    communities most in need.
        Senator Murray. I am in my 14th year here in the Senate,
    and I can say that I know of very few programs that have as
    much broad-based support as CDBG. It is supported by Members of
    Congress, by Governors, mayors, county supervisors, community
    development organizations, everywhere I go, and it is
    consistently supported by Democrats and Republicans alike
    because they go home and they hear how these funds are being
    used, and they know that it makes an incredible difference in
    their community. It seems to me like the only group that
    appears to be openly hostile to the CDBG Program is the Bush
    administration.
        Last year the proposal was to combine the program with
    other programs and cut it by more than one-third, and this year
    you want to cut it by $1.15 billion. I just want to know how
    the administration came to the conclusion that this program is
    broken and it needs to be fixed.
        Secretary Jackson. Let me say this to you. I do not think
    that we are hostile toward it, and I can specifically tell you
    that I am not. I have seen the program work, so I cannot debate
    about it not working----
        Senator Murray. What is broken about it?
        Secretary Jackson. The point is, is I do not think it zeros
    in or zooms in on those communities most in need or those
    cities most in need, and I think that if we began to do that,
    not pockets of poverty in Palm Springs, but places like Akron,
    Ohio that really needs tremendous infusion of funds. I think we
    should clearly specify where the money should go and what is
    needed, and we have not done that. I think that that is a
    serious problem, we have not. I mean there are areas in Dallas,
    where I was born and raised, that receive block grant funds
    that should not, but if you take specific areas in St. Louis
    where you have almost a total community that has suffered
    tremendously, I think we should gear the money where it is
    needed.
        Senator Murray. Okay. But right now your own budget
    documents say that as the program exists today, 95 percent of
    CDBG entitlement funds and 97 percent of State grantee funds
    went to benefit, today, low- and moderate-income individuals.
    So if every dollar of this program is already providing
    benefits to targeted communities, why is the administration
    saying we need to target it even more?
        Secretary Jackson. Again, I am not going to disagree with
    you, but let me say this to you. Take Dallas as an example,
    where I am from. Their block grant monies, a great deal is
    spent on housing inspection. That is a worthless waste of time
    of Community Development block grant money. That is what it is.
    But if you ask Dallas, they are going to say that they are
    doing that in low- and moderate-income areas, which they are,
    but that is a function of city government, and they should be
    doing it themselves. They should be using the block grant
    funds, if they are going to use them wisely, for the
    infrastructure and rebuilding of that city.
        Senator Murray. Here in Washington, DC, are we going to
    look at every community and decide ourselves here, or yourself
    in your program, who is using the money wisely, and start doing
    earmarks?
        Secretary Jackson. No, that is not what I am saying, but I
    am saying to you that we have communities that are wealthy that
    can address many of these needs, and they have not been
    addressing these needs.
        Senator Murray. I do not know Dallas. I did not know it was
    wealthy. But in your proposal, you say, so-called affluent
    communities are going to be eliminated. How are you going to
    define affluent communities? We have Bellview, that some people
    may say is affluent, but let me tell you, there is a growing
    large number of low-income people in Bellview, and they use
    those funds for low-income people even though Bellview may be,
    I do not know, within the Nation, an affluent community. I do
    not think so, but how are you going to define this?
        Secretary Jackson. Well, if you want to use Bellview, that
    is a very good example.
        Senator Murray. It is not a good example.
        Secretary Jackson. I am very aware of it. They use a larger
    portion of their funds for housing inspection. They should be
    doing that. That should not be a function. If we are going to
    deal with it, we should look at the areas of the highest area
    of poverty to address needs.
        Senator Murray. So are you saying CDBG funds should not be
    used for housing inspections?
        Secretary Jackson. Really, I do not think it should. If it
    should, it should come out of the administrative costs of that
    city. See, I think we have gotten so used to us not really
    addressing the needs of Community Development Block Grant funds
    as to what they were initially set out to do, that we think
    that it is okay to continue to do this. I am not saying that a
    portion of it should not be used, or should not come out of the
    administrative costs.
        Senator Murray. How are you going to define affluent
    communities?
        Secretary Jackson. I think when you get our proposal that
    we are submitting to you, to reorganize and to look at how we
    can best serve communities. I think we can define affluent
    communities. I think Palm Beach is an affluent community. I
    think that, clearly, several communities that I could name are
    affluent. I think Bellview is affluent.
        Senator Murray. So you are basically going to say at the
    Federal level, we are going to define what affluent communities
    are, and none of them will get any CDBG funds; is that right?
        Secretary Jackson. No, that is not what I am saying, but I
    think we should look at it very hard and see how we address it
    proportionally or whether they should receive it.
        Senator Murray. When will we get your proposal?
        Secretary Jackson. You will have our formula within the
    week of what we are setting forth.
        Senator Murray. Well, it will be very fascinating to see
    how you define affluent.
        Secretary Jackson. I will tell you this, I clearly believe
    we can define it without a doubt, and I think the formula will
    address that.
        Senator Murray. Communities like Bellview have a
    dramatically growing number of low-income people. They are the
    people who work in the hotels. They are even the people who
    teach in our schools, and their housing needs are incredibly
    difficult because they live in a community where housing is
    even more expensive than other communities. So I see CDBG funds
    being incredibly important to what you may well define to us as
    affluent.
        Secretary Jackson. And I would say to you, I do not
    disagree with you on what you just said, but if the monies were
    going to the housing needs, that would be a different
    perspective. I think I would ask you to go back and look at how
    Bellview has been spending their money, because one of the
    things I did before I got here is I did look at it, and a lot
    of it is being spent in areas that I think you would ask them
    to relook at that and go spend it for just what you said.
        Senator Murray. We will see how you define affluent and
    what happens with that.
        Secretary Jackson. Okay.
        Mr. Chairman, Thank you very much.
        Senator Bond. Thank you very much, Senator Murray.
        We are very pleased to be joined by additional members of
    the subcommittee, and sorry you missed out on our initial very
    thoughtful discussions that Senator Murray and I offered.
        But now we are happy to hear your questions, beginning with
    Senator Leahy.

                     STATEMENT OF SENATOR PATRICK J. LEAHY

        Senator Leahy. Thank you, Mr. Chairman. We were here prior,
    but we also have a massive immigration bill before Judiciary,
    and that is where I was.
        Secretary Jackson, it is good to see you again.
        Secretary Jackson. Good seeing you, Senator.
        Senator Leahy. Welcome you to your second appearance before
    our subcommittee. I know that Senator Bond and Senator Murray,
    who do a superb job in leading this committee--I will repeat
    that for Senator Bond.
        Senator Bond and Senator Murray, you do a superb job in
    leading this subcommittee.
        Senator Bond. Thank you very much.
        Senator Leahy. I am concerned though about the budget, and
    I understand what you said to Senator Murray, but I look at
    cuts in affordable housing by cutting funds for public housing,
    weakening of the section 8 program, the President slashed
    funding for--I believe that CDBG is extremely helpful.
        Secretary Jackson. I agree.
        Senator Leahy. I have watched how it has been used in my
    State, and I see these cuts. Whether you are for or against the
    war in Iraq, we just get asked for billions and billions and
    billions of dollars more all the time to rebuild parts of Iraq,
    to do everything from providing for the National Guard of Iraq,
    while we cut money for the National Guard of the United States;
    for housing for Iraq, we cut it here. I believe a strong
    America begins at home, and that has nothing to do with whether
    you are for or against the war in Iraq, but if we are going to
    be providing for these things in Iraq, we ought to start
    providing for them in the United States.
        Fortunately, the attempts to pay for the war in Iraq out of
    our domestic programs is not a wise one to do. If the war is
    that great an idea, then pass a tax to support it. We did this
    with World War II. We did it in Korea. We have always done it.
    Now, I think this puts a real burden on ordinary people. In my
    home State of Vermont, Vermonters are finding it harder and
    harder to find basically affordable housing. It is going to
    become increasingly difficult for our teachers and our police
    officers and our fire and rescue workers even to afford places
    to live in the communities they serve. We are going to see
    homeless families in Vermont grow.

                               PREPARED STATEMENT

        Last weekend it was 10 degrees below zero in Vermont, not
    unusual this time of year. I have been in my home in Vermont
    when I could not tell exactly what the temperature was because
    the thermometer on the front porch only goes to 25 below zero.
    I live in a comfortable house. Many Vermonters do not. That
    does not become a matter of discomfort, that becomes a matter
    of life or death. I will submit a full statement for the
    record, if I might, Mr. Chairman.
        Senator Bond. Without objection.
        [The statement follows:]

                 Prepared Statement of Senator Patrick J. Leahy

        I welcome Secretary Jackson to this hearing of the subcommittee. We
    have much to discuss, as the President has sent a budget to Congress
    that ratchets down affordable housing among our budget priorities, and
    that would increase, not lessen, the burden put on the shoulders of our
    Nation's struggling low-income families. I must say that I wish it
    could start on a more positive note. Unfortunately the President's
    proposed budget for the important work of your Department is one that
    again invites disappointment and even incredulity, not praise.
        For an unprecedented sixth year in a row, the Bush Administration
    has decided that affordable housing is not a national priority. The
    President's budget proposal says to ordinary Americans families
    struggling to make ends meet and needing help in affording basic
    housing, ``Sorry, but putting a roof over your head is no longer our
    concern.'' That attitude is short-sighted, has real consequences in
    real communities for real people and is anything but compassionate.
        At a time when Federal leadership is needed more than ever before,
    the Bush Administration is running in the other direction. The
    President has sent a budget to Congress that would hurt affordable
    housing programs by cutting funds for public housing and weakening the
    section 8 program, and he would slash funding for one of the most
    successful initiatives that supports economic development and
    affordable housing, the Community Development Block Grant (CDBG)
    Program.
        After squandering record surpluses and converting them overnight
    into a record national debt through irresponsible tax and spending
    policies, the White House's solution is to slash funds for affordable
    housing programs that help hard-working Americans and their families
    who are stuck in a financial cul de sac, as the gap between housing
    costs and wages continues to widen. At the same time, the White House
    calls for more massive tax cuts for the wealthiest individuals and
    corporations. Our children and grandchildren, who cannot possibly
    afford such irresponsibility, will reap the true legacy of the Bush
    Administration's abysmal fiscal management.
        In my home State, Vermonters are finding it harder and harder to
    find basic, affordable housing. If we fail to address this problem head
    on, it will become increasingly difficult for our teachers, police
    officers and fire and rescue workers to afford places to live in the
    communities where we need them. We will continue to see the ranks of
    homeless families in Vermont grow. This is not a problem unique to
    Vermont.
        The budget before us signals a substantial retreat in our
    commitment to help provide access to safe and affordable housing for
    all Americans. The public housing capital fund is cut by 11 percent and
    the operating fund is level-funded despite the need for additional
    funding for the operation of public housing under the new asset-based
    management system, funds for housing for persons with disabilities have
    been cut in half, HOME formula grants have been reduced, the housing
    for the elderly program has been slashed, and both fair housing
    programs and lead-based paint grants have been cut.
        Most egregious is the administration's proposal to cut the CDBG
    program by $736 million, leaving funding at its lowest level since
    1990. This program provides critical source of funding for affordable
    housing, supportive services, public improvements, and community and
    economic development. If the President's proposed cuts to CDBG are
    enacted in fiscal year 2007, then an estimated 97 percent of the more
    than 1,000 communities that have held entitlement status since fiscal
    year 2004--which was the highest level of funding for CDBG under this
    administration--or earlier and every State program would have their
    CDBG allocation slashed by at least one-third.
        One of the few programs to see an increase in this budget proposal
    is the section 8 Housing Vouchers program, and even that increase will
    not be enough to restore the cuts that were made to this year as a
    result of inadequate funding in fiscal year 2005.
        I hope to hear from you today about the vision you have for the
    Department of Housing and Urban Development and how you expect to run
    efficient and effective programs like these, when they are slowly being
    starved to death.

        Senator Leahy. To go back to what Senator Murray was saying
    on CDBG, slashing by $736 million, that is the lowest level
    since 1990. The National Low-Income Housing Coalition estimates
    these cuts are in there, then 97 percent of the more than 1,000
    communities that have held entitlement status will find it
    slashed by at least one-third. You have been asked questions
    about that. I will not keep going on that. But we see CDBG,
    proposed consolidation of Brownfields redevelopment grants,
    rural housing, economic development, and section 108 loan
    guarantees. If you are going to consolidate all of those
    programs, how are you going to do more with less? Is there some
    magic or are we using the same rosy assumptions we are in Iraq?
        Secretary Jackson. Well, first of all, I would not agree
    that it is a rosy assumption in Iraq. I believe our President--
    --
        Senator Leahy. I have heard the administration say we would
    be welcomed as liberators. I have seen signs ``mission
    accomplished,'' and I heard, ``Bring it on,'' and I heard that
    this is just a momentary blip in the road as the country is
    spiraling, apparently, into civil war. But this is not the
    committee of Defense Appropriations or Foreign Operations. I am
    just worried that we sometimes make these projects, and they do
    not work very well.
        Secretary Jackson. To answer your question, Senator, if I
    did not think that this could work, I would not be here
    defending it. I think before you came in I said to Senator
    Murray I have the real dubious distinction of being the only
    HUD Secretary to run a housing authority, and to be chairman of
    two community development agencies. And my perspective is, is
    that----
        Senator Leahy. That is one of the reasons we welcome you,
    because of your experience.
        Secretary Jackson. Thank you, sir. My perspective is that
    if we implement the revised formula, which I think is very
    important--and I have said this almost from day one when I was
    Deputy Secretary--to look at how best to distribute the money
    to those communities most in need, and not as we have over the
    last 30 years. I think that when Senator Murray asked me or
    made a statement about the success of the program, there are so
    many successes. I cannot even debate that. But I think we can
    distribute the money much better to address those communities
    in 2005 that most need it, and not communities that have used
    it for programs that are not necessary to address the needs of
    what the block grant program was, from the inception, believed
    to accomplish.
        And I say that again, yes, there is a cut, but I believe
    that clearly the monies that we have, if we adopt a formula
    that we are going to submit to you, will address the needs of
    what we think is very important in the block grant.
        Now, if it is not adopted, I think you are absolutely
    correct, but I do believe that we can do a lot more with not as
    much money this time.
        Senator Leahy. My time is up, but I see this case every
    year. There are all these different holes in the budget. This
    subcommittee is faced with the unenviable task here for every
    mayor, every Governor, and just by every other group saying,
    ``Can you put the money back in?'' Again, we have worked in a
    very bipartisan way here, but it is somewhat difficult. We will
    have a further conversation. My time is up, but I will submit
    questions for the record, and maybe you and I might chat later
    on.
        Secretary Jackson. Yes, sir, thank you.
        Senator Leahy. Thank you, Secretary.
        Senator Bond. Thank you very much for your comments and for
    your sympathy, Senator Leahy. This is a tough year, and we will
    all have a lot of work to do.
        Senator Kohl.
        Senator Kohl. Thank you very much, Mr. Chairman.
        Secretary Jackson, just to plow this ground a little
    deeper, and once again, about section 202. The program, as you
    know, provides funding for local nonprofit agencies to
    construct and manage housing for low-income seniors. This
    section 202 program creates, as you know, safe and affordable
    communities where senior residents have access to the services
    that allow them to live independently, with the number of
    individuals over the age of 65 expected to double, as you know,
    in the next 24 years. How do you explain in a way that makes
    people understand and accept a proposal by the administration
    to cut funding for this program?
        Secretary Jackson. To date, Senator, we have decreased the
    program by $307 million, but it is fully funded for the
    existing contracts that exist today, fully funded. In 2006 we
    funded 7,000 units of 202 and 811, and in 2007 we are funding
    an additional 3,000 units. So clearly, from my perspective, if
    the money is spent in an expeditious manner, I have no problems
    at all going back, saying we need more money. The program has
    been slow starting, and in fact, we geared the program up,
    since we have come in 2001, to get the backlogs of 202s, 811
    that was in the backlog, and we have almost cleared it up, but
    not quite. And if the money continues to be funded, I think it
    is--I will be happy to go back and ask. I am not against 202's,
    811, but I think the money must be expended very quickly.

                                    HOPE VI

        That is my argument even with my good friend, the chairman,
    about the HOPE VI. To date we still have about $3.2 billion
    outstanding over 10 years in HOPE VI that has not been spent,
    and I do not think we should continue to fund the program
    unless clearly the money is spent expeditiously and wisely. To
    date, out of 200 allocations of HOPE VI, a little over 200, we
    have only had about 35 completed. That was the same situation
    we faced when we came in to 202. So it is not, again, that I do
    not think it is worthy. I think we have to look at the program
    and see whether it is being utilized in the best manner. If we
    do that, then, yes, I am the person that will defend it until
    the end and go ask for money.

                                      CDBG

        Senator Kohl. Well, we will see. CDBGs, Mr. Secretary, as
    you know, provide important funding to States, counties, cities
    and local communities for a range of projects such as housing,
    supportive services for seniors and disabled, improvements in
    public facilities, and so on. In my State, Wisconsin, the
    program has funded housing projects for elderly, homeless and
    single family housing, for low-income first-time homeowners,
    and a host of other projects. It is a sort of decentralized,
    locally controlled program that this administration has
    supported. So, again, why does the budget target this program
    for such a significant cut? And is it going to be distributed
    in such a way so that communities such as Wisconsin will not be
    cut? Is that what you suggested earlier?
        Secretary Jackson. What I suggested is, is that we put in
    place a revised formula that we are going to submit to you all
    for you to act upon. I think that we are going to look at all
    of the recipients of block grant programs, look at the
    community as a whole, not necessarily piecemeal, and that is
    what I said to Senator Murray. You have very rich communities
    that have pockets of poverty, but clearly, those communities
    can address that pocket of poverty, where we could best use the
    monies that we have and been allocated, to address those cities
    of total communities that need it.
        I am one, Senator Kohl, that believes block grant works. I
    have seen too many great projects that have been very well
    carried out, but I have also seen cities utilize money--and
    this is not something I have just said today--I have seen
    cities over the years utilize monies for things I did not think
    they should be utilizing the money for. One of the biggest
    problems, when I chaired the redevelopment authority here in
    the District, I had great fights with the council people
    because they had their pet projects, and I said, really, that
    should not be the case. We should zero in on the low- and
    moderate-income community, those with the most poverty, those
    which have the potential of developing economic development in
    conjunction with housing. And so I do believe that the program
    is valuable and worthwhile. I just think we have to redirect
    our energy and specifically say how this program should be
    used.
        Senator Kohl. In doing so, cut the budget for the program.
    I mean, we must----
        Secretary Jackson. No, and a revised formula. Yes, the
    budget has been cut.
        Senator Kohl. I mean, at one end you say it is a great
    program and you support it, you endorse it, you think it is
    good. On the other hand, the budget has a cut for the program
    and there is something there that does not connect. If you, for
    example, take the position, as most of us do, that there is so
    much that needs to be done in our country, so much, with
    programs like this, how you can support at the same time
    cutting the program is, as you can understand, to some of us
    hard to understand.
        Secretary Jackson. Sure.

                                  BROWNFIELDS

        Senator Kohl. But before my time runs out, just on
    Brownfields, obviously, the program, Brownfields, promotes
    economic development in abandoned and under-used industrial
    commercial facilities, as you know. It is a program that is
    good for the environment, good for business, and good for
    economic development. A number of communities in my State,
    including a neighborhood development initiative in Beloit,
    Wisconsin, have benefited from the Brownfield funding. So, can
    you explain why the President would propose eliminating,
    eliminating funding for the Brownfield redevelopment programs?
        Secretary Jackson. We have not cut it. We have consolidated
    the program. I think in consolidating the program, it goes back
    again to what I have said to the others. I think we must zero
    in on those communities, Senator Kohl, that most need the
    money. And if Beloit is one of those communities--that is one I
    cannot comment on--then, yes, we would zero in on that
    community. The question we would ask when we zeroed in on this
    community: ``When we go in with the Community Development Block
    Grant Program, what effect is this going to have on the
    community? Has this community been devastated because of loss
    of jobs over a period of time? Will this invigorate the
    economic development, the housing development within that
    community?''
        If it does, then it is our responsibility to go in and help
    Beloit become a better community. But it is not our
    responsibility to go into Palm Beach and help Palm Beach get
    richer, even though you might have pockets of poverty in Palm
    Beach.
        Senator Kohl. Are you saying that the Brownfield program
    will not be eliminated in Beloit?
        Secretary Jackson. It will be part of--it is consolidated
    into the Community Development Block Grant Program.
        Senator Kohl. Our fear, of course, as you know, is that
    this consolidation will result in less or no money for
    something like brownfields. As you know, that is what those of
    us on the other side of the issue are arguing, and very fearful
    will occur. Tell us that we are wrong.
        Secretary Jackson. Well, I can tell you as the Secretary
    that is not my intention when we talk about consolidation. My
    intention is to take a picture of what is needed in a community
    to bring that community to where it should be after devastation
    has occurred, whether industry has left, whether that has
    happened. I do believe that it is important to look at the
    community as a whole, and as I said to Senator Murray a few
    minutes ago, yes, there are cuts, but I am well aware of monies
    from block grants that have not been used for what I think they
    should be used for. I know people will disagree and say, ``That
    is what you think,'' and it is what I think.
        I think that cities have totally taken--as my city, Dallas,
    I use all the time--just totally taken every housing inspector
    in the city off the payroll and put them on CDBG. I think that
    is the function of the city of Dallas. And I always want to use
    the city because that is the safest city for me to use, since
    it is Dallas. But I do not think it should be used for that.
        I think it should be used for infrastructure to address
    issues, as the Senator just said, for rebuilding house
    infrastructure for low-and moderate-income people, such as fire
    people, police people, nurses, teachers, who find it very
    difficult today to be able to afford a home in this country.
    That is why I think we should juxtapose CDBG funds with HOME
    funds, with Shop funds, and help people who most need it, and
    in many cases that has not been the case. It has been a
    supplement for cities to do things that they should be required
    to do themselves.
        Senator Kohl. Thank you so much.
        Mr. Chairman, thank you.
        Senator Bond. Thank you very much, Senator Kohl.

                                    HOPE VI

        Mr. Secretary, since you wanted to talk about HOPE VI, I
    thought that we might talk a little bit about it, because you
    know how complex it is. You know how long it takes these deals
    to get done. Very difficult for the local governments to put
    all the plans together, and, frankly, from what I hear, HUD has
    not been as helpful as it could and should be, doing something
    that is absolutely the most important thing we can do, and that
    is to turn obsolete, unsafe, unsound, housing, which has been a
    festering place for crime and drugs and not good places for
    families, and turn them into viable communities.
        Now, I can show--and I know you have seen what is going on
    in St. Louis, Murphy Park instead of Vaughn, the King Louis
    operations. This has truly revolutionized downtown St. Louis.
        Secretary Jackson. That is true.
        Senator Bond. And I understand Atlanta, and Louisville, and
    even Chicago, which had had some very real programs, is being
    reborn with the money that goes into the HOPE VI operation. I
    am not going to be like Jim Cramer on Mad Money and tout my
    book, but I hope that you have read the San Francisco Chronicle
    article on HOPE VI, which said that it was one of the very few
    revolutionary programs that is making a difference in housing.
    And if you wanted to change it, if we want to, first of all,
    improve the management, administration of it, but when you are
    saying, well, all these needs are going to be handled through
    the Public Housing Capital Fund, and at the same time more than
    a 10 percent decrease in that, you take that into account with
    the proposal to eliminate HOPE VI, it seems to me that this
    budget turns its back on the need to help cities provide the
    infrastructure that is needed in many instances to clean out
    unsafe, unlivable housing projects into decent places for
    families to live.
        I am just very much troubled by what the budget does to the
    Public Housing Capital Fund, and to HOPE VI.
        Secretary Jackson. Mr. Chairman, let me say this to you.
    Since 1991, when we first implemented the first HOPE VI after
    the recommendation of the National Committee on Severely
    Distressed Public Housing, which I served on, and you, and Jack
    Kemp were very instrumental in making sure that HOPE VI was put
    into law, we have demolished almost 120,000 units today around
    this country. So the same capital fund that was needed then is
    clearly not needed today. And I think, clearly, we should not
    have the same amount of money.
        Secondly, I cannot ever question St. Louis. St. Louis has
    been very, very unique in a sense--so has Atlanta--because in
    their HOPE VI they have had developers who would leverage the
    money. That was the basis of the program in the first place, is
    to find a developer who would take the allocation from the
    Government, leverage it and create a community that was both
    socially and economically integrated.
        Now, have we seen that in St. Louis with developers? I will
    not call any names, but it has been successful. Have we seen
    that in Atlanta? It has been successful. Have we seen that in
    Charlotte? It has been successful. Have we seen it in Dallas?
    It has been successful. But those are only some examples of the
    35 of over 200 applications that were funded, that were done,
    and done in a timely manner.
        Now, if you look in the last 3 years that we have been
    here, we went back to the original language of the HOPE VI,
    where we suggested that you have a developer come in who could
    leverage the money that we give you. That is working, but we
    still have this money in the pipeline.
        Now, I would be the first to say if we are recapturing part
    of this $3 billion, I would say, yes, let's find some way to
    reallocate it to other HOPE VIs in the country, but right now,
    the money is standing still. And we just began, after 15 or so
    years in New Orleans, to get those HOPE VI off the ground. So I
    am saying to you, I am not saying the program in certain areas
    has not worked, but clearly it has not been the program that
    you thought about or Secretary Kemp thought about, or we
    thought about on the National Commission.
        Senator Bond. I think we suggested recapturing some of that
    money, some of the unused HOPE VI money, but we understood that
    HUD opposed it because they did not want to be in the position
    of recapturing it.
        Secretary Jackson. No, no, Senator----
        Senator Bond. If there are some areas where it is not being
    used, and other areas where it is needed, I think we ought to
    work together to recapture that. But you put your finger on one
    critical point for HOPE VI to work, there has to be a community
    with a developer with leverage that is going to come in and
    make this a truly mixed income, viable community.
        Secretary Jackson. If you recapture the money and tell us
    what to do with it, I will do it.

                          PUBLIC HOUSING CAPITAL FUND

        Senator Bond. Well, we have about $20 billion in public
    housing capital backlogs, and the budgets that have been
    presented by OMB do not come anywhere near meeting those. We
    need to get money into the Public Housing Capital Fund, and you
    and we need to be clear that if you are going to have HOPE VI,
    you need to come in with a plan, and with a developer, with the
    financing, with this community support, and then HUD needs to
    streamline its act----
        Secretary Jackson. Absolutely.
        Senator Bond [continuing]. So these people can make it
    work. There are needs around the country for the HOPE VI
    funding, and if some day when you say that they are all done, I
    will be happy to check, and I will bet we can find some more
    where it is needed.
        Anyhow, I took up a lot more time than I meant. Sorry.
        Senator Murray.
        Senator Murray. Thank you, Mr. Chairman.

                        PUBLIC HOUSING CAPITAL FUND CUTS

        Mr. Secretary, following up on that, in your formal opening
    statement you said the Department continues to place great
    emphasis on the physical condition of public housing
    properties. Well, I am having a hard time reconciling that
    statement with the budget proposal that actually cuts the
    Public Housing Capital Fund by more than a quarter of a billion
    dollars, both last year and then again this year.
        Let me just share with you how those Federal capital grants
    have impacted a PHA in my State. King County Housing Authority
    has been trying for a long time, for years, to install fire
    prevention sprinkler systems into all their older buildings
    that house the elderly and house the disabled. They have had an
    increasing number of fires, and one of them resulted recently
    in a fatality.
        These cuts in capital grants have meant that the
    installation of those safety systems are taking longer and
    longer and longer to get done, and it is really putting people
    who live there at risk.
        If the Department is so concerned with the condition of
    public housing, why have you allowed funding for this program,
    the housing capital fund, to drop every year for the last 6
    years?
        Secretary Jackson. Let me say this to you, Senator: We
    believe that the assets which King County and other housing
    authorities have are marketable. They can issue bonds very
    easily to cover any expense that they need, because, clearly,
    they know they are going to receive every month their monies
    from HUD.
        The best example I can give you is what Mayor Daley has
    done in Chicago. He has issued bonds to the tune of almost $350
    million to address needs, plus using the capital fund. If they
    did not have those assets, I think the argument that you--the
    question you just asked, the argument you are making is
    legitimate.
        We have gone back and said use the assets. For years,
    housing authorities--and I was one of them--asked to be able to
    issue bonds on our assets so that we could do things that we
    ordinarily could not do within capital funds. We have given
    them that authority to do it now. There is no reason why King
    County or anyone else cannot issue bonds to cover areas that
    they say are in critical need and do them very quickly. It is
    being done right there in Chicago. It is being done right there
    in Philadelphia. It is being done in other cities.
        So I don't understand why they cannot address this if it is
    a really critical need not only through the capital funds, but
    also through issuing bonds.
        Senator Murray. Well, maybe we can get you together with
    them, because they say this is a real challenge, and when they
    see those declining dollars in the future, they have to pledge
    their future capital grants from HUD for this purpose, and when
    those numbers are declining and they don't know that they are
    there, it is harder and harder for them to do.
        Secretary Jackson. Well, I think the key to it is that,
    from talking to the investment bankers, they realize--and I
    have had a chance to talk to them because that was a concern
    that was raised, a legitimate concern. I said the only way we
    are not going to meet the obligations of housing authorities in
    this country is that our Government goes bankrupt. And I do not
    see our Government going bankrupt, because if we go bankrupt,
    then we cannot meet any of our obligations.
        So I allayed the fears of many of the people on Wall Street
    about making these bond issues. That is why they have done it
    in probably 15 cities today, because they know they are going
    to be paid out of the income that each housing authority
    receives around this country.
        We have to pay them. Every year they have the operating
    subsidy, they have the capital subsidy that we have to give.
    And we have to give it because it is in the budget that you
    allocate for us each year. So I cannot understand why they
    cannot do it.

                            ELDERLY DISABLED HOUSING

        Senator Murray. Well, let me follow up on Senator Kohl's
    question on housing for disabled and elderly. The AARP reported
    that there are currently nine people waiting for every unit
    available, and the senior population is expected to double by
    2030, from 36 million to 70 million.
        Given the unmet needs and the growth in the aging
    population, I find it very hard to see how we can follow
    through on a huge cut to housing support for elderly, more than
    26 percent. How do you justify that?
        Secretary Jackson. Because right now we have fully funded
    the existing contracts in the 202 program. We did, as I said to
    Senator Kohl, cut $190 million, but for 2006, we had and still
    have 7,000 new units today that have not been developed. In
    2007, we have an additional 3,000 units. And all of these to
    date are being put out through a proposal to be developed.
        So I think we are addressing the needs, and if we can clear
    up, as we have done the pipeline before, we will be happy. That
    is a program that I think is absolutely important. In fact, I
    was talking to Chairman Bond about it. You know, I am almost
    there. I am near elderly. So you will have to look and see
    where we are in this program. But I believe that clearly right
    now we are addressing the needs because we have not cut out one
    existing contract. We have funded 7,000 units for 2006. We have
    funded an additional 3,000 units for 2007. And then, if
    necessary, we will fund again.
        But I think until we develop those units again, I don't
    think we should just put money in the budget.
        Senator Murray. What you were saying to Senator Kohl is
    there are unobligated funds in the pipeline so, therefore, you
    are decreasing your request. Well, we don't do that in other
    programs. There are a lot of unobligated funds in the NASA
    program, but the President is asking for an increase there
    because of the need. And I do not understand why the same is
    not true, because the need is so high, and you are doing a
    better job of getting the money out the door. But because the
    need is so high, I do not understand why we are asking----
        Secretary Jackson. Well, I cannot address what the
    administrator at NASA does, but I can tell you what I have
    suggested, and my position is that I believe that clearly we
    can address the needs of the elderly at this point. If I did
    not, I would go and--I would be the first to tell you. I really
    do.
        Senator Murray. All right. Well, thank you, Mr. Chairman.
        Senator Bond. Thank you, Senator Murray. I will have a
    number of questions to follow up on section 202 because, as I
    mentioned to you, we share those concerns.

                                  SECTION 811

        I might as well get to another very serious cut, the 811, a
    90 percent reduction in the 811 fund from $155, almost $156
    million, down to almost $16 million. How are you supposed to
    continue the progress toward eliminating costly institutional
    care that everyone agrees is outdated if 811 is eliminated as a
    tool for developing permanent supportive housing?
        Secretary Jackson. First of all, 811 is still fully funded.
    HUD has built about 27,000 units of 811, and there are about a
    little over 300 in the pipeline today. I still believe, again,
    that with the fully funded contracts, with the units built, we
    can address the needs. If it is clear to me that the needs
    further exceed what we perceive--what we have in the budget,
    then clearly I will come back and speak with you.
        Senator Bond. Well, we are going to have some more
    questions about that. We will get back to you on that one.
        Secretary Jackson. Okay.
        Senator Bond. Because we really think that one is serious.
    There are many other things I want to touch on very briefly.

                               IMPROPER PAYMENTS

        Improper payments. You found $1.25 billion in 2004 in the
    section 8 program, losses estimated $2 to $3 billion a year,
    but under the Improper Payments Information Act of 2002, HUD
    plans only to target improper payments of no more than 5
    percent in 2006 and 3 percent in 2007.
        How do you measure and verify these numbers? And has the
    HUD IG verified your methodology?
        Secretary Jackson. Yes, we have--the HUD IG is involved,
    but also, chairman, when we came, we had really no way from our
    perspective of really verifying it. We have got a top-notch
    information technology person and we react now that we have put
    in place systems that we can verify for the first time. We are
    still working with others to even be more specific in verifying
    it, but I feel a lot better now with the numbers that we are
    giving you than I would have felt 3 years ago.
        Senator Bond. Speaking of numbers, we had to rescind $2
    billion-plus from section 8 for the current year, and you told
    us you would find it, and now OMB has said you are going to
    find another $2 billion.
        How are you doing finding the $2 billion for 2006? And
    where do you expect to find it from excess section 8 for the
    coming year?
        Secretary Jackson. I will have to give you a written
    response to that, Chairman.
        Senator Bond. I look forward to that one.
        [The information follows:]

      U.S. Department of Housing and Urban Development,
                                        Washington, DC, August 31, 2006
    The Hon. John W. Olver,
    Ranking Member,
    The Hon. Joe Knollenberg,
    Chairman,
    Subcommittee on Transportation, Treasury and Housing and Urban
            Development, The Judiciary, District of Columbia, Committee on
            Appropriations, U.S. House of Representatives, Washington, DC.
    The Hon. Patty Murray,
    Ranking Member,
    The Hon. Christopher S. Bond,
    Chairman,
    Subcommittee on Transportation, Treasury, the Judiciary and Housing and
            Urban Development, and Related Agencies, Committee on
            Appropriations, U.S. Senate, Washington, DC.
        The Fiscal Year 2006 Appropriations (Public Law 109-115) Act
    requires the Department to notify the Committees on Appropriations if
    the statutory rescission of $2.05 billion will be met from sources
    other than section 8. Pursuant to this requirement, the Department is
    submitting a list of programs that may be used to meet the rescission
    requirement. With the exception of Drug Elimination Grants, the funds
    for these programs will expire at the end of fiscal year 2006 if not
    obligated. The Department will make these funds available to the
    program offices for obligation almost through the end of September
    2006. However, if by the end of September 2006, the funds are not
    needed then these funds will be used to meet the Department's
    rescission requirement for fiscal year 2006.
        In fiscal year 2002, Congress terminated the Drug Elimination
    Grants Program. The balances remaining in this program are from
    recaptures. These balances will be used to meet the rescission
    requirement. A reprogramming is pending Congressional approval for
    $14.5 million of the total $34 million in the Public Housing Capital
    Fund. If Congress does not approve the reprogramming in time, then
    these funds may also be used to meet the rescission requirement.
        If you have any questions or if I can provide additional
    information, please let me know.
                 Sincerely,

                                         L. Carter Cornick III,
                    General Deputy Assistant Secretary for Legislation.

    DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT POTENTIAL SOURCES FOR FISCAL
                              YEAR 2006 RESCISSION
    ------------------------------------------------------------------------
                                                                  Amount
    ------------------------------------------------------------------------
    Unobligated Funds Expiring at the End of Fiscal Year
     2006:
        HOPE VI (SY 2005)...................................      $2,946,391
        Housing for Persons w/Disabilities (SY 2003)........       3,966,849
        Housing for Persons w/Disabilities-TB (SY 2003).....         118,800
        Housing for Persons w/Disabilities (SY 2004)........       3,084,243
        Housing for Persons w/Disabilities-TB (SY 2004).....       1,771,486
        Housing for Persons w/Disabilities (SY 2005)........      11,420,573
        Housing for Persons w/Disabilities-TB (SY 2005).....       2,307,920
        Housing for the Elderly (SY 2003)...................      24,727,911
        Housing for the Elderly (SY 2004)...................       3,942,457
        Conversion to Assisted Living (SY 2004).............       2,467,584
        Service Coordinators (SY 2003)......................         288,703
        Service Coordinators (SY 2004)......................         456,083
        Pre-Construction Grant Demo (SY 2003)...............       4,440,662
        Pre-Construction Grant Demo (SY 2004)...............      19,682,000
        Working Capital Fund................................       2,843,992
        Public Housing Capital Fund.........................  \1\ 34,810,700
    Unobligated funds available until expended:
        Drug Elimination....................................         796 948
                                                             ---------------
          Total, non-section 8 sources......................     121,273,302
                                                             ===============
    Section 8 Rescission....................................   1,928,726,698
    ------------------------------------------------------------------------
    \1\ Of this total amount, a reprogramming request has been submitted to
      Congress for $14.5 million. If the reprogramming request is not
      approved by Congress before the end of the fiscal year then the entire
      $34.8 million will be available to meet the fiscal year 2006
      rescission.

                             FHA MORTGAGE INSURANCE

        Senator Bond. Moving on to FHA, you have heard me raise my
    serious questions about the single-family mortgage program. It
    is competing with the private sector, and you are trying to put
    all kinds of bells and whistles on it to bring in wealthier
    homeowners to subsidize less economically strong home
    purchasers.
        How is that going to compete successfully with the private
    mortgages? And how do you expect them to--what role is FHA
    going to provide that the private mortgage companies cannot
    provide?
        Secretary Jackson. Let me say this: Our regulations have
    been an inhibiting force for us to continue to compete with the
    private market. The first thing that we are doing is getting
    rid of those inhibiting regulations.
        Second, there is a large group of people who do not fit the
    private market, but yet who have been using, in my mind, many
    predatory lenders at high interest rates to get loans. We feel
    deeply that that is the population we need to zero in on. And
    if we can be flexible in our regulations and offer them the
    same kind of flexibility that many private entities offer those
    persons who are not in this limbo area that we call it, we can
    address the needs.
        I don't think that FHA is obsolete. I don't think it has
    been managed very well, and I don't think we have put our
    programs out publicly like we should have. We have not been
    proactive in any of the processes, and so when we asked
    Assistant Secretary Brian Montgomery to come, one of the things
    that we stressed with him is that we have to be more active
    with FHA to get part of the market back. Over the last 10
    years, we have--it is the most amazing thing to see how we have
    lost market, but we have lost market because it is as if we
    really did not care about being in the market. And I think that
    clearly, for those persons who are in that limbo area, we
    should be there for them to make sure that they do not get
    these high usury rates.

                              HIGH-RISK BORROWERS

        Senator Bond. Well, one of the things I am worried about--
    there are a number of worries I have about it. In other words,
    there is a risk that HUD may be taking on the risks of a number
    of mortgage companies who have taken on high-risk borrowers in
    the sub-prime market and then FHA gives them a new FHA
    mortgage. That is bailing out the initial lender, giving the
    initial lender who had the high rates in the sub-prime market,
    and you wind up with FHA bearing the loss that they have caused
    by taking out--giving a sub-prime loan with a high rate to
    somebody who is not a worthy borrower. So I am worried that FHA
    is setting itself up to be the chump in this process and
    leaving people with great problems in defaulted housing.
        That relates to other questions, that HUD seems to be
    permitting nonprofits funded by a property seller to fund the
    downpayment so that they get the 3 percent downpayment
    requirement, but the seller puts money into a charity that
    provides and raises the price by 3 percent so the homeowner who
    may not be economically able to carry a mortgage has
    essentially a zero downpayment no-risk mortgage, which, based
    on the experience we have seen, is destined to be a disaster.
        Now, those things worry me about what FHA is doing. Please
    respond.
        Secretary Jackson. Well, let me say this: You are
    absolutely correct. That was the posture of FHA for a period of
    time. That is not our posture today because we see that as
    unacceptable because we are creating severe problems for the
    prospective homeowners. And, clearly, we do not think that is
    what we should be doing.
        That is why we are asking you to look at the Flexible bill
    that we are sending you today, to give us the power to cut many
    of the regulations so we can deal directly with this group that
    is right in the middle rather than having the lenders that you
    just spoke about dealing with that group.
        So I do not disagree with you. That has been our posture,
    but that is not our posture today.
        Senator Bond. I will come back to that after Senator Murray
    asks her questions.

                                  HOMELESSNESS

        Senator Murray. Thank you, Mr. Chairman.
        Mr. Secretary, you noted in your testimony that you
    currently serve as the Chairman of the Interagency Council on
    Homelessness. Last year, our committee directed the Council to
    assess an issue that I care a great deal about, and that is the
    educational rights of homeless children. I have worked very
    hard to strengthen the protections for homeless children in the
    No Child Left Behind Act, the Individuals with Disabilities
    Act, Head Start, Higher Education Act.
        Can you tell me, as Chairman of the Interagency Council,
    what the status and preliminary findings of your assessment are
    yet?
        Secretary Jackson. Honestly, Senator, I cannot, but I will
    find out for you. I was not Chairman--I have been Chairman now
    for about 4 months. I did not know that you had asked for that,
    but I will ask where it is and I will make sure that I get back
    to you directly, because I did not know you had asked for that.
        Senator Murray. Okay. I would really appreciate that. I
    have been really concerned by some reports I have heard that
    homeless shelters may be requiring homeless children today to
    change schools and that certain school districts are being
    allowed to skirt their responsibilities to provide
    transportation. And I want to know exactly what is happening
    with that and----
        Secretary Jackson. I will get back to you.
        Senator Murray [continuing]. What leadership your agency is
    demonstrating to make sure those homeless kids their
    educational rights in this country. So I will be hearing----
        Secretary Jackson. I will get back to you immediately.
        [The information follows:]

                  Interagency Council on the Homeless Reports

        The House Conference Report 109-307, on page 293 of H.R. 3058, the
    ``Transportation, Treasury, Housing and Urban Development, the
    Judiciary, the District of Columbia, and Independent Agencies
    Appropriations Act of 2006,'' enacted as Public Law 109-115, directed
    the Interagency Council for the Homeless to conduct an assessment of
    the guidance disseminated by the Department of Education, the
    Department of Housing and Urban Development, and other related Federal
    agencies for grantees of homeless assistance programs on whether such
    guidance is consistent with and does not restrict the exercise of
    education rights provided to parents, youth, and children under
    subtitle B of title VII of the McKinney-Vento Act. This assessment also
    addressed whether the practices, outreach, and training efforts of
    these agencies serve to protect and advance such rights. The
    Interagency Council for the Homeless submitted to the House and Senate
    Committees on Appropriations the attached interim report on May 1,
    2006, and the attached final report on October 25, 2006.
        [Clerk's Note.--The reports referenced above have been retained in
    the committee files, and are also available in part at http://
    www.usich.gov/slocal/EducationWebPost.html.]

                              PHAS OPERATING COSTS

        Senator Murray. Very good.
        You are, as you told us, the first Secretary of HUD who
    actually ran a housing authority, and I appreciate that. But I
    have heard from some of the larger PHAs up in the Northeast
    that are heating with natural gas that now they have to commit
    half of their Federal operating funds just to pay for those
    utility costs. And I was just curious if you were running one
    of those PHAs up there and now having to pay those tremendous
    costs for your utility bills, what would you do? Eliminate
    services for elderly? Reduce maintenance? What decisions would
    you make in order to pay for that?
        Secretary Jackson. You know, I cannot answer that question
    because to me--and I do not mean to dodge the question. That is
    speculation because it is very strange to me. I have not heard
    that yet. And I know the prices of natural gas have gone up,
    but no one has brought that to my attention. So if there is a
    large number that that is occurring----
        Senator Murray. There is----
        Secretary Jackson [continuing]. I will be happy to look
    into it.
        You know, let me say this to you, Senator--and I believe
    exactly what you just said. What bothers me tremendously is I
    have been very open to industry. It is amazing how they come to
    you with stuff, and I have been the most open Secretary and the
    only one that was their colleague at this level, and they do
    not bring it to me. And I hope they are here and they hear what
    I am saying, because they bring problems to me, but they do not
    bring other stuff to me. And if they are going to still want
    accessibility to me, I would much rather for them to tell me
    that than me be surprised today with something that you have
    said and they have not brought it to me.
        Senator Murray. Okay. I am hoping they heard that.
        Mr. Chairman, I have a number of other questions that I
    will submit for the record. Particularly, I have some on
    Katrina, but I understand you are coming before the committee
    next week to talk directly about that.
        Secretary Jackson. Yes.
        Senator Murray. So I will save those for that time.
        Secretary Jackson. Thank you.
        Senator Bond. Thank you very much, Senator Murray. I am
    going to close up, too, but I also am looking forward to
    talking with you and Mr. Donohue, the HUD IG, about Katrina,
    because we are being asked to put a whopping big amount in, and
    I kind of wonder--like Jerry Maguire, ``Show me the money.''
    Where did it go?
        But we were talking the last time about the gifts for the
    downpayment. Have you stopped that practice? Have you made it
    clear that this is not a legal practice for----
        Secretary Jackson. Have we stopped that practice?
        I am sorry. We are waiting--I am sorry. I knew we had
    brought--we are waiting on the IRS to come with a
    recommendation to us because, clearly----
        Senator Bond. It seems to me, the IRS or no IRS, it is a
    recipe for disaster, and, you know, I think you ought to be
    looking at the risks that are entailed with accepting this. I
    mean, I don't care----
        Secretary Jackson. You are right.
        Senator Bond [continuing]. What the IRS says about it. I am
    worried about what it does to the FHA.
        Secretary Jackson. Chairman, I agree with you, and I will
    do that.

                                 SECTION 8 CUT

        Senator Bond. And to go back to what I was saying about
    section 811, the budget request is a 50 percent reduction, but
    only about $15 to $16 million is going to be left for new
    construction. The rest will go to rental payments for current
    projects and vouchers, and so when I said 90 percent cut, the
    new construction available under the budget request for 811 is
    only $15 to $16 million, and it seems to me that there are a
    lot more needs out there than that.
        Secretary Jackson. Yes, sir.

                               PREDATORY LENDING

        Senator Bond. All right. Predatory practices, what are you
    doing to reduce predatory lending? And how successful have you
    been?
        Secretary Jackson. I think we have been very successful. We
    are working extremely hard because we are concerned about that,
    especially in the Northeast. It is--and when I say the
    Northeast, I am talking everything from Washington, DC back. It
    has been absolutely astounding, and also----
        Senator Bond. One of our very good friends from Baltimore,
    who is not here today, will have a lot to say about that, and
    on her behalf, I reiterate the concern that she has had with
    that practice.
        Secretary Jackson. And she has been working well with us,
    and we have talked to her on numerous occasions regarding that.
        Senator Bond. Good. FHA multifamily, you are proposing
    increased mortgage insurance premiums. Again, some have
    suggested this could have a chilling effect on the development
    of multifamily housing projects. Why is the fee necessary? And
    have you conducted an impact analysis on the marketplace? And
    if so, what did you find?
        Secretary Jackson. I do not know the answer to that, Mr.
    Chairman. I will get back to you.
        [The information follows:]

                        FHA Mortgage Insurance Premiums

        The Department's budget stated that FHA would apply a 32 basis
    point increase on the FHA mortgage insurance premiums for all
    multifamily projects except mortgages for projects that utilize low-
    income housing tax credits, and GSE and HFA risk-sharing. This increase
    was to apply to both initial and annual premiums. In no case, however,
    was the resulting premium to exceed 80 basis points. The purpose of the
    increase was to permit continuation of the program while at the same
    time offsetting taxpayer liability for the program's administrative
    costs and any potential financial losses arising from insuring these
    mortgages. The proposal was prompted by the outcome of an evaluation of
    the program using OMB's Program Assessment Rating Tool (PART). That
    evaluation raised questions concerning program targeting and its
    overall efficiency. Since submission of the budget, HUD staff has had
    the opportunity to have numerous discussions with Congressional staff
    and the industry on this topic. Both have raised legitimate concerns
    about the impact such a premium increase would have on HUD's ability to
    foster the development of much needed rental units. The Department
    realizes these concerns must be addressed before any increases are made
    to insurance premiums. The Secretary is committed to fully discussing
    the proposed increase with the industry and Congressional leadership
    before any action is taken.

        Senator Bond. All right. Finally, you are chairing the
    Interagency Council on the Homeless. How are you doing meeting
    your goals? How much progress has been made to meet the goal of
    150,000 units of permanent housing? And when do you expect to
    achieve it?
        Secretary Jackson. I would prefer to speak, Mr. Chairman,
    to you and the Ranking Member in private about that.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Bond. All right. Well, the nice thing about it is
    this conversation will be continued. We have lots of things to
    work on. I believe that that concludes it. There will be--I am
    sure that the ranking member and I will have several questions
    for the record, and if any other members of the subcommittee
    have questions for the record, we would ask them to get them in
    by the end of this week. And we will expect your replies in a
    timely fashion and look forward to continuing these
    discussions.
        [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 Arlen Specter

                    PUBLIC HOUSING OPERATING FUND--NEW RULE

        Question. The fiscal year 2007 budget request maintains funding at
    $3.564 billion for the Public Housing Operating Fund. According to the
    National Association of Housing and Redevelopment Officials, this level
    of funding would represent only 81 percent of actual operating subsidy
    needed for fiscal year 2007 as housing authorities shift to asset-based
    management. Additionally, the implementation of the new regulations for
    the Public Housing Operating Fund provides a new formula for
    distributing operating subsidy to public housing agencies (PHAs) and
    establishes requirements for PHAs to convert to asset management. What
    is HUD's plan for assisting PHAs to come into compliance with this new
    approach?
        Answer. The Department has issued a significant amount of guidance
    and information regarding the transition to asset management. Most of
    the guidance has been shared with interested PHAs and representatives
    of the industry groups that represent PHAs while it was in draft form
    to solicit input prior to finalization and publication. Since
    publication of the rule, the Department has held approximately 20
    meetings with PHAs and the industry groups to discuss the steps
    required for implementation of asset management. All guidance has been
    shared with these groups prior to the meetings and working drafts
    provided for comment and recommendations.
        The transition to asset management is a complex undertaking and the
    Department recognizes that a great deal of guidance and information for
    both PHAs and HUD staff will be necessary to ensure a successful
    transition. For that reason, the Department has been taking a phased
    approach at getting the guidance developed and issued, rather than
    issuing one set of guidance that is expected to cover all actions
    required over several years as PHAs transition to asset management.
        On the day that the Final Rule was published, the Department met
    with representatives of the industry groups to provide a copy of the
    rule and to discuss next steps. The Final Rule was published on
    September 19, 2005 and in response to concerns raised by PHAs and the
    industry groups over the implementation of the rule in fiscal year
    2006, the Department issued a revision on October 24, 2005, pushing the
    implementation date back to October 1, 2006. On November 2, 2005, the
    Department published Notice PIH 2005-34 (HA) that provided an overview
    regarding implementation of the Final Rule for the Public Housing
    Operating Fund Program. This Notice was for informational purposes only
    and informed PHAs of various upcoming notices and other activities tied
    to the implementation of the Final Rule.
        On December 28, 2005, the Department published a Federal Register
    Notice that provided supplemental information regarding the
    Department's method of calculating public housing operating subsidy
    under the Final Rule. The Notice explained the computation of the
    Project Expense Level (PEL) that is one factor in the formula expenses
    component of the Operating Fund Formula. The Notice provided a step-by-
    step description of the computation of the PEL so that PHAs would
    understand how their PELs would be calculated.
        A key component of the transition to asset management is the need
    for each PHA to identify their project or property groupings.
    Recognizing that the current project numbering system did not
    necessarily reflect the appropriate grouping of buildings for
    management purposes, the first step was to allow PHAs to self-identify
    their project groupings. After a series of meetings with PHAs and
    industry groups, the Department issued Notice PIH 2006-10 (HA) on
    February 3, 2006 that provided guidance and related instructions to
    PHAs and HUD field staff regarding the identification of projects for
    purposes of asset management. On February 28, 2006, and March 1, 2006,
    the Department held meetings with the HUD field office staff to discuss
    the Notice and to conduct a live demonstration of the computer screens
    that the PHAs would see when they entered their project grouping
    information. On March 8, 2006, the Department conducted a video
    broadcast with the PHAs and HUD field office staff on the project
    groupings' Notice and conducted a demonstration of the computer screens
    for both PHAs and field office staff. The broadcast was taped and used
    as a webcast on March 15, 2006 and March 23, 2006. The webcast is
    stored in the Department's archives of webcasts and can be accessed
    from its web site at www.hud.gov.
        On March 22, 2006, the Department issued Notice 2006-14 (HA) that
    provides guidance to PHAs on the criteria for asset management. This
    criteria is for those PHAs that want to submit documentation of
    successful conversion to asset management in order to discontinue their
    reduction in operating subsidy under the Operating Fund Program Final
    Rule, commonly referred to as the ``stop-loss'' provision. This Notice
    was discussed thoroughly with PHAs and representatives of the industry
    groups prior to publication and the industry groups provided the
    working drafts of the Notice to their members through their web sites
    and provided extensive information and comments about it through their
    publications.
        The Department has held a series of meetings with PHAs, the
    industry groups and the private market vendors that offer computer
    assistance and software programs used by a number of PHAs. The meetings
    with the IT professionals and the vendors are to assure that any
    changes to systems and software can be done, as necessary, so that PHAs
    do not experience system problems as they transition their inventory to
    an asset management model.
        The Department has also held a series of meetings with PHAs, the
    industry groups, Fee Accountants, Certified Professional Accountants,
    Independent Professional Auditors and representatives of the American
    Institute of Certified Public Accountants (AICPA) to discuss the
    necessary financial reporting changes. The Department will issue
    guidance to PHAs on asset-based accounting and budgeting requirements.
    The first group of PHAs that will have to maintain their books on an
    asset-based approach will be those PHAs whose fiscal year begins July
    1, 2007. The Department intends to have the guidance issued prior to
    July 1, 2006, so that PHAs will have a full year to implement any
    necessary changes to their accounting systems. The last group of PHAs
    that will have to maintain their books on an asset-based approach are
    those PHAs whose fiscal year begins March 31, 2008.
        Question. Given the anticipated shortfall, how will your budget
    fully implement the negotiated rule, including transitional costs?
        Answer. Many PHAs have healthy levels of operating reserves. At the
    end of fiscal year 2005, nationwide, PHAs had approximately half a
    billion dollars in reserves that can be used to support the operation
    and maintenance of low-income housing. PHAs are allowed to retain all
    of the income they receive from investments and other non-dwelling
    rental income such as income from rooftop antennas, laundry receipts,
    etc. In 2005, this other income accounted for $298 million. For
    purposes of subsidy calculation, rental income is frozen at 2004
    levels, which means that any increase in rental income does not
    decrease the amount of subsidy that the PHA will receive in 2006 and
    2007.
        There is much to be gained through providing needed program and
    regulatory reforms that will give PHAs the flexibility to address their
    locality's housing assistance needs. By unlocking the potential that
    PHAs have in their assets, additional funding can be obtained to make
    needed improvements in housing stock or to develop an additional type
    of affordable housing that is self-sustaining and not wholly dependent
    upon Federal appropriations. PHAs will be able to make local program
    decisions and to focus their housing resources in a way that makes
    sense for their communities while seeing reduced regulatory costs.
    Through a variety of programs, the Department has encouraged PHAs to
    look at their inventory and make informed management decisions about
    the housing stock. Steps that PHAs have taken include demolishing the
    worst, and often most expensive housing stock, entering into energy
    performance contracts to reduce the cost of utilities, and switching to
    tenant-paid utilities.

                          MOVING TO WORK PROGRAM (MTW)

        Question. MTW has enabled public housing authorities to implement
    federally-funded housing programs based on local needs by providing
    budget flexibility and regulatory relief. The fiscal year 2006 TTHUD
    Appropriations Conference Report provided a 3-year extension to MTW
    agreements that would expire on or before September 30, 2006. While we
    thank you for the extension, the Pittsburgh Housing Authority's MTW
    agreement expires 3 months after the September 30, 2006 deadline. Would
    you be willing to work with the Pittsburgh Housing Authority to grant
    them a similar extension as was received by all housing authorities
    expiring 3 months earlier?
        Answer. The Department has agreed to grant the Housing Authority of
    the City of Pittsburgh (HACP) a 1-year extension to their MTW
    Agreement. Following subsequent communication between your office and
    HUD, the Department is currently considering granting HACP a 3-year
    extension rather than a 1-year extension.
        The Department has expressed its willingness to continue and expand
    MTW through Title III of the proposed State and Local Housing
    Flexibility Act. While this bill is under consideration in Congress,
    the Department recognizes HACP's desire to avoid a lapse in their
    participation in the demonstration.
        Question. Could you please clarify why some public housing
    authorities initially received MTW extensions through 2011, yet similar
    extensions have not been granted to other requesting housing
    authorities?
        Answer. No current MTW housing authorities have received an
    extension to continue their MTW demonstration until 2011. Agreements
    for only three of the demonstration participants have expiration dates
    that occur in 2011 or 2012: Oakland, Baltimore, and Chicago. Oakland
    and Baltimore only recently executed their agreements and were given
    the now standard 7-year term. Their Agreements expire in 2011 and 2012
    respectively. Due to the complexities of Chicago's Transformation Plan,
    their initial Agreement provided for a 10-year demonstration term,
    which expires in 2011.
        It should be noted that the issue of extensions would not be a
    matter of concern under Title III of the State and Local Housing
    Flexibility Act (SLFHA), which is awaiting Congressional action. In
    Title III, the MTW Demonstration Program is made permanent and
    participating PHAs will meet certain performance requirements, not
    arbitrary time periods for participation. SLHFA would provide funding
    and program flexibility to PHAs; would allow agencies to develop
    program implementations that respond to local market conditions; would
    allow fungibility and flexibility needed to achieve greater cost-
    effectiveness in Federal expenditures; increase housing opportunities
    for low-income households; reduce administrative burdens; allow Federal
    resources to be more effectively used at the local level; and enable
    families to achieve economic self-sufficiency.

             STRENGTHENING AMERICA'S COMMUNITIES INITIATIVE (SACI)

        Question. The President's budget outlines a modified SACI
    (Strengthening America's Communities Initiative) proposal where only 2
    of 18 economic development programs would be funded--HUD's CDBG
    program, and a Regional Development Account within Commerce's Economic
    Development Administration. In fiscal year 2006, Congress funded these
    18 programs at a combined level of $5.3 billion. The fiscal year 2007
    budget proposes only $3.36 billion--a reduction of nearly $2 billion.
    Additionally, the fiscal year 2007 budget proposes a plan for a new
    CDBG funding allocation formula. Given the drastic cuts in funding to
    the CDBG program, altering the formula would likely result in cutting
    off CDBG funding to hundreds of municipalities--the expected loss in
    CDBG to PA is $56.5 million. How does HUD intend to achieve the impact
    of these 18 programs, with a nearly $2 billion or 37 percent reduction
    in funding?
        Answer. The fiscal year 2007 budget request for CDBG is an
    acknowledgment that HUD and its grantees are actively working to
    address the current and future effectiveness of the CDBG program. With
    regard to the proposed CDBG formula changes, a recent study by the
    Office of Policy Development and Research clearly indicates that
    targeting to community development need has fallen dramatically since
    the formula was established 30 years ago. Restoring a greater degree of
    equity to the distribution of CDBG funds will help offset any
    reductions experienced as a result of reduced funding levels. The HUD
    budget does propose consolidation of the Brownfields, Rural Housing and
    Economic Development program and the section 8 Loan Guarantee program,
    all of which can be funded as eligible activities through the mainstay
    CDBG program. In addition, these are small programs compared to the
    scale of CDBG funding.
        In addition to formula reform, the creation of a Challenge Fund
    will further target grants to effective efforts as high impact projects
    in distressed communities. Finally, the ongoing development of
    effective performance measurement efforts will add to the efficiency
    and effectiveness of the CDBG program.
        Question. How does HUD intend to address the unmet CDBG funding
    needs in municipalities that will lose funding under the new formula?
        Answer. Any proposed formula revision would not alter or restrict
    the list of CDBG eligible activities. CDBG will retain its hallmark
    flexibility and emphasis on local decision-making and, through the
    proposed formula reform, HUD will establish a strong foundation for the
    future of the CDBG program. These reforms include:
      --A proposed formula change to target to need. The formula change
            will direct a higher proportion of resources to areas with
            greater need than under the existing formula and areas with
            similar needs will receive similar funding;
      --In addition, the reform includes bonus funds to reward more
            effective grantees;
      --Finally, there is improved performance measurement, which will lead
            to a more effective national program and greater local impacts.

                             ELIMINATION OF HOPE VI

        Question. HOPE VI enhances communities by decentralizing poverty
    and giving families an opportunity to live in mixed-income
    neighborhoods with better educational and employment opportunities. I
    have visited HOPE VI sites throughout Pennsylvania and have discovered
    the critical impact that reconstruction in these public housing
    developments has on revitalizing neighborhoods. As HOPE VI has
    accomplished one of its goals of demolishing 100,000 units--which
    suggests to me that the program has been effective--how does HUD
    propose to accomplish this level of reconstruction in the future if
    HOPE VI is eliminated?
        Answer. As a result of the HOPE VI program and other initiatives,
    the Department's goals for demolition of the worst public housing have
    been met. However, the HOPE VI program has shown to be more costly than
    other programs that serve the same population. For example, a GAO
    report (GA0-02-76) stated that the housing-related costs of a HOPE VI
    unit were 27 percent higher than a housing voucher and 47 percent
    higher when all costs were included.
        The Department recognizes the importance of addressing the current
    capital backlog within the public housing inventory and believes that
    this need can be more appropriately met through other modernization
    programs operated by the Department; e.g., the Capital Fund, Capital
    Fund Financing Program, non-HOPE VI mixed-finance development including
    leveraging private capital investment, required and voluntary
    conversion, section 30, and the use of tax credits. The Department will
    encourage housing authorities in need of this assistance to submit
    proposals under these programs. The Department has already approved
    over $2.5 billion in 61 transactions involving 131 public housing
    agencies under the Capital Fund Financing Program.
                                     ______

                Questions Submitted by Senator Pete V. Domenici

                           ELIMINATION OF SECTION 811

        Question. This is second year in a row that the administration is
    attempting a deep cut to the HUD section 811 program. For fiscal year
    2006, the proposal was to completely eliminate funding for new capital
    advance/project-based units. Congress rejected this idea in 2005--both
    the House and Senate Appropriations Committees restored funding. This
    year, the proposal is to impose another reduction to the capital
    advance/project-based side of the program--a 90 percent reduction, from
    $155.7 million, down to $15.84 million.
        Additionally, the President's New Freedom Initiative spans numerous
    Federal agencies including HHS, Education, Labor and HUD. It is
    designed to promote integration of people with disabilities into the
    mainstream of community life through access to health care, education,
    employment and housing. It is based on the principle of life in the
    community as an alternative to institutional settings such as nursing
    homes and psychiatric hospitals. These deep reductions to the 811
    program run completely against the important national goals contained
    in the New Freedom Initiative.
        Secretary Jackson, how are States and communities supposed to
    continue progress toward eliminating costly institutional care if 811
    is eliminated as a tool for developing permanent supportive housing?
        Answer. The budget proposes $119 million for the Housing for
    Persons with Disabilities program. Despite the section 8 funding
    absorbing a majority of the Department's budget, we are able to direct
    significant funding to the section 811 program that provides for: (1)
    funds to renew and amend existing contracts; (2) $13.2 million for the
    construction of additional new units, and (3) continued financial
    support for the 27,000 units that we have already constructed and for
    the 314 projects (about $400 million) in the construction pipeline.
        Question. What resource will replace the permanent supportive
    housing developed by section 811?
        Answer. We have not abandoned new construction in favor of
    vouchers. We believe that both forms of assistance are needed to
    properly serve persons with disabilities.
                                     ______

                    Question Submitted by Senator Herb Kohl

                              CUTS TO SECTION 202

        Question. The section 202 program provides funding for local non-
    profit agencies to construct and manage housing for low-income seniors.
    The section 202 program creates safe and affordable communities where
    senior residents have access to the services that allow them to live
    independently. With the number of individuals over the age of 65
    expected to double in the next 24 years, how can you explain the
    proposal in the administration's budget to cut section 202 funding by
    $190 million in fiscal year 2007?
        Answer. Despite the fact that section 8 renewal funding absorbed a
    majority of the Department's budget, we are able to direct significant
    funding ($546 million) to the section 202 program to provide for: (1)
    congregate services; (2) service coordinators; (3) funding to convert
    projects to assisted living; $414.8 million for the construction of new
    units; and (4) funds to renew and amend existing contracts.
        The Department has always and continues to be a proponent of
    housing for the elderly. We have constructed approximately 400,000
    units specifically for the elderly and have 342 projects (about $1.6
    billion) in the construction pipeline. In addition, we serve an
    additional 675,000 elderly families under other HUD rental assistance
    programs.
        We also are ensuring that elderly families who own homes can remain
    there through FHA's reverse mortgage program. In 2005, we insured
    43,131 reverse mortgages and we are seeing a steady increase in this
    area.
                                     ______

                Questions Submitted by Senator Richard J. Durbin

                              WHY CUT CDBG FUNDS?

        Question. I met with many of the Chicago aldermen last week while
    they were here in Washington, and one of the first things they asked me
    about was Community Development Block Grants. They asked: should we
    just assume a 10 percent cut in CDBG funds when we plan our upcoming
    budgets? They went on to tell me how devastating that would be, and how
    much good they can do in their local communities in Chicago thanks to
    those CDBG funds. So my question is this: why does the Bush
    Administration want to cut CDBG funds each and every year?
        Answer. The administration's fiscal year 2007 budget requests more
    than $3 billion in funding for CDBG. While the request is lower than
    the fiscal year 2006 appropriation level, the accompanying formula
    reforms will enable these funds to be better targeted to the Nation's
    most distressed communities. Over time, the program's targeting to
    community development need has been diffused as a result of demographic
    changes, development patterns and other factors. Therefore, HUD is
    proposing to reform the program so that it can continue to meet its
    objectives. Reform has four components: formula reform to restore
    appropriate targeting and preserve fairness in the distribution of
    funds; creation of a Challenge Fund that would enable effective CDBG
    grantees to obtain additional funding for community and economic
    development activities in distressed neighborhoods; consolidation of
    duplicative programs; and implementation of a performance measurement
    framework to establish clear, measurable goals of community progress to
    show the results of our formula programs. In addition, each CDBG
    grantee will retain the ability to utilize their CDBG funds as they see
    fit, but will have to carefully prioritize their needs in order to use
    those funds most effectively.

                         CAN HUD AND HHS WORK TOGETHER?

        Question. We all share the goal of eliminating the homelessness
    epidemic in this country. The experts tell me that in order to do so
    the chronically homeless must be provided with services such as
    addiction treatment, mental health counseling, job training, and so
    forth in addition to housing, in order to keep them off the street and
    help them become productive members of society. Do you believe that
    your department can best manage the provision of these services, or
    should the Department of Health and Human Services handle this effort?
    If HHS should be doing this, how can you ensure that HUD and HHS will
    effectively work together to provide the complete services that these
    folks desperately need?
        Answer. The McKinney-Vento Act authorizes the use of HUD funds for
    a variety of supportive services through the Department's Supportive
    Housing Program. As such, since enactment of the Act, HUD has provided
    funding for housing as well as supportive services. HUD has and
    continues to work closely with the Department of Health and Human
    Services (DHHS) and other departments that provide supportive services
    for homeless persons, including the Departments of Veterans Affairs and
    Labor. All such agencies are members of the U.S. Interagency Council on
    Homelessness (ICH). The ICH agencies have been working collaboratively
    on a number fronts in recent years, including demonstration programs to
    provide needed housing and supportive services for chronically homeless
    persons. In these demonstrations, HUD provided resources for housing,
    and other agencies, including DHHS, provided needed supportive
    services. These demonstrations, now underway, will provide useful
    insights on collaborations between the Federal partners involving
    housing and services.

                   CAN HUD PROVIDE HOUSING DURING DISASTERS?

        Question. We've watched in disgust as the Gulf Coast residents who
    lost their homes to Hurricane Katrina have been locked in sports
    stadiums, bused to different States, kicked out of hotels . . . and
    maybe, just maybe, offered a trailer in a location that is not at all
    conducive to finding a job or rebuilding a sense of community. FEMA has
    shown that it is simply not up to the challenge of providing permanent
    housing to such a large number of displaced families. What can HUD do
    to step in here on behalf of the families in the Gulf? In preparation
    for the next disaster, what role should HUD be prepared to play in
    providing both short term and long term housing to those in need?
        Answer. The $11.5 billion enacted for disaster assistance under the
    Community Development Block Grant program can be used by States to
    address the housing needs of families in the Gulf. The flexibility of
    the CDBG program works well in the grey area between temporary and
    permanent housing solutions. Each of the five States has a housing
    component in its action plan for disaster recovery. Mississippi and
    Louisiana will directly undertake programs that focus on housing.
    Alabama, Florida, and Texas will distribute their allocations to
    various units of general local government to address housing needs. In
    addition, Texas plans to allocate funding to councils of governments to
    carry out housing as part of their overall activities.
        Following issuance of the report, The Federal Response to Hurricane
    Katrina: Lessons Learned, and at the direction of the Homeland Security
    Council, HUD began actively exploring options for implementing the
    recommendation that HUD become the lead Federal agency for the
    provision of temporary housing should that transfer of responsibility
    occur. HUD's preparation involves consideration of comprehensive and
    scalable program designs, operations and logistics, program
    authorities, and appropriation resources for temporary disaster housing
    program funding, staffing, travel, training, etc.

                 WHY CUT FUNDING FOR THE ELDERLY AND DISABLED?

        Question. At a time in which the President continues to push hard
    for making permanent the tax cuts that overwhelmingly benefit the
    wealthy, how can you at the same time justify cutting funding that
    supports the housing needs of the elderly and the disabled? What does
    that say about the morals and the priorities of this administration?
        Answer. The $1.1 billion increased cost of serving the roughly 3.4
    million families currently receiving section 8 rental assistance
    required that the Department make some very difficult funding
    decisions. Our first priority had to be to families currently receiving
    subsidy.
        However, despite the fact that section 8 renewal funding absorbed a
    majority of the Department's budget, we are able to direct significant
    funding ($546 million) to the section 202 program to provide for: (1)
    congregate services; (2) service coordinators; (3) funding to convert
    projects to assisted living; $414.8 million for the construction of new
    units; and (4) funds to renew and amend existing contracts.
        In addition, proposed sufficient funding for the section 811
    program provides for: (1) funds to renew and amend existing contracts;
    (2) $13.2 million for the construction of additional new units; and (3)
    continued financial support for the 27,000 units that we have already
    constructed and for the 314 projects (about $400 million) in the
    construction pipeline.
                                     ______

                 Questions Submitted by Senator Byron L. Dorgan

               HOUSING FOR THE ELDERLY AND DISABLED PROGRAM CUTS

        Question. A large number of North Dakotans who take part in public
    housing programs are elderly or disabled. Many of these folks cannot
    work, and if they do, cannot afford suitable housing without
    assistance. We are now on the front edge of the boomers turning senior
    and my State doesn't have housing available for the rapidly growing 30
    percent of median and under portion of this group. This is a problem
    that the section 202 Elderly Housing Program and section 811 Disability
    Housing Programs were designed to address. In my opinion, these
    programs should be expanding not contracting. If you were in my shoes,
    how would you justify cutting section 202 by 25 percent and section 811
    by 50 percent to my constituents?
        Answer. Our first priority for fiscal year 2007 was to provide for
    the $1.1 billion in increased costs associated with serving the roughly
    3.4 million families currently receiving section 8 rental assistance.
    This required that the Department make some very difficult funding
    decisions.
        However, despite the fact that section 8 renewal funding absorbed a
    majority of the Department's budget, we are able to direct significant
    funding ($546 million) to the section 202 program to provide for: (1)
    congregate services; (2) service coordinators; (3) funding to convert
    projects to assisted living; $414.8 million for the construction of new
    units; and (4) funds to renew and amend existing contracts.
        In addition, proposed sufficient funding for the section 811
    program provides for: (1) funds to renew and amend existing contracts;
    (2) $13.2 million for the construction of additional new units; and (3)
    continued financial support for the 27,000 units that we have already
    constructed and for the 314 projects (about $400 million) in the
    construction pipeline.

                   CUTS TO COMMUNITY DEVELOPMENT BLOCK GRANTS

        Question. This year, the President's budget calls for a $1 billion
    reduction in the CDBG program, representing a 25 percent loss in
    funding from last year's levels. Because of its flexibility and use in
    a variety of projects, local and State governments in Grand Forks,
    Fargo, and other North Dakota communities have come to rely on the
    program as the cornerstone of any new community revitalization effort.
    Folks at various North Dakota Housing Authorities tell me that for
    every $1 of the CDBG program invested in communities, $3 are leveraged
    in private funding, bringing much-needed investment, and jobs in North
    Dakota communities. I support this program and am pleased that Congress
    rejected the administration's proposal to eliminate CDBG last year. I
    see the proposed cuts as evidence that the administration is abandoning
    its commitment to America's communities in the guise of reform. How
    would you respond to that, Mr. Secretary?
        Answer. The administration's fiscal year 2007 budget proposal is a
    clear statement of commitment to America's communities and of support
    for the CDBG program. It retains the program at HUD, funds it at a
    level of $3 billion, and proposes a series of legislative initiatives
    that will ultimately strengthen the CDBG program. HUD is committed to
    seeing these reforms enacted and establishing a strong foundation for
    the future of the CDBG program. These reforms include:
      --A proposed formula change to target to need. The formula change
            will direct a higher proportion of resources to areas with
            greater need than under the existing formula and areas with
            similar needs will receive similar funding;
      --In addition, the reform includes bonus funds to reward more
            effective grantees;
      --Finally, there is improved performance measurement, which will lead
            to a more effective national program and greater local impacts.

       NATIVE AMERICAN HOUSING AND SELF-DETERMINATION ACT BILL LANGUAGE
                                  CONTINUATION

        Question. The fiscal year 2007 budget requests the continuation of
    bill language included in last year's HUD appropriations Act that
    amends the Native American Housing and Self-Determination Act funding
    formula to require that HUD distribute funds on the basis of single-
    race or multi-race data, whichever is the higher amount. What is the
    Department rationale for including this language in fiscal year 2007,
    given that it generated a fair amount of controversy among the tribes
    and tribally designated housing entities in fiscal year 2006? Wouldn't
    it be preferable to consider whether changes are appropriate to the
    funding formula as part of the NAHASDA reauthorization process, which
    we will be engaged in the 110th Congress?
        Answer. The fiscal year 2006 HUD Appropriations Act (2006 Act)
    contains a provision directing the Department to implement what is
    commonly known as the ``hold harmless'' provision. This calls for the
    Need component of the Indian Housing Block Grant (IHBG) formula to be
    calculated twice for each tribe, once using single-race data and once
    using multi-race data. Each tribe is then awarded the higher of those
    two amounts.
        Until reauthorization of the Native American Housing Assistance and
    Self-Determination Act (NAHASDA) is addressed, and Congress determines
    what statutory changes, if any, it will enact during the
    reauthorization process, the Department has determined that the best
    course of action to follow is to continue the methodology Congress
    provided in the 2006 Act. This will ensure stability and continuity in
    the way that IHBG recipients receive their IHBG formula funding.

                     RISING UTILITY COSTS IN PUBLIC HOUSING

        Question. Public housing and voucher program participants make a
    monthly housing payment that covers rent and utilities. As utility
    costs skyrocket, energy costs consume a greater and greater proportion
    of the housing payment. This means that housing authorities receive
    less in the form of rent for public housing. The utility over payments
    in the Voucher program come directly out of the fixed administrative
    fees allocated by HUD. In public housing, I'm told that increased
    utility costs could easily tap out these reserves. Under the
    President's proposal, there is not a utility allowance adjustment. Do
    you think that HUD is prepared to cover skyrocketing utility bills?
        Answer. While the Department will not know the actual cost of
    utilities for fiscal year 2006 until PHAs submit their financial
    statements for the past 5 to 7 years, PHA utility costs have remained
    relatively stable with no dramatic spikes. Immediately after Hurricane
    Katrina, utility rates spiked and then came down considerably.
        The 2007 Utility Expense Level (UEL) for the Public Housing
    Operating Fund is calculated based upon a 3-year rolling average to
    account for increases as well as decreases in the cost of utilities
    over a period of time. Although, the Department's 2007 utility expense
    estimate is based on actuals from a 3-year rolling base inflated by the
    OMB utility inflation factor of minus 1.8 percent, it is difficult to
    estimate the impact of utilities without actual cost data.
        However, over the past 3 fiscal years (2003-2005), PHAs have been
    able to retain over $100 million in excess utility payments made to
    them, which are available as a part of their operating fund reserves to
    cover operational and maintenance costs of their program. Also, to
    reduce the cost of utilities, the Department encourages PHAs to enter
    into energy performance contracts, and to also switch to tenant-paid
    utilities. Switching to tenant-based utilities does not shift the cost
    of utilities to the persons needing the assistance because the tenant's
    rent is lowered by the amount of the standard utility allowance, and
    the tenant becomes responsible for the entire utility cost, above or
    below what the standard utility allowance was before the change in
    policy. This will encourage personal responsibility of tenants in
    conserving energy and reducing utility consumption and will reduce, or
    at least make predictable, the utility expense of the PHA and the
    Department. In addition, the Energy Policy Act allows for energy
    performance contracts to run for up to 20 years instead of 12 years.
    This should allow PHAs and HUD greater certainty in planning their
    utility expenses, and responding to unexpected variations in
    consumption or price.
        The Housing Choice Voucher program assists families with the gross
    rent, which is not only the rent due to the owner, but also includes
    applicable utility allowances for any tenant supplied utilities. The
    individual PHA establishes the utility allowances for its program.
    These allowances must be based on the typical cost of utilities and
    services paid by energy-conservative households that occupy housing of
    similar size and type in the same community. In accordance with 24 CFR
    982.518(c), the PHA must review its schedule of utility allowances each
    year, and must revise its allowance for a utility category if there has
    been a change of 10 percent or more in the utility rate since the last
    time the utility allowance was revised. Funding to cover these
    allowances is part of the Housing Assistance Payment (HAP) subsidy
    amount provided by HUD for rental assistance; it is not part of the
    administrative fee provided to a PHA to manage the program. Starting in
    fiscal year 2005, Congress has provided funding to PHAs based on a
    budgetary formula and has directed PHAs to manage all increases in HAP
    costs, including increases in utility allowances, within that budgetary
    allocation.
                                     ______

                Questions Submitted by Senator Patrick J. Leahy

                   CUTS TO COMMUNITY DEVELOPMENT BLOCK GRANTS

        Question. This is the second year that the President's budget seeks
    drastic cuts and changes to CDBG. The request would slash CDBG by over
    $1 billion, leaving funding at its lowest level since 1990. This
    program is a critical source of funding for affordable housing,
    supportive services, public improvements, and community and economic
    development.
        The National Low Income Housing Coalition estimates that if further
    cuts to CDBG are enacted, then an estimated 97 percent of the more than
    1,000 communities that have held entitlement status since fiscal year
    2004--when we reached the highest level of CDBG funding under this
    administration--or earlier would have their CDBG allocation slashed by
    at least one-third. Each State would also see its allocation reduced by
    at least a third compared to the fiscal year 2004 funding level.
        Secretary Jackson, your Department is principally responsible for
    housing and community development. How do you justify a budget that
    slashes funding for this most successful initiative that supports
    economic development and affordable housing?
        Answer. The fiscal year 2007 budget of $3.032 billion for CDBG
    reflects a reduction of approximately $700 million from the enacted
    fiscal year 2006 level. The administration's fiscal year 2007 budget
    proposal recognizes the value of the CDBG program to local community
    development efforts in two ways. First, it maintains the CDBG program
    at HUD as opposed to consolidating or transferring it to another
    agency. Second, the budget requests funding for the CDBG program at a
    level of more than $3 billion. In addition, the fiscal year 2007 budget
    proposal improves the effectiveness of the program in several
    significant ways. The proposal is as follows:
      --proposed formula change will direct a higher proportion of
            resources to areas with greater need than under the existing
            formula and areas with similar needs will receive similar
            funding;
      --bonus funds will be established to provide additional funds to more
            effective grantees; and
      --improved performance measurement will lead to a more effective
            national program and greater local impacts.

                   CUTS TO COMMUNITY DEVELOPMENT BLOCK GRANTS

        Question. Is it the President's intention to focus this program
    solely on job creation and economic development? If so, why don't we
    call this what it is--the elimination of community development as part
    of HUD's core mission?
        Answer. The proposed reforms of the CDBG program will not alter or
    restrict the list of CDBG eligible activities. Thus, grantees will
    continue to make their own decisions as to the activities they will
    fund with their CDBG dollars--be it public services, infrastructure,
    housing or economic development. The reforms will achieve three goals--
    CDBG formula reform, improved performance measurement standards for
    CDBG and implementation of a challenge grant to provide targeted
    development grants to high impact projects in distressed communities.

         CONSOLIDATION OF HUD'S SMALLER COMMUNITY DEVELOPMENT PROGRAMS

        Question. I noted that the President's proposal from last year for
    the ``Strengthening America's Communities Initiative'' remains alive in
    the fiscal year 2007 budget request. The administration was soundly
    beaten back by Congress last year on its proposal to consolidate and
    slash funding under this initiative for several smaller economic and
    community development programs with larger programs like CDBG.
        The administration pursues this misguided goal for fiscal year 2007
    with a proposed consolidation of CDBG with Brownfields Redevelopment
    grants, Rural Housing and Economic Development, and section 108 Loan
    Guarantees. It again proposes no funding for these smaller programs and
    would fund CDBG at 20 percent less than this year.
        Since the fiscal year 2007 budget request would fund CDBG at
    substantially less than this year, as well as consolidate it with those
    other programs, how do you magically propose to do so much more with so
    much less?
        Answer. The key will be reform of the CDBG formula. A recent study
    by the Office of Policy Development and Research found that one of the
    problems with the CDBG formula is that some communities with little
    need for CDBG funds have received much more on a per capita basis than
    many communities with much greater needs. Restoring a greater degree of
    equity to the distribution of funds will help offset any reductions
    experienced as a result of reduced appropriations levels. The budget
    does propose consolidation of the Brownfields Economic Development
    Initiative (BEDI), Rural Housing and Economic Development Program, and
    the section 108 Loan Guarantee Programs under CDBG. In almost every
    case, the activities eligible for assistance under these programs can
    be funded through the CDBG program. This point is demonstrated by the
    fact that the section 108 and BEDI programs are authorized through the
    CDBG statute and utilize the CDBG eligible activities list to define
    their eligible activities.

                            CUTS TO HOUSING PROGRAMS

        Question. I was pleased to see an increase this year for the
    section 8 voucher program in fiscal year 2007. Finding an affordable
    place to live is becoming increasingly difficult for many working
    families in Vermont and the section 8 program often helps bridge the
    gap for families who are struggling to make ends meet.
        Unfortunately due to inadequate funding in fiscal year 2005, local
    housing agencies budgets continue to be cut this year. Some estimate
    that 80,000 fewer families may be served by the voucher program as a
    result, over 200 of those in Vermont. The increase in the fiscal year
    2007 budget is enough to undo about half of these reductions--and I
    thank you for that--but it still falls short of the money needed to
    restore the cuts we have seen over recent years.
        In other areas of the budget we see additional rollbacks. The
    public housing capital fund is cut by 11 percent, the operating fund is
    level-funded despite the need for additional funding for the operation
    of public housing under the new asset-based management system, funds
    for housing for persons with disabilities have been cut in half, HOME
    formula grants have been reduced, housing for the elderly programs have
    been slashed, and both fair housing programs and lead-based paint
    grants have been cut.
        Mr. Jackson, each year the administration submits a budget for HUD
    that is littered with bullet holes--one year it is section 8, the next
    it is public housing, the next it is CDBG--and each time the
    subcommittee is left holding the bag. Can you offer me any assurances
    that this will not continue in future years?
        Answer. While some, including the Center for Budget and Policy
    Priorities (CBPP), forecasted that approximately 80,000 fewer families
    would be able to be assisted given the administration's funding request
    for fiscal year 2005, this has turned out not to be so. In fact more
    families were assisted in fiscal year 2005 than the previous year and
    the CBBP has retracted its initial fiscal year 2005 projections in a
    footnote to its 2006 report. The Department has not been made aware of
    a single family in the State of Vermont displaced as a result of the
    fiscal year 2005 budget for the Housing Choice Voucher Program.
        HUD has been consistent in its support for the section 8 program.
    The administration agrees with the appropriators in that the most
    effective way to deliver section 8 rental assistance is through a fixed
    budget that allows public housing agencies to properly plan their
    operations. In support of that approach the President's budget request
    currently being debated, includes a $380 million budgetary increase
    over 2006 funding levels coupled with a number of key legislative
    proposals aimed at further improving the efficiency of the Housing
    Choice Voucher Program. HUD will continue to actively engage in
    communication with Congress to ensure these important reforms are
    enacted. By measuring outcomes and aligning incentives, these important
    programs will be even better.

                       CUTS TO PROPOSED HOUSING PROGRAMS

        Question. How do you expect to run a Department whose core programs
    are being eroded away bit by bit?
        Answer. By appropriately prioritizing resources and proposing
    reforms to key Departmental programs, including section 8 and CDBG, HUD
    can continue the advances for the good of the low-income community.
    Those programs that are not able to drawdown all of its funds or are
    simply inefficient, must be reformed. HUD will continue to work with
    Congress to ensure these key reforms are enacted.

                              SUBCOMMITTEE RECESS

        Secretary Jackson. Thank you.
        Senator Bond. Thank you very much. The hearing is recessed.
        [Whereupon, at 11:04 a.m., Tuesday, March 2, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      DEPARTMENTS OF TRANSPORTATION, TREASURY, THE JUDICIARY, HOUSING AND
    URBAN DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR
                                      2007

                                  ----------

                            THURSDAY, MARCH 16, 2006

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:35 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Christopher S. Bond (chairman)
    presiding.
        Present: Senators Bond, Bennett, Cochran, Murray, Durbin,
    Dorgan, and Leahy.

                          DEPARTMENT OF TRANSPORTATION

                            Office of the Secretary

    STATEMENT OF HON. NORMAN Y. MINETA, SECRETARY

                OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Mr. Secretary, if you are ready, we will
    welcome you. I didn't want to start until you got organized,
    but Senator Murray and I have some words, we hope, of wisdom,
    at least of concern, that we would like to share with you to
    begin.
        The Senate Appropriations Subcommittee on Transportation,
    Treasury, the Judiciary, HUD and Related Agencies will come to
    order. It is a pleasure to welcome our good friend, Secretary
    Mineta, and thank him for appearing today to testify on the
    Department's 2007 budget. This is the first of two hearings we
    have scheduled for the review of the budget request, especially
    Amtrak and FAA, both of which are facing significant policy
    decisions over the next several years.
        Our hearing today will focus on the overall budget request
    for the Department of Transportation and then we will have a
    second panel that will take a closer look at the state of
    Amtrak in the 2007 budget. In April, we are planning to have
    our second DOT-related hearing, where we will focus on the FAA
    and labor issues facing FAA.
        Mr. Secretary, we look forward to your comments on the
    overall budget picture for all modes of transportation and we
    will welcome now the second panel on Amtrak, FRA Administrator
    Joe Boardman, David Hughes, President and CEO of Amtrak, Mr.
    David Laney, Chairman of the Board, and Mr. Mark Dayton, Senior
    Economist, Department of Transportation for the OIG.
        The 2007 budget for DOT would provide $65.64 billion in
    gross budgetary resources, basically, a flat budget from last
    year's 2006 $65.51 billion budget. The budget, I regret to tell
    you, is deceiving because not all modes are treated equally.
    There are bright spots in the budget for some modes within the
    Department, like FHWA and the Federal Transit Administration,
    FTA. Unfortunately, there are significant shortfalls for other
    modes, like FAA and Amtrak.
        Since we will be holding a separate hearing on FAA, I am
    not going to focus significantly on the FAA. Our April hearing
    will include issues related to the resolution of a labor
    contract with the air traffic controllers, a significant
    reduction to the Airport Improvement Program, and the proposed
    open skies aviation treaty.
        First, having worked for better than 2\1/2\ years as
    chairman of the Senate Subcommittee on Transportation and
    Infrastructure to pass SAFETEA, I am pleased to see that this
    year, the administration has fully embraced the historic
    funding levels achieved under the law. Although I regret some
    things that those crazy authorizers did, we will now try to
    clean up the mess in our appropriations process.
        This year marks the 50th anniversary of the Dwight D.
    Eisenhower System of Interstate and Defense Highways, a
    landmark commitment to the transportation and commercial needs
    of the Nation. Our interstate highway system has had a profound
    impact on our Nation's economy, keeping communities and
    families connected to one another and serving as the primary
    system for moving goods and products that are the life blood of
    our economy. The 2007 budget would provide $3.4 billion, a
    boost in needed investment funding for our Nation's highways
    and bridges. Over $2 billion of this funding increase was
    called for by SAFETEA.
        An additional $842 million is also made available by the
    Bond-Chafee Revenue Aligned Budget Authority, or RABA, begun
    under TEA21 and continued in SAFETEA. Some people in Washington
    call it the Chafee-Bond proposal, since Senator Chafee was
    chairman of the committee, but I am taking the liberty of
    changing the alignment of names. These additional funds will
    allow an increased investment in key highway and transportation
    projects which will complement and assist the continuing growth
    of the U.S. economy.
        I commend the administration for its commitment to
    increasing important highway spending when receipts into the
    Highway Trust Fund are higher than projected. Unfortunately,
    this is where the good news ends, and permit me to explain our
    subcommittee's unmet budgetary needs in the current budget.
        As I stated in our March 2 hearing on HUD, this year's
    budget request is lacking for many of the programs under our
    jurisdiction. Many widely supported programs within HUD, such
    as CDBG, public housing capital funding, HOPE VI, Section 202
    elderly, Section 811 housing for the disabled have been slashed
    in the 2007 budget. Even more troubling, the 2007 HUD budget
    includes a $2 billion rescission of excess Section 8 funds,
    which I don't think are available. They also assume, without
    any justification whatsoever, a wide range of fees that the
    Congress will not approve and rescissions which Congress will
    not approve. This makes the decisions posed by the 2007 budget
    especially troubling.
        The subcommittee will also have to face substantial
    shortfalls in many other accounts, for example, a shortfall of
    some $400 million in proposed Amtrak funding level for fiscal
    year 2007 and some $1.557 billion for AIP and F&E. The proposed
    Amtrak funding of $900 million is clearly not enough to support
    Amtrak's funding needs, and I am not even sure that flat
    funding will meet the anticipated expenses in 2007.
        Last year, to avoid a veto which the administration
    proposed, we added reform language with necessary funding to
    support Amtrak's need for 2006. Consistent with this reform
    legislation, I expected the administration to have a vision for
    reform and be prepared to implement this vision. That was an
    empty hope. Nothing has happened. Reducing the budget for
    Amtrak makes no sense unless and until the administration is
    prepared to implement a reform strategy which can be supported
    by the budget request.
        Let me be clear. As many people here know, when I was
    Governor of Missouri, I supported and signed into law annually
    millions of dollars in subsidies to keep Amtrak running in our
    State. But let me be equally frank that we cannot continue to
    see costs rising beyond the available revenues with many areas
    of expenditure apparently unjustified. Consequently, Mr.
    Secretary, I expect you and our second panel to justify the
    Amtrak budget and I expect the Amtrak panel to explain where we
    are, where we are going, and what it is going to cost. Anything
    less would be a big disappointment for us and the people who
    depend upon Amtrak.
        In particular, I am troubled that while the administration
    seems to press for Amtrak reforms and accountability in its
    budget submissions, it has yet to exercise the substantial
    authority it has sought and received from Congress to maintain
    greater control over the Federal funds provided to Amtrak.
        Mr. Secretary, we provided you with sole authority to
    approve or disapprove Amtrak's requests for funds to cover
    capital needs and operating losses. To date, I am not aware of
    a single instance in which you have denied funding to Amtrak.
    In particular, DOT and Amtrak must be able to account for its
    expenditures in budget submissions with long-term plans for
    individual capital improvements similar to State TIPS or
    Transportation Improvement Plans. If detailed Transportation
    Improvement Plans were provided by Amtrak, we would be better
    able to understand what unmet needs are out there and we could
    then decide whether or not we agree with providing additional
    funds for passenger rail service.
        I am concerned the budget submission does not include any
    funds for Amtrak for debt service payments. These payments are
    necessary and will have to be paid, whether through a line item
    for debt service added by this subcommittee or through the $500
    million provided in the capital costs budget for Amtrak
    included in your budget submission. One cannot ignore the fact
    that the debt is there and that there is an immediate and legal
    obligation to repay it, even if you do not agree with the
    manner in which the sizeable debt was incurred. Until a reform
    bill is enacted, we would expect the Amtrak Board to step up to
    the plate, make such reforms that are needed and necessary
    consistent with the current budget and the budget request.
        Finally, among other issues, the 2007 budget requests a
    total of $13.8 billion for FAA, a $500 million decrease from
    the current year. While the FAA's operational activities in the
    budget would see a 5 percent increase over the amount provided
    last year, the budget would impose a dramatic cut in airport
    construction and investment.
        This subcommittee is once again left to fill in the gaps of
    underfunded Federal responsibilities for our Nation's airports,
    including a reduction of some $765 million for AIP from what
    was provided for this year. As the administration should know,
    this program is critical to the future of commercial aviation
    in the Nation. Nevertheless, this cut would be used to increase
    funding for salaries and expenses and the hiring of air traffic
    controllers and safety inspectors at the expense of funding
    needed for airport investment improvements under AIP. If the
    administration were to follow the blueprint of Vision 100, the
    authorizing legislation for aviation, in the same manner in
    which they funded needed highway improvements under SAFETEA,
    the AIP number for 2007 would be $3.7 billion rather than the
    $2.7 billion provided.
        Let us be clear. Over the next 15 years, passenger
    boardings on airplanes are expected to grow by some 15 percent
    and include a 30 percent growth in air transport and commercial
    operations. At the 35 busiest airports in the Nation, total
    operations are expected to grow by more than 34 percent by
    2020. While I know the administration is expected to propose
    new ways to fund the Aviation Trust Fund, we cannot afford to
    shortchange our commercial air needs in the meantime.
        We need answers to all these issues, but more importantly,
    we need adequate funding. We need to protect the future of
    commercial aviation, and absent a substantive explanation of
    the budget, I consider the proposed funding level a failure of
    leadership. In other words, we need to understand the
    justification for this funding and how the administration
    intends to maintain a world class, indeed a world first
    commercial aviation industry.

                               PREPARED STATEMENT

        Mr. Secretary, we appreciate your willingness to work with
    us in being here today and it is my pleasure to turn to my
    ranking member and partner on the subcommittee, Senator Murray.
        [The statement follows:]

               Prepared Statement of Senator Christopher S. Bond

        The Senate Appropriations Subcommittee on Transportation, Treasury,
    the Judiciary, HUD and Related Agencies will come to order.
        We welcome Secretary Mineta and thank him for appearing before us
    today to testify on the Department of Transportation's budget
    submission for fiscal year 2007. This is the first of two hearings that
    we have planned to review the fiscal year 2007 DOT budget submission.
        Our hearing today will focus on the overall budget submission for
    the Department of Transportation, followed by a second panel that will
    take a closer look at the state of Amtrak in the fiscal year 2007
    budget. In April, we are planning to have our second DOT related
    hearing where we will focus in on the Federal Aviation Administration
    and labor issues facing the FAA.
        Mr. Secretary, I look forward to your comments on the overall
    budget picture for all of the modes of transportation within the
    Department. I also welcome our second panel witnesses on Amtrak: FRA
    Administrator Joseph Boardman; Mr. David Hughes, President and CEO,
    Amtrak; Mr. David M. Laney, Chairman of the Board of Amtrak and Mr.
    Mark Dayton, Senior Economist, Department of Transportation Office of
    the Inspector General.
        The proposed fiscal year 2007 budget for DOT would give the
    department $65.64 billion in gross budgetary resources. This is
    basically a flat line from last year's fiscal year 2006 $65.51 billion
    appropriation for the Department of Transportation. The fact that this
    is a flat line budget is deceiving because all modes are not treated
    equally. There are bright spots in this budget for some modes within
    the Department, like the Federal Highway Administration (FHWA) and the
    Federal Transit Administration (FTA), and unfortunately there are black
    holes for other modes like the FAA and Amtrak.
        Having worked for over 2\1/2\ years as the Chairman of the Senate
    Subcommittee on Transportation and Infrastructure to pass SAFETEA-LU, I
    am pleased to see that this year the administration has fully embraced
    the historic funding levels achieved under the law. This year marks the
    50th anniversary of the Dwight D. Eisenhower System of Interstate and
    Defense Highway. No one can deny that our interstate system has had a
    profound impact on our Nation's economy, keeping communities and
    families connected to one another and serving as the primary system for
    moving goods and products that are the lifeblood of our economy.
        The fiscal year 2007 budget will provide a $3.4 billion boost in
    needed investment for our Nation's highways and bridges. While over $2
    billion of this funding increase was called for by SAFETEA, an
    additional $842 million is also made available by what I call the Bond-
    Chafee Revenue Aligned Budget Authority (RABA) begun under TEA-21 and
    continued in SAFETEA. I commend the administration for continuing its
    commitment to allowing spending to increase when receipts into the
    highway trust fund are higher than had been projected.
        Unfortunately, this is where my good news report ends, and I begin
    with our subcommittee's unmet budgetary needs provided under the fiscal
    year 2007 budget speech.
        As I stated at our March 2 hearing on HUD, this year's budget
    request for HUD proposes some $33.65 for fiscal year 2007, a decrease
    of some $621 million, or some 2 percent from the fiscal year 2006
    funding level of $34.27 billion.
        This request does not reflect the true extent to which many other
    important housing and community development programs are compromised.
    In particular, because of needed increases to section 8 funding,
    funding for many widely supported programs, such as CDBG, Public
    Housing Capital funding, HOPE VI, Section 202 Elderly and Section 811
    housing for the disabled, has been slashed. The fiscal year 2007 HUD
    budget also includes a $2 billion rescission of excess section 8 funds
    which are unlikely to be available.
        In addition to the very difficult decisions posed by the HUD fiscal
    year 2007 budget, this subcommittee will also have to face substantial
    shortfalls in many other accounts including, for example, a shortfall
    of some $400 million in the proposed Amtrak funding level for fiscal
    year 2007. This proposed level is clearly not enough to support
    Amtrak's funding needs and I am not sure that even flat funding will
    meet Amtrak's anticipated expenses in fiscal year 2007. Why was $900
    million chosen instead of the approximately $1.315 billion provided for
    Amtrak in fiscal year 2006? Is $900 million really sufficient to keep
    Amtrak afloat?
        If the administration wants Congress to be serious in its efforts
    to pass reform legislation, the administration must be more serious in
    its budget submissions. I am troubled that, while the administration
    seems to press for Amtrak reform and accountability in its budget
    submissions, it has yet to exercise the substantial authority that it
    has sought and received from Congress to maintain greater controls over
    the Federal funds provided to Amtrak. The Secretary of Transportation
    now has sole authority to approve or disapprove Amtrak's request for
    funds to cover capital needs and operating losses. To date, I am not
    aware of a single instance in which the Secretary has denied funding to
    Amtrak because Amtrak's grant request would not be the most efficient
    use of Federal funds.
        As we all know, this year's budget proposal of $900 million is
    better than the black hole provided for Amtrak in fiscal year 2006,
    however the $900 million reflected in the budget does not come with
    sufficient budgetary justification to draw any conclusions as to what
    $900 million will get us? I think that Amtrak should have to account
    for its expenditures and budget submissions with long term plans for
    individual capital improvements, similar to state TIPs, or
    transportation improvement plans. If detailed transportation
    improvement plans were provided by Amtrak, we would be better able to
    understand what unmet needs are out there, and we could then decide
    whether or not we agree with providing additional funding for passenger
    rail service.
        I am concerned that the budget submission we have before us for
    Amtrak does not include any funds for debt service payments. These
    payments are necessary and will be paid, whether through a line item
    for debt service added by this subcommittee, or through the $500
    million provided in the capital costs budget for Amtrak provided in
    your budget submission. One can not ignore the fact that the debt is
    there and that there is an immediate and a legal obligation to repay
    it, even if you do not agree with the manner in which this sizeable
    debt was incurred.
        Finally, the budget requests a total of $13.8 billion for FAA, a
    $500 million decrease from fiscal year 2006. While the FAA's
    operational activities under the budget would see a 5 percent increase
    over the amount provided last year, the budget would impose a dramatic
    cut in airport construction investment.
        This subcommittee is left once again to fill in the gaps of under-
    funded Federal responsibilities for our Nation's airports to the tune
    of $765 million for AIP below what was provided in fiscal year 2006.
    This cut would be used to increase funding for salaries and expenses
    and hiring of air traffic controllers and safety inspectors at the
    expense of funding needed airport investment improvements under the AIP
    program. If the administration were to follow the blueprint of VISION-
    100, the authorizing legislation for aviation in the same manner in
    which they funded needed highway improvements under SAFETEA, the AIP
    number for fiscal year 2007 would be $3.7 billion, rather than the
    $2.75 billion provided.
        Mr. Secretary, I appreciate your time today. I now turn to my
    ranking member and partner on this subcommittee, Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you very much, Mr. Chairman.
        Just a few months ago, Congress passed the SAFETEA-LU
    highway, transit and safety authorization bill. That law
    settled many of the major questions about transportation policy
    and funding for the next few years. Normally, this would be a
    relatively quiet period on transportation policy, but instead,
    this year is going to be anything but quiet when it comes to
    the challenges facing us in transportation.
        We already hear voices of concern that the revenues to the
    Highway Trust Fund will not be adequate to actually fund the
    SAFETEA-LU bill through 2009, and we will be presented with
    proposals this year to dramatically restructure the way we
    finance our national aviation enterprise, including the
    operations of the FAA.
        One of the biggest cost drivers in the FAA's budget is the
    need to pay for our hard working and highly capable air traffic
    controllers. Yet there are many rumors floating around that the
    Bush administration would rather let Congress settle the
    contract dispute with air traffic controllers than settle the
    issue at the bargaining table. I hope that is not the case.
    Last night, I received word that the FAA has asked the mediator
    to extend the negotiations in the hope that more progress can
    be made, and I take that as a positive sign. I hope Secretary
    Mineta will instruct his team to get back to the bargaining
    table and stay there until a contract is negotiated. This is
    not something that should be thrown in the laps of Congress.
        Now, as I review the Department of Transportation's budget
    for the coming fiscal year, it is clear that there are three
    huge and controversial funding holes in the President's budget.
    One is the 30 percent funding cut proposed for Amtrak. Another
    is the proposal to cut in half the essential air service
    subsidies necessary to maintain air service to our rural
    communities. The last is the administration's proposal to cut
    more than $750 million from our capital investments in our
    Nation's airports.
        I am pleased that Chairman Bond has agreed to have special
    hearings so we can review those issues in detail. Following our
    discussion with Secretary Mineta this morning, we will have a
    panel that will specifically address Amtrak, and we also have a
    hearing with the FAA Administrator on May 4.
        Another challenge we face is the need to adequately fund
    the transportation needs of the gulf coast recovery. Last year,
    this subcommittee provided $2.75 billion for emergency relief
    for highways. Now, it is becoming clear that several of the
    major highway and bridge replacement projects in Louisiana and
    Mississippi will be more expensive than anticipated. This is an
    issue I hope we address in the supplemental, Mr. Chairman, if
    we are to ensure that the Gulf region has the kind of
    infrastructure that will allow its economy to rebound, and we
    must not ignore the other emergency relief projects from other
    disasters that have been awaiting reimbursement for many months
    or, in some cases, years.
        So, as I said, these will not be quiet times for
    transportation policy and this subcommittee will be right in
    the middle of the debate.
        Other than the three large funding holds that I cited, the
    Department of Transportation is clearly one of the winners in
    the administration's budget proposal. Secretary Mineta, you did
    quite well with funding for the Transportation Department,
    which is rising almost 5 percent, and I am sure that didn't
    come without a fight. And I am sure there will be more funding
    fights as this year continues.
        The budget resolution currently being debated on the floor
    endorses the President's overall funding for discretionary
    spending. While funding for the DOT in the President's budget
    may be increased by 5 percent, funding for the Department of
    Housing and Urban Development is cut by almost 2 percent.
    Funding for the Department of Health and Human Services is down
    2.3 percent. And funding for education is cut almost 4 percent.
    That is the universe in which transportation programs will have
    to do battle this year.
        Since I often spend time during these statements
    complaining about what is not included in the agency's budget,
    I do want to take a minute to commend the Secretary for some
    initiatives that are included in this budget.
        Most notably, within the FAA, $80 million is included for
    the ADS-B program and $24 million is requested for the SWIM
    program. I will spare my colleagues an explanation of those
    acronyms, but those two programs really hold the promise of
    allowing us to break away from an air traffic control system
    that is dependent on dated radar technology. Those are the
    kinds of investments that we should have been making over the
    last several years, and instead, those initiatives were crowded
    out of the budget because the administration had insisted on
    cutting the funding for air traffic control modernization for
    each of the last 2 years. These technologies will allow us to
    get greater productivity out of our limited airspace with an
    even greater margin of safety. So I want to commend Secretary
    Mineta and Administrator Blakey, as well, for insisting that
    these initiatives be funded in the budget this year.
        Our second panel today will be on Amtrak, and we want to
    welcome our new Federal Railroad Administrator, Joe Boardman,
    as a witness today. During the time that Mr. Boardman's
    position was vacant, the DOT General Counsel served as the
    Secretary's lead on passenger rail policy. Those were not the
    responsibilities for which the Senate confirmed the General
    Counsel, so I am glad Mr. Boardman is now prepared to take
    over. We hope and expect that he will shortly be serving as the
    Secretary's designee on the Amtrak Board of Directors.
        During our discussions this morning with Mr. Boardman and
    our witnesses from Amtrak and the Inspector General's office, I
    hope to pursue precisely what choices would face us if we are
    forced to live within the President's proposed 30 percent cut
    in funding. I expect that we will find, as we have in prior
    years, that with Amtrak's existing debt levels and its
    statutory responsibility to its employees, there is no way the
    railroad will be able to shed roughly $400 million in costs
    during the fiscal year starting this coming fall without
    lapsing into bankruptcy.
        That is why I expect the Amtrak Board of Directors has
    submitted a budget to us seeking $1.6 billion for 2007. Despite
    the fact that every member of Amtrak's Board of Directors has
    now been appointed by the Bush administration, that Board is
    seeking an appropriation that is some $700 million more than
    the Bush administration is supporting. Apparently, those Bush
    appointees know something about Amtrak's costs and the national
    rail network that the ideologues at OMB and DOT do not.
        As part of our discussion with the second panel, I want us
    to have an honest dialogue about Amtrak's real costs. For too
    long, the Amtrak trains that serve the vast majority of States
    in this country, the States outside of the Northeast, have been
    castigated as Amtrak's main budget problem while the trains
    operating in the Northeast Corridor are held up as the flagship
    of efficiency.
        When you look into the realities of where Amtrak's annual
    subsidies are going, however, you find that this is far from
    the whole truth. Due to the extraordinary capital needs of the
    Northeast Corridor and the debt service costs associated with
    that corridor, the fact is that a vast amount of Amtrak's
    annual appropriation must go straight into that corridor. Those
    subsidies are needed not just to continue Amtrak's service, but
    also to ensure the continuation of all the community railroads
    that operate over that corridor every day.
        Over the last 4 years, Amtrak's appropriation has increased
    by $244 million, and over the same time, Amtrak's annual
    investment in the Northeast Corridor has increased by roughly
    the same amount. So put another way, the Northeast Corridor has
    absorbed just about every dollar of the increased appropriation
    this subcommittee has provided over the last few years.
        Now, I am not saying that those investments are not
    necessary. In fact, they are long overdue. What I am saying is
    that the service in the Northeast Corridor, including the local
    commuter services that operate on the corridor, are no less
    dependent on annual subsidies from this subcommittee as Amtrak
    services across the rest of the country.
        Amtrak just reached a record number of riders for its third
    consecutive year. It is noteworthy that ridership over the
    Northeast Corridor grew by only 1 percent, while trains around
    the rest of the country grew at faster rates. Let us just look
    at the trains that are serving my State and Chairman Bond's
    State.
        The Empire Builder is a train that provides service between
    Seattle and Spokane in my State, and that train continues on to
    serve the States of several other subcommittee members,
    including Senator Burns, Dorgan, Kohl, and Durbin. Ridership on
    the Empire Builder grew by 9 percent last year. Ridership on
    the Cascades service that runs from Vancouver, B.C. all the way
    to Eugene, Oregon, grew by almost 6 percent. In the chairman's
    State, service between Kansas City and St. Louis grew by almost
    7 percent, while service between St. Louis and Chicago grew by
    almost 14 percent just last year.

                               PREPARED STATEMENT

        My point here is that while there is a growing level of
    pressure on the railroad to eliminate or terminate these
    services, their popularity among the traveling public is
    rising. I, for one, am not going to support a policy where we
    leave thousands of passengers across the entire country without
    rail service solely because the capital needs of the Northeast
    Corridor have gotten too expensive.
        Thank you, Mr. Chairman.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        Thank you, Mr. Chairman.
        Just a few months ago, Congress passed the SAFETEA-LU highway,
    transit and safety authorization bill. That law settled many of the
    major questions about transportation policy and funding for the next
    few years.
        Normally, this would be a relatively quiet period on transportation
    policy. But instead, this year is going to be anything but quiet when
    it comes to the challenges facing us in transportation.
        We already hear voices of concern that the revenues to the Highway
    Trust Fund will not be adequate to actually fund the SAFETEA-LU bill
    through 2009.
        And we will be presented with proposals this year to dramatically
    restructure the way we finance our national aviation enterprise
    including the operations of the FAA.
        One of the biggest cost drivers in the FAA's budget is the need to
    pay for our hard working and highly capable air traffic controllers.
    Yet there are many rumors floating around that the Bush Administration
    would rather let Congress settle the contract dispute with air traffic
    controllers than settle the issue at the bargaining table.

                              THREE FUNDING HOLES

        As I review Department of Transportation's budget for the coming
    fiscal year, it is clear that there are three huge and controversial
    funding holes in the President's budget.
      --One is the 30 percent funding cut proposed for Amtrak.
      --Another is the proposal to cut in half the Essential Air Service
            subsidies necessary to maintain air service to our rural
            communities.
      --The last is the administration's proposal to cut more than $750
            million from our capital investments in our Nation's airports.
        I'm pleased that Chairman Bond has agreed to have special hearings
    so we can review these issues in detail.
        Following our discussion with Secretary Mineta this morning, we
    will have a panel that will specifically address Amtrak. We also have a
    hearing with the FAA Administrator on May 4th.

                                   GULF COAST

        Another challenge we face is the need to adequately fund the
    transportation needs of the Gulf Coast recovery. Last year, this
    subcommittee provided $2.75 billion for Emergency Relief Highways.
        Now it's becoming clear that several of the major highway and
    bridge replacement projects in Louisiana and Mississippi will be more
    expensive than anticipated.
        This is an issue we must address in the Supplemental, Mr. Chairman,
    if we are to ensure that the Gulf region has the kind of infrastructure
    that will allow its economy to rebound.
        And we must not ignore the other emergency relief projects from
    other disasters that have been awaiting reimbursement for many months
    or, in some cases, years.
        So, as I said, these will not be quiet times for transportation
    policy, and this subcommittee will be right in the middle of the
    debate.

                                  DOT'S BUDGET

        Other than the three large funding holes that I cited earlier, the
    Department of Transportation is clearly one of the winners in the
    administration's budget proposal. Secretary Mineta did quite well with
    funding for the Transportation Department rising almost 5 percent. I'm
    sure it did not come without a fight.
        And there will be more funding fights as the year continues. The
    Budget Resolution currently being debated on the Floor endorses the
    President's overall funding for discretionary spending.
        While funding for the DOT in the President's budget may be
    increased by 5 percent--
      --funding for the Department of Housing and Urban Development is cut
            by 2 almost percent;
      --funding for the Department of Health and Human Services is down 2.3
            percent;
      --and funding for Education is cut by almost 4 percent.
        That is the universe in which transportation programs will have to
    do battle this year.

                       AIR TRAFFIC CONTROL MODERNIZATION

        Since I often spend time during these statements complaining about
    what is not included in the agency's budget, I want to take a minute to
    commend the Secretary for some initiatives that are included in the
    budget.
        Most notably, within the FAA, $80 million is included for the ADS-B
    program and the $24 million is requested for the SWIM program. I will
    spare my colleagues an explanation of these acronyms. But these two
    programs hold the promise of allowing us to break away from an air
    traffic control system dependent on dated radar technology.
        These are the kind of investments that we should have been making
    over the last several years. Instead, initiatives like these were
    crowded out of the budget because the administration insisted on
    cutting the funding for air traffic control modernization for each of
    the last 2 years.
        These technologies will allow us to get greater productivity out of
    our limited air space with an even greater margin of safety. So, I want
    to commend Secretary Mineta and Administrator Blakey for insisting that
    these initiatives be funded in the budget this year.

                                     AMTRAK

        Our second panel at today's hearing will be on Amtrak. We welcome
    our new Federal Railroad Administrator, Joe Boardman, as a witness.
        During the time that Mr. Boardman's position was vacant, the DOT
    General Counsel served as the Secretary's lead on passenger rail
    policy.
        Those were not the responsibilities for which the Senate confirmed
    the General Counsel, so I am glad Mr. Boardman is now prepared to take
    over.
        We hope and expect that he will shortly be serving as the
    Secretary's designee on the Amtrak Board of Directors.
        During our discussions this morning with Mr. Boardman and our
    witnesses from Amtrak and the Inspector General's office, I hope to
    pursue precisely what choices Amtrak would face if it is forced to live
    within the President's proposed 30 percent cut in funding.
        I expect that we will find, as we have in prior years, that with
    Amtrak's existing debt levels and its statutory responsibilities to its
    employees, there is no way that the railroad would be able to shed
    roughly $400 million in costs during the fiscal year starting this
    coming fall without lapsing into bankruptcy.
        That is why, I expect, the Amtrak Board of Directors has submitted
    a budget to us seeking $1.6 billion for 2007.
        Despite the fact that every member of Amtrak's Board of Directors
    has been appointed by the Bush Administration, that Board is seeking an
    appropriation that is some $700 million more than the Bush
    Administration is supporting.
        Apparently, these Bush appointees know something about Amtrak's
    costs and the national rail network that the ideologues at OMB and DOT
    do not.

                              AMTRAK'S REAL COSTS

        As part of our discussion with the second panel, I want us to have
    an honest dialogue about Amtrak's real costs.
        For too long, the Amtrak trains that serve the vast majority of
    States in this country--the States outside of the Northeast--have been
    castigated as Amtrak's main budget problem while the trains operating
    in the Northeast Corridor are held up as the flagship of efficiency.
        When you look into the realities of where Amtrak's annual subsidies
    are going, however, you find that this is far from the whole truth.
        Due to the extraordinary capital needs of the Northeast Corridor
    and the debt service costs associated with that corridor, the fact is
    that a vast amount of Amtrak's annual appropriation must go straight
    into that corridor.
        Those subsidies are needed not just to continue Amtrak service, but
    also to ensure the continuation of all the commuter railroads that
    operate over that corridor every day.
        Over the last 4 years, Amtrak's appropriation has increased by $244
    million. And over the same time, Amtrak's annual investment in the
    Northeast Corridor has increased by roughly the same amount.
        Put another way, the Northeast Corridor has absorbed just about
    every dollar of the increased appropriations this subcommittee has
    provided over the last few years. I am not saying that those
    investments are not necessary. In fact, they are long overdue.
        What I am saying is that the service in the Northeast Corridor--
    including the local commuter services that operate on the Corridor--are
    no less dependent on annual subsidies from this subcommittee as
    Amtrak's services across the rest of the country.

                           AMTRAK'S RISING RIDERSHIP

        Amtrak just reached a record number of riders for its third
    consecutive year.
        It is noteworthy that ridership over the Northeast Corridor grew by
    only 1 percent while trains around the rest of the country grew at far
    faster rates.
        Let's just look at the trains serving my State and Chairman Bond's
    State. The Empire Builder is a train that provides service between
    Seattle and Spokane in my State. The train continues on to serve the
    States of several other subcommittee members including Senator Burns,
    Dorgan, Kohl and Durbin.
      --Ridership on the Empire Builder grew by 9 percent last year.
      --Ridership on the Cascades Service that runs from Vancouver, BC all
            the way to Eugene, Oregon grew by almost 6 percent.
        In Chairman Bond's State, service between Kansas City and St. Louis
    grew by almost 7 percent while service between St. Louis and Chicago
    grew by almost 14 percent just last year.
        My point is that, while there is a growing level of pressure on the
    railroad to eliminate or terminate these services, their popularity
    among the traveling public is rising.
        I, for one, am not going to support a policy where we leave
    thousands of passengers across the entire country without rail service
    solely because the capital needs of the Northeast Corridor have gotten
    too expensive.
        Thank you, Mr. Chairman.

                               PREPARED STATEMENT

        Senator Bond. Thank you very much, Senator Murray. Senator
    Leahy has also submitted a statement which will be included in
    the record.
        [The statement follows:]

                 Prepared Statement of Senator Patrick J. Leahy

        Thank you, Mr. Chairman, for holding this important hearing today.
    On the heels of last year's passage of the transportation
    reauthorization bill and significant managerial changes at Amtrak, it
    is very timely to hold this hearing on the budget requests for the
    Department of Transportation and Amtrak.
        I am very concerned that Congress will not be able to fund our
    Nation's multi-faceted transportation system adequately if Congress
    accepts the President's budget request. The President shortchanges
    Amtrak and public transit programs, and he drastically cuts funding for
    the Essential Air Service program that brings air service to small
    communities, like Rutland, Vermont. Without this program, air passenger
    service to dozens of small communities across the country will end.
        I look forward to hearing the testimony from today's witnesses
    about the future direction of the Transportation Department and Amtrak.
    Thank you.

        Senator Bond. Now, Mr. Secretary, your statement, please.

                    STATEMENT OF SECRETARY NORMAN Y. MINETA

        Secretary Mineta. Mr. Chairman and members of the
    subcommittee, thank you again for this opportunity to appear
    before you today to discuss the President's fiscal year 2007
    budget for the Department of Transportation.
        Our transportation network is the backbone of the strongest
    and most dynamic economy in the world, and President Bush is
    proposing a $65.6 billion plan to keep America moving safely,
    reliably, and efficiently.
        I will touch on a few highlights, and at this time, I
    request unanimous consent that my full written statement be
    made a part of the record.
        Senator Bond. Without objection.

                        SURFACE TRANSPORTATION PROGRAMS

        Secretary Mineta. The President's 2007 budget request, Mr.
    Chairman, reflects the funding level authorized in SAFETEA-LU,
    which provides a record investment of $286 billion through
    fiscal year 2009. Now, this investment reflects a strong
    commitment to transportation in what we all recognize is a very
    tight budget environment. However, we have reached a juncture
    where our focus must be on modernizing financing as well as
    infrastructure.
        I know that this committee is aware that the balances in
    the Highway Trust Fund are on a downward slope and there is a
    growing consensus that we will need to look beyond traditional
    gasoline taxes to finance 21st century transportation needs. So
    the President's budget sets aside $100 million for States that
    want to test alternatives to the gasoline fuel tax on a broad
    scale.
        The Open Roads Financing Pilot Program will allow us to see
    how the public accepts fees, tolls, and other approaches and
    how well they raise revenue, and whether they are, indeed, more
    effective in reducing traffic congestion. The lessons that we
    learn through these demonstrations, as well as the work done by
    the congressionally-created Commission on the Future of the
    Highway Trust Fund, will help form future decisions on surface
    transportation policies.

                           FEDERAL AVIATION PROGRAMS

        Aviation financing also is in need of modernization, and
    after consultation with the stakeholder community, we are
    developing a forward-looking plan which we expect to submit
    shortly. In the meantime, the President's 2007 budget provides
    $13.7 billion for the Federal Aviation Administration from a
    combination of trust fund revenues as well as general fund
    revenues. Of the requested amount, $8.4 billion will address
    the FAA's operational needs and support hiring the needed
    safety inspectors and air traffic controllers per the
    Congressional plan.
        An additional $2.75 billion is provided for the Airport
    Improvement Program, otherwise known as AIP. The airport
    construction grant request for 2007 is sufficient to address
    the construction needs for all currently planned runways and to
    meet our goal for improving runway safety.
        Looking to the future, the Department's budget provides
    $122 million for the next generation Air Transportation System
    Initiative. Early progress in this multi-agency effort is
    encouraging and our fiscal year 2007 budget invests in key
    building blocks for transforming the way that America flies,
    including the ADS-B, the Automatic Dependent Surveillance-
    Broadcast program, which ultimately will move us from the
    ground-based to a satellite-based air traffic control system.

                            INTERCITY PASSENGER RAIL

        The budget also promotes continued transformation of
    intercity passenger rail. First, I want to express my
    appreciation to Chairman Bond and Senator Murray and this
    committee for delivering a clear message to Amtrak that it must
    address its money-losing services. We are confident that
    management and the Board are committed to turning the company
    around, and we will use the oversight authority that you gave
    us to ensure that this happens.
        In recognition of the progress to date, and with the
    expectation that we will see much more by the end of fiscal
    year 2006, the President requests $900 million to help Amtrak
    make the transition to a new and better model of intercity
    passenger rail. Five-hundred million dollars of that request is
    for capital needs and maintenance. The remaining $400 million
    would be available as Efficiency Incentive Grants tied directly
    to continued activities that support reformed railroad
    operations.

                               SAFETY INITIATIVES

        Now, over the past 5 years, we have also gained important
    momentum when it comes to safety, and roughly one-fourth of the
    Department's total resources in the 2007 budget will pay for
    safety initiatives. As fiscal year 2007 approaches, we face the
    twin challenges of modernizing our transportation
    infrastructure and bringing financing mechanisms that support
    them into the 21st century.
        I look forward to working closely with all of you and with
    the entire Congress as we make sure that America continues to
    have a transportation system that is the envy of the world.

                               PREPARED STATEMENT

        Thank you again for this opportunity to testify today and I
    will be pleased to respond to any questions that you may have.
        Senator Bond. Thank you very much, Mr. Secretary.
        [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 2007 budget request for the U.S. Department of
    Transportation. The President's request totals $65.6 billion in
    budgetary resources, which will support major investments in
    transportation nationwide that are vital to the health of our economy
    and the American way of life.
        Nearly $16 billion, or more than 24 percent, of the total request
    for the Department will support transportation safety--my top priority.
    Statistics show our past safety efforts are paying off. Our early
    estimates show in 2005 the highway fatality rate reached an historic
    low of 1.43 fatalities per 100 million vehicle-miles traveled. Still,
    annual highway deaths continue to hover around 43,000--a number that is
    still too high.
        Our transportation network is the backbone of the strongest and
    most dynamic economy in the world. The President's budget request
    continues record investments in our Nation's transportation
    infrastructure, as well as supporting research and technology. At the
    same time, the budget reflects the recognition that our funding
    mechanisms are outdated. There is a growing consensus that traditional
    gasoline taxes and airline ticket taxes are not adequate to the task of
    supporting 21st century transportation needs. We must explore new and
    innovative ways to provide more reliable transportation services while
    focusing on costs. Consequently, the 2007 budget introduces alternative
    financing ideas that may provide possible funding options for our
    resource needs in the future.

                        SURFACE TRANSPORTATION PROGRAMS

        Last summer, the ``Safe, Accountable, Flexible, Efficient
    Transportation Equity Act: A Legacy for Users'' (SAFETEA-LU)
    reauthorized our surface transportation programs through fiscal year
    2009, providing a record $286 billion investment and a continued focus
    on improvements in highway safety. The President's 2007 budget plan for
    the Federal Highway Administration, the Federal Transit Administration,
    the Federal Motor Carrier Safety Administration, and the National
    Highway Traffic Safety Administration reflects the funding envisioned
    in SAFETEA-LU. The budget provides $815 million for the National
    Highway Traffic Safety Administration, along with $521 million for the
    Federal Motor Carrier Safety Administration, to improve safety on our
    Nation's highways. The budget also proposes a record $8.9 billion
    Federal investment in public transportation. This funding for the
    Federal Transit Administration will help achieve common-sense transit
    solutions, especially for the elderly, persons with disabilities, and
    in rural areas where 40 percent of counties have no public
    transportation.
        Even though SAFETEA-LU has just recently passed, we are already
    thinking about new ways to fund surface transportation programs in the
    future. That is why the 2007 budget plan proposes a $100 million pilot
    program to evaluate innovative ways to finance and manage major
    portions of highway systems. Grants under this pilot program will allow
    the Federal Government to partner with up to five States that want to
    test fees, tolls, and other approaches on a broad scale--either
    statewide or across an urban area and its suburbs. We will see how the
    public accepts these approaches, how well they raise revenue, and
    whether they are indeed more effective in reducing traffic congestion.
    The lessons learned from this pilot program, as well as the work done
    by the Congressionally created commissions on the future of the Highway
    Trust Fund, will help inform future decisions on financing surface
    transportation needs. The timing is important. By the end of the 2007
    budget year, only 2 years will remain before SAFETEA-LU expires.

                           FEDERAL AVIATION PROGRAMS

        Approaching even more quickly is reauthorization of the Federal
    Aviation Administration (FAA) and the taxes that finance the Aviation
    Trust Fund, which expire at the end of fiscal year 2007. Currently, our
    primary funding source for the FAA is tied to the price of an airline
    ticket. But there is general consensus that our growing aviation system
    needs a more stable and predictable revenue stream--one that creates a
    more direct relationship between revenues collected and services
    provided. Soon, the Bush Administration will propose a reauthorization
    plan that will include a solid, forward-looking financing proposal for
    the Aviation Trust Fund.
        The President's 2007 budget plan provides $13.7 billion to fund
    aviation. Of this request, $8.4 billion will address the FAA's
    operational needs and support hiring needed safety inspectors and air
    traffic controllers. The President's budget also includes nearly $2.8
    billion for Airport Improvement Program (AIP) grants, which were
    instrumental in helping restore service last year to several Gulf Coast
    airports shut down by Hurricanes Katrina and Rita. The 2007 AIP request
    is sufficient to address construction needs for all currently planned
    runways.
        The demand for air transportation continues to rise, placing more
    burdens on our current systems. To address future needs, the FAA is
    partnering with other Federal agencies in planning for the Next
    Generation Air Transportation System (NGATS). This multi-agency effort
    is exploring new ways to manage air transportation through the use of
    modern technology. As a first step, the 2007 budget provides funding
    for this effort, including $80 million to support FAA's deployment of
    Automatic Dependent Surveillance-Broadcast (ADS-B). ADS-B will replace
    current radar systems and provide more accurate surveillance coverage.
    In addition, the budget provides $24 million for System Wide
    Information Management, which will make a network-enabled air traffic
    system possible, improving safety, efficiency, and security. These are
    the building blocks of the Next Generation initiative, which will
    transform the way that America flies.

                            INTERCITY PASSENGER RAIL

        The budget also promotes continued transformation of intercity
    passenger rail in America. In last year's budget, the administration
    demanded reform. America needs a sustainable framework for convenient,
    high-quality passenger rail service, and over the past year both Amtrak
    and the Congress have responded. Amtrak developed a strategic reform
    plan that seeks to restructure the company and introduce route
    competition. Through the fiscal year 2006 appropriation, Congress
    included measures to address Amtrak's money-losing sleeper car and food
    and beverage services, among other efficiency measures. Together, these
    reforms will help Amtrak realize meaningful savings this year, and
    therefore reduce its need for Federal subsidies.
        In recognition of this progress--and with the expectation that we
    will see much more by the end of fiscal year 2006--the President's
    fiscal year 2007 budget requests $900 million to help Amtrak make the
    transition to a new and better model of intercity passenger rail. Of
    this amount, $500 million will provide for capital needs and
    maintenance of existing infrastructure, including the Northeast
    Corridor. The remaining $400 million will fund new ``Efficiency
    Incentive Grants'' tied directly to continued progress toward reform.
    In addition, our plan assumes continuation of the legislative
    initiative begun in 2006 that would assess fees for capital investment
    and maintenance costs by transit agencies for their use of the
    Northeast Corridor. We recognize that this budget will require Amtrak
    to accelerate its efforts to address its costs, but we believe the
    recommendations recently made by the Government Accountability Office
    and the Department of Transportation Inspector General, as well as the
    company's own strategic plan, provide a roadmap for success. While much
    work remains to address Amtrak's serious and well-documented problems,
    we believe the fiscal year 2007 budget will encourage progress and
    promote efforts to move to a more sustainable system.

                               MARITIME PROGRAMS

        The President's plan includes $154 million to fully fund the
    Maritime Administration's Maritime Security Program. This fleet of 60
    active, militarily useful vessels manned by U.S. mariners is critical
    to the support of our troops abroad. The President's budget also
    includes $62 million for the U.S. Merchant Marine Academy, of which $15
    million is for capital investment improvements at the Academy.

              RESEARCH, PIPELINES, AND HAZARDOUS MATERIALS SAFETY

        Approximately 15 months ago, Congress enacted the Department of
    Transportation's reorganization proposal to create the Pipeline and
    Hazardous Materials Safety Administration (PHMSA) and the Research and
    Innovative Technology Administration (RITA).
        PHMSA is responsible for the safety of almost one-third of all
    products shipped each year and two-thirds of all energy products
    consumed. This includes the packaging, shipment, and handling of all
    hazardous materials by highway, rail, water, and air, as well as the
    movement of energy products by pipeline. The 2007 budget provides $149
    million for PHMSA's operations, including $75.7 million for pipeline
    safety, $27.2 million for hazardous materials safety, and $28.2 million
    for emergency preparedness grants.
        RITA has brought new energy and a focus on the Department's
    research efforts, and is working to expedite the implementation of
    cross-cutting, innovative transportation technologies. The President's
    2007 budget request includes $8.2 million in direct funding, plus an
    additional $27 million from the Highway Trust Fund for the Bureau of
    Transportation Statistics, to continue these efforts. In addition, RITA
    will undertake over $300 million in transportation-related research,
    education, and technology application on a reimbursable basis.

               DEPARTMENT OF TRANSPORTATION HEADQUARTERS BUILDING

        Finally, I want to highlight the fiscal year 2007 President's
    budget request of $59.4 million for the new Department of
    Transportation headquarters building project. The goal is to complete
    the consolidation of the Department's headquarters' operating
    functions, excluding the FAA, into a facility at the Southeast Federal
    Center in fiscal year 2007. The requested funds will cover DOT's
    tenant-related costs, including security and telecommunications
    equipment and the infrastructure to support it. The end result will be
    a facility that provides modern office technology, enhanced
    communications, a quality work environment, and updated security
    systems for more than 5,000 Federal workers.
        The President's budget request reflects a fiscally responsible plan
    for the Department of Transportation to help America meet its 21st
    century transportation needs. To ensure that the Department is
    exercising sound stewardship over the financial resources entrusted to
    us, we continue to focus on program performance to maximize efficiency
    and create a results-oriented Government. Together with the Congress,
    and with our public- and private-sector partners, we are
    revolutionizing transportation to keep America moving.
        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 2007 President's budget
    request. I will be pleased to respond to any questions you may have.

                             FREIGHT TRANSPORTATION

        Senator Bond. We are going to have to do a quick round and
    move on to the FRA, but one of the first things I have is a
    growing concern about freight transportation capacity. Your
    Bureau of Transportation Statistics estimates freight volumes
    in tons will increase by 70 percent by 2020. We have roughly
    the same highway miles and we have 40 percent fewer rail miles.
    We are watching our inland water infrastructure become
    obsolete, inefficient, and outdated. How much concern do you
    have that in the decades ahead, if we don't plan and do
    something more for transportation, there will be a
    straightjacket on our economy, frustrating competitiveness,
    growth, and job creation?
        Secretary Mineta. There is no question that the increase in
    trade in the next 20 years is going to be a very large impact
    on the transportation system, and that is why the Safe,
    Accountable, Flexible, Efficient, Transportation Equity Act; A
    Legacy for Users (SAFETEA-LU) legislation is so important. It
    brings back what we started in the Intermodal Surface
    Transportation Efficiency Act of 1991 (ISTEA), and that was the
    I, intermodal. Today, we know that given the large inflow of
    transport into the country through maritime trade, loads go
    onto rail and onto the highway. What we are trying to do
    through SAFETEA-LU is make sure that the intermodal freight
    gateway connection is coordinated.
        Given limited financial resources, SAFETEA-LU includes
    financing mechanisms other than the traditional Highway Trust
    Fund that we rely on, such as the Transportation Infrastructure
    and Innovation Act (TIFIA), State Infrastructure Banks (SIBs),
    private activity bonds, and other financing mechanisms where we
    want more people to come to the table with public-private
    partnership programs.
        Senator Bond. As more intermodal freight becomes available
    and increases that burden, you are looking at taking the
    overseas shipments and putting them on rail and highways, which
    are overcrowded. Given the fact that one single medium-size
    barge tow can carry the freight of 870 trucks, shouldn't we be
    looking at the increasingly important option to maintain the
    efficiency, relieve congestion, conserve fuel, and reduce air
    emissions by bringing our inland waterways up to speed?
        Secretary Mineta. Absolutely, and that was one of the first
    things I undertook when I became Secretary of Transportation in
    2001. We already had the Wendell H. Ford Aviation Investment
    and Reform Act (AIR-21) to take care of aviation. We had the
    Transportation Equity Act for the 21st Century (TEA21) as it
    related to surface transportation needs. One of the things we
    proposed was a SEA-21 program to deal with short-sea shipping
    on the east, west, gulf coasts and the inland waterway system.
    That program is now before the Office of Management and Budget
    (OMB) and we are hoping that we will be able to get that out,
    because it is part of our total marine transportation system.

                        INTERCITY PASSENGER RAIL SYSTEM

        Senator Bond. I would hope, Mr. Secretary, with your broad
    understanding of transportation that we can mark you down as a
    supporter of the Water Resources Development Act, which OMB
    treats like an illegitimate child at a family reunion.
        I wish to address one Amtrak question. I would like to know
    how you see your responsibility for Amtrak. I am concerned
    about the debt. I am concerned about reforms that will require
    elimination or cut-back. What do you see as your role and what
    do you expect to achieve in your position as the Secretary of
    Transportation with overall responsibility for the area?
        Secretary Mineta. First of all, there is a need for an
    intercity passenger rail system. What the administration and I
    are trying to do is give a long-term, sustainable future to
    intercity passenger rail. The present model can't do it. You
    recognize that when you see first-class sleeper service being
    subsidized to the extent that it is, and in terms of some
    passenger rail services where the subsidy may be $450 to $500
    per passenger. There are areas like food services, first class
    sleeper services, and other areas where they do need change.
        What we are trying to do is bring reform that will give
    long-term financial sustainability to an intercity passenger
    rail system. Last year, we requested no funding for Amtrak. We
    submitted our reform measure in 2003, 2004, and 2005, but no
    action was taken on the reform measure. So OMB said, okay, let
    us get their attention. We will request zero funding for fiscal
    year 2006 until we get reform. We got Congress' attention.
        We attempted a three-prong approach: the authorizing
    committees; the Appropriations Committee; and the Board of
    Directors. The House authorizing committee provided a $2
    billion a year, 6-year program, but no reforms. In the Senate,
    we got an $8 billion package over 5 years, or $1.6 billion per
    year for 5 years; it had some reforms in it. The proposal went
    on the budget reconciliation bill, but then it got pulled in
    conference and that reform effort failed.
        So then we were dependent on the Appropriations Committees.
    You folks did come back with reforms, plus the actions of the
    Board brought about sufficient reform. OMB recognized this
    effort and we included $900 million in this year's budget. We
    are looking for further reforms, and for that there will be
    additional monies forthcoming.
        Senator Bond. Mr. Secretary, thank you very much. You may
    have had a black and blue spot on your jaw, but we lost a pound
    of flesh in this subcommittee, and so to follow up on these
    questions, I believe that Senator Murray may have some
    questions to ask.
        Senator Murray. I certainly will, and unfortunately, our
    time is limited, but I know well that the Secretary, as a
    former member, knows that the authorization committee has to
    make those rules, not the Appropriations Committee, and I think
    the Secretary has a pretty strong history in the House of
    ensuring that that occurred, so I hope that is where you are
    leaning, Mr. Secretary.
        Secretary Mineta. Well, you are right, absolutely right. We
    will keep trying.

                        FEDERAL AVIATION ADMINISTRATION

        Senator Murray. Let me ask you about the FAA because the
    FAA expects 73 percent of its air traffic controllers to retire
    over the next 10 years, and as part of last year's
    appropriations bill, we fully funded your request to hire an
    additional 595 air traffic controllers and we provided an extra
    $12 million that you did not request to try to fill some of
    those vacancies in the ranks of the aviation safety inspectors.
    These are perhaps the most critical safety positions in the
    entire FAA, and unfortunately, as you know, the across-the-
    board cut was imposed in the defense appropriations bill that
    impacted that funding somewhat.
        But it is now the middle of March. We are almost halfway
    through this fiscal year, and ever since the new year began,
    our subcommittee has been trying to find out how many new air
    traffic controllers and safety inspectors you will actually be
    hiring this year. Your Department has not been able to give us
    a straight answer to address that issue and I can't help but be
    concerned that if your Department doesn't have a plan yet
    halfway through this year for dealing with this critical safety
    question, that we are either endangering safety or you are
    incapable of managing your people.
        So, Mr. Secretary, can you tell this committee precisely
    how many air traffic controllers and how many air safety
    inspectors you will be hiring this year?
        Secretary Mineta. We are adhering to the congressional
    plan. As I recall, the plan was for 1,129 air traffic
    controllers.
        Ms. Scheinberg. I believe it was originally 1,249.
        Secretary Mineta. I am sorry, the plan was originally for
    1,249 air traffic controllers, and there is no plan for
    inspectors. But in any event, we are geared toward the
    congressional plan.
        Senator Murray. Well, how many----
        Secretary Mineta. The 1 percent across-the-board rescission
    has impacted the FAA, plus the fact that we have to absorb pay
    raises from within the budget. In fiscal year 2006, as I
    recall, we have to absorb close to 1 percent of the pay raise.
        Senator Murray. We actually gave you 12----
        Secretary Mineta [continuing]. Two-point-two----
        Senator Murray. We gave you $12 million more than you
    requested----
        Secretary Mineta. It was a 3.1 percent pay raise----
        Senator Murray [continuing]. So even with the across-the-
    board cut and with the other factors that you put in place, we
    should be on a road to do this? I am deeply concerned that we
    have not yet been able to get from your office the workforce
    plan. You have to hire these critical safety inspectors that we
    need on the ground, so when our public flies, they know their
    planes have been inspected, and air traffic controllers, who,
    as you know, are retiring at a much higher rate than you are
    now hiring.
        Secretary Mineta. Well, our plan on air traffic controllers
    was 1,249 and the number of inspection for flight standards and
    aircraft certification personnel Congress funded to be hired is
    238. That is the congressional plan that was----
        Senator Murray. If you could get back to us within the next
    week here how many you have actually hired and exactly, over
    the course of the next few months, how many you are in the
    process of hiring----
        Secretary Mineta. Absolutely.
        Senator Murray [continuing]. I think it is important for us
    to know.
        Secretary Mineta. We will do that for the record.
        [The information follows:]

        With regard to air traffic controllers, in December 2004, the FAA
    published ``A Plan for the Future: The Federal Aviation
    Administration's 10-Year Strategy for the Air Traffic Control
    Workforce.'' This document outlined the agency's plans to hire and
    train controllers based on actual results and changes in traffic
    forecasts since 2004. In the December 2004 report, FAA estimated the
    need to hire 1,249 controllers in fiscal year 2006 with estimated
    losses of 654 controllers for a net gain of 595 controllers. This
    estimate was based on traffic forecasts produced in March of 2004.
    Based on the March 2005 forecasts, FAA reduced the number of planned
    hires in fiscal year 2006 from 1,249 to 1,129. Since that time, in
    March 2006 new aviation forecasts were released resulting in further
    reductions to the number of planned hires in fiscal year 2006 from
    1,129 to 930 controllers with losses of 800 for a net increase of 130
    controllers in fiscal year 2006.
        Unlike the air traffic controllers, there is no FAA staffing plan
    for hiring safety personnel. For fiscal year 2006, FAA requested
    funding for 97 additional safety personnel in flight standards and
    aircraft certification. Congress increased funding for FAA safety
    personnel to a total of 238 in fiscal year 2006, or a net increase of
    141 personnel from the FAA request. As a result of the 1 percent
    rescission and unfunded pay raise in fiscal year 2006 ($13.9 million),
    FAA planned to hire only 87 additional safety personnel. However, in
    keeping with the Congressional desires to increase safety personnel
    above the FAA requested level, the Department submitted a reprogramming
    request to Congress to use lapsed funds in fiscal year 2005, in
    addition to transfers from other lines of business, to fund an
    additional 84 staff in safety surveillance oversight in fiscal year
    2006. FAA anticipates hiring a net increase of 171 safety personnel in
    fiscal year 2006, or 67 less than the level requested by Congress.

                              FAA REAUTHORIZATION

        Senator Murray. All right. The authorization of the
    Aviation Trust Fund, as you know, expires at the end of fiscal
    year 2007 and we have not yet heard the administration's views
    on the future of aviation financing. The Air Transport
    Association supports a plan that would charge a fee to every
    user of the air traffic control system. The general aviation
    community responded quickly opposing user fees. We were told to
    expect the administration's plan to be released sometime this
    month, in March, and as I said, this month is half over. Can
    you tell us when we are going to see the administration's new
    proposal for aviation financing?
        Secretary Mineta. We have submitted it to OMB. I don't
    think it will be out by the end of this month. I would say
    within a month, it will be completed.
        Senator Murray. Well, what is your----
        Secretary Mineta. So I would say by the--I am sorry.
        Senator Murray. Since you have submitted it to OMB, can you
    give us your general response to the proposals that have been
    put forward by the Air Transport Association?
        Secretary Mineta. Until OMB approves the plan, I am not
    able to say where we are going on it.
        Ms. Scheinberg. Senator Murray, our proposal has
    significant changes to the current financing of the FAA, and as
    a result, OMB has put the proposal through interagency
    clearance. There are significant issues that the Department of
    Treasury and other agencies are contemplating. This is not a
    single-agency review; we have been talking with these other
    agencies and trying to iron out the plan.
        Senator Murray. Okay. Well, let me ask you one very
    specific question. The proposal of the Air Transport
    Association appears to eliminate the role of this committee in
    overseeing the FAA as well as directing Federal funds for the
    operation and modernization of the FAA.
        Secretary Mineta. I am sorry, the ATA----
        Senator Murray. The ATA proposal appears to eliminate this
    committee's oversight of the FAA and I want to know whether
    your proposal is going to change the role of this committee.
        Secretary Mineta. No, not at all.
        Senator Bond. Thank you very much, Senator Murray. This
    committee goes by the FIFO rule, but since we have been joined
    by the distinguished chairman of the full committee, I might
    ask, since he has multiple responsibilities, if he would like
    to go next.

                       STATEMENT OF SENATOR THAD COCHRAN

        Senator Cochran. Mr. Chairman, thank you. I appreciate the
    opportunity to join you and the other members of the
    subcommittee in welcoming the distinguished Secretary of
    Transportation and his Chief Financial Officer to our committee
    hearing. We appreciate your good assistance as you carry out
    your duties. Over the last 5 years, you have demonstrated a
    great amount of competence and you have devoted an enormous
    amount of effort to helping to protect and expand our Nation's
    transportation assets. We appreciate your very outstanding
    work.
        Secretary Mineta. Thank you.
        Senator Cochran. I might add, too, we thank you for your
    timely assistance to the airports in the gulf coast region,
    which suffered enormous damages as a result of Hurricanes
    Katrina and Rita. We are recovering. We are rebuilding. But it
    wouldn't be possible without the strong support of you
    personally and the other members of this administration. We
    appreciate that help very much.
        Secretary Mineta. Thank you very much, sir.
        Senator Cochran. Thanks, Mr. Chairman.
        Senator Bond. Thank you very much, Chairman Cochran.
        Senator Bennett.

                     STATEMENT OF SENATOR ROBERT F. BENNETT

        Senator Bennett. Thank you, Mr. Chairman.
        Mr. Secretary, I would be remiss if I did not once again
    thank you and commend your Department for all of the support
    you have given to public transportation in the State of Utah. I
    sit on the Banking Committee, which authorizes public
    transportation and mass transit, and it is always fun, as the
    Senator from a State perceived to be a rural State--actually,
    we are one of the most urbanized States in the Nation--to hear
    Senators on the Banking Committee from Eastern States always
    talk about urban transit and say, why can't we do it as well
    everywhere as we are doing it in Salt Lake City?
        That always makes me feel good and it is because of the
    partnership that has been built with the people in Utah and the
    staff at FTA. I need to continually thank you and them for the
    cooperative way in which we have worked on that. We like being
    the example that people point to.
        My favorite story, Mr. Chairman, there is still a hard-core
    group in Utah that opposes mass transit and they held a rally
    in downtown Salt Lake City, and in the notice for the rally,
    they said, this will take place during rush hour, so if you
    want to be sure to get there on time, take mass transit in
    order to be there.

                            INTERCITY PASSENGER RAIL

        Mr. Secretary, do you really think we have got a shot at
    making Amtrak finally work? It has been around for so long. I
    have heard so many stories over the years about, well, this is
    the year that we are going to get Amtrak under control. This is
    the year that Amtrak is going to finally deal with its debt
    burden. It is going to finally get its service where it ought
    to be. I hear your optimistic statements and I read them. I
    have been reading through the material that is available to us.
    It all sounds good. Just give me your gut reaction as to where
    we are in Amtrak.
        Secretary Mineta. Amtrak reform is not going to be done in
    a short period of time. As an example, in our reform measure we
    asked that the Northeast Corridor assets be turned over to the
    Department of Transportation. We would then take 6 or 7 years
    to bring it up to a good state of affairs. In the meantime, we
    would form a consortium of the Northeast Corridor States to
    which we would then be able to turn back those assets. The
    other part of the program would be 50 percent capital
    partnership with the States on capital improvements.
        It is a journey that starts at some point. That point is
    going to be when we get the reform measures in place on the
    structure of Amtrak, based on the principles in our reform
    measure. It requires those principles to be embraced in
    legislation, or in terms of Board practices, and laid out over
    a number of years to transform Amtrak into a sustainable, well-
    functioning intercity passenger rail system.
        Senator Bennett. I agree absolutely that we have to have a
    functioning intercity rail passenger system in those parts of
    the country where it makes sense. Every year at these hearings,
    I say this, and every year at these hearings, or after these
    hearings, there are nasty letters to the editor about me in the
    Salt Lake papers.
        The Northeast Corridor Amtrak rail passenger service,
    absolutely essential. We could not sustain the impact of
    dumping that many passengers on the highway or trying to cram
    them into airplanes. I think the total number of people who
    debark Amtrak in Salt Lake City is less than a dozen a week.
    Now, I may be off by an order of magnitude. It may be 120 a
    week. But the cost of maintaining that kind of service over
    those kinds of distances simply doesn't make sense to me.
        I see the Senator from Illinois is here. It may make sense
    from New York to Chicago. That is outside of the Northeast
    Corridor. It may make sense from Los Angeles to San Francisco.
    But I hope as we look at the Amtrak long-term, we recognize
    that in order to have, paraphrase it just a little, in order to
    have mass transit make sense, you have to have the mass that
    needs to be transited.
        Given the distances we have in this country, intercity
    passenger service in the Northeast Corridor or perhaps between
    New York and Chicago, you do have the mass that needs to be
    transited, but the mass coming from, let us say, Denver to Salt
    Lake City that is currently handled by train is not enough to
    justify the kinds of expenditure that the taxpayers are being
    called upon to provide.
        Thank you, Mr. Chairman.
        Secretary Mineta. You are absolutely correct, Senator, and
    the No. 1 principle, as I recall, in our reform proposal is to
    make economic sense and congestion sense. Yes, sir.
        Senator Bond. Thank you very much, Senator Bennett.
        Senator Durbin.

                            INTERCITY PASSENGER RAIL

        Senator Durbin. Thank you, Mr. Chairman.
        Secretary Mineta, thank you for being here. You have given
    a lifetime to public service as a mayor and Member of the House
    of Representatives and in the President's Cabinet and I thank
    you for that.
        Secretary Mineta. Thank you.
        Senator Durbin. I am happy to count you as a friend. But I
    want to ask you some questions following up on Senator
    Bennett's questions.
        I can't figure out where this administration is when it
    comes to Amtrak. Last year, you zeroed it. Congress came back
    and said, no. We passed an authorization bill for Amtrak in the
    Senate by a vote of 93 to 6 and an appropriation bill of $1.3
    billion, which we felt might be adequate to keep Amtrak
    functioning.
        Six days after we passed the authorization bill, Mr. Gunn
    was dismissed as the head of Amtrak. I think that was a serious
    mistake. I think he has been one of the most level-headed
    administrators in the history of that operation. He was totally
    apolitical, as I saw it, and maybe that is what cost him his
    job. He has not been replaced, as I understand it, as of today,
    which is a sad commentary on Amtrak's administration and
    management. If the administration is clearly dedicated to
    reforming Amtrak, then you need an engineer in that locomotive
    and you don't have one at this moment.
        Secondly, the budget request this year just leaves me cold.
    It is as if someone is drowning 50 feet offshore and you throw
    them a 25-foot rope. That is what has happened this year with
    this $700 million request. We know, I think reliably so--I am
    sorry, $900 million request. We know, reliably so, that Amtrak
    needs about $1.6 billion to maintain operations and to make
    critical investment, to conform with the Americans with
    Disabilities Act and other legal requirements. Absent that kind
    of basic capital investment, there is no way they can maintain
    schedules and ridership.
        In my State, it is personal. We are deeply committed to
    Amtrak. The State of Illinois has made a commitment of $12
    million-plus to Amtrak on an annual basis because we value it
    so much. So it isn't as if we are begging from the Federal
    Government or asking without coming up with something locally.
    It is essential to us in terms of the passengers that are
    served when we have, I think, 2.5 million passengers in the
    course--yes, 2.5 million passengers ticketed through Chicago on
    Amtrak in the year 2005.
        So my basic question to you, Mr. Secretary, is this. Is it
    the administration's intent before they leave office to let
    Amtrak slowly wither and die on the vine, or are you willing to
    work with people of good faith and good will who are trying to
    make the necessary investments so that Amtrak has a future? I
    can't argue for Senator Bennett's situation in Utah because I
    don't know it, but I do know the situation in Illinois. Amtrak
    is essential to down-State residents as well as those in the
    Chicagoland region, and we are fearful that the
    administration's goal is to close down Amtrak as we see it, or
    to diminish the investment in Amtrak that is necessary for its
    future. I would like to ask you to comment, please.
        Senator Bennett. Senator, I have been trying to give our
    Amtrak dollars to you for years.
        Senator Durbin. We are still willing to take them, too.
        Secretary Mineta. We are very committed to an intercity
    passenger rail system, but the present structure isn't going to
    give us a long-term, viable intercity passenger system that is
    sustainable. That is why people say, ``Mineta, why are you
    trying to kill Amtrak?'' Frankly, if I wanted to kill Amtrak, I
    would do nothing. But we are working to formulate a financial
    and public policy to deal with Amtrak in the long-term.
        I wish we could get over the hump of other people saying we
    are trying to kill Amtrak. Rather, we are trying to build
    Amtrak, or some kind of an intercity passenger rail system, for
    the future. That is why in our proposal, we commit to a 50
    percent capital improvement program partnership with the
    States. As examples, there are Oregon and Washington with
    service to British Columbia, the California system, and the
    Northeast Corridor. There are also the States themselves, as
    former Governor Kit Bond talked about his commitment to rail in
    the State of Missouri.
        Today, there is a Midwest Railroad Initiative made up of
    Michigan, Illinois, Wisconsin, Minnesota, Iowa, Indiana, Ohio,
    Missouri, and Kansas. Those States are putting into their rail
    operation, as I recall, somewhere around $30 million. They are
    doing that totally with State money. We are willing to work
    with the States and come up with a 50-50 partnership for their
    capital programs.
        In our reform package, we are trying to follow the model
    currently used to finance transit, highway and airport capital
    projects. Those are all partnership programs.
        Senator Durbin. Mr. Secretary, if I could just--I know my
    time is up, and I don't want to prevail on the committee any
    longer other than to suggest that Illinois has already invested
    $250 million in upgrading Amtrak. We have made a commitment. We
    are not just there with our hands up to the Federal Government.
    And a $12 million annual commitment to the operating expenses
    of Amtrak in our State. We believe it is essential for our
    economy.
        I don't believe we can have a realistic and cogent energy
    policy in America that does not include mass transit and rail
    transit, including Amtrak, in circumstances like Illinois. To
    put more cars on the road is not going to in any way reduce our
    addiction to oil in this country. So I hope that the
    administration will work with us in Congress to try to find the
    right funding level so that Amtrak doesn't just survive another
    year, but starts to build for a more successful future.
        Secretary Mineta. Well, I think----
        Senator Bond. Thank you very much, Senator Durbin, and
    regrettably, since we do want to get this next panel up and
    have them testify, because our votes are starting, I am going
    to stay here as long as I can, I want to hear what the Amtrak
    panel has and I will submit a whole bunch of questions on AIP,
    why you took the $100 million out of existing funds, what are
    the other options that States may pursue on Amtrak and Open
    Skies.
        But thank you very much, Mr. Secretary, and we will be
    continuing our dialogue with you and now we would like to
    invite the second panel.

                         ADDITIONAL COMMITTEE QUESTIONS

        Secretary Mineta. We will submit for the record responses
    to the questions sent by the members. Thank you very much,
    Chairman Bond and members of the committee.
        [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 Department of Transportation
               Questions Submitted by Senator Christopher S. Bond

                              TRANSIT SMALL STARTS

        Question. Mr. Secretary, in light of the Advanced Notice of
    Proposed Rulemaking issued by FTA last month regarding Small Starts,
    how will you ensure that the Small Starts program has the right balance
    between oversight and flexibility of funds? This program could be a
    great resource for small transit authorities or those that are lacking
    the financial resources to devote to large scale mass transit projects.
    However, my concern is that if the Department creates too much
    bureaucratic red tape, it may defeat the purpose of providing a grant
    program for smaller transit projects.
        Answer. The Safe, Accountable, Flexible, Efficient Transportation
    Equity Act: A Legacy for Users (SAFETEA-LU) provides Small Starts
    funding to projects with total costs not exceeding $250 million and New
    Starts funding of less than $75 million. Each project must conduct an
    alternatives analysis and be approved to enter project development
    based on requirements in a reduced set of criteria for Small Starts
    project justification compared to traditional New Starts projects.
        The Advanced Notice of Proposed Rule Making (ANPRM) issued January
    30, 2006, addresses both reduced requirements on grantees and the need
    for projects to be well justified. The requirements are scaled to the
    size and complexity of the project so that simple projects at lower
    cost require less effort to demonstrate their worthiness for funding
    while larger projects are required to perform more analysis. To
    highlight these differences in justification the Federal Transit
    Administration (FTA) has proposed a category of projects that are
    justified for funding by virtue of their physical characteristics, cost
    limitations and existing ridership. This category is called ``Very
    Small Starts.'' Projects that qualify for this category also rate well
    for each of the project justification criteria in SAFETEA-LU;
    therefore, no detailed assessment of transportation benefits is
    necessary, saving project sponsors significant time and costs for
    analysis. The specific project characteristics for Very Small Starts
    have been defined in FTA's proposed interim guidance for Small Starts
    that was issued on June 9, 2006.
        Additional reductions in requirements for Small Starts funding are
    for alternatives analysis studies and for effort to produce information
    for evaluation. It is anticipated that alternatives analysis studies
    will be simpler than those for traditional New Starts because areas
    considering smaller projects will have a limited number of alternatives
    that need to be examined and the settings for the projects could
    involve less analysis. The tools needed to forecast transportation
    benefits could also be simpler to develop and apply as described in the
    ANPRM. These efforts are aimed at reducing Federal ``red tape'' while
    ensuring project benefits and financial capacity can be met so that
    only meritorious projects go forward.

                               BUS RAPID TRANSIT

        Question. Mr. Secretary, in terms of providing more cost-effective
    solutions to traffic congestion, Bus Rapid Transit appears to be a
    great alternative to the expensive capital costs associated with
    building or expanding light and heavy rail mass transit systems. Are
    there any new ideas coming from the Department to make Bus Rapid
    Transit more efficient in terms of operating? Is anything being done to
    make BRT more attractive to transit authorities throughout the country?
        Answer. While each transit mode has its place, Bus Rapid Transit
    (BRT) generally offers an attractive solution where there are dedicated
    or segregated travel lanes, well-designed bus stations with level
    boarding, multiple doors for entry and egress onto large platforms, and
    less frequent stops as opposed to minimally equipped and frequent bus
    stops, off-board fare collection, transit signal priority and queue
    jumping at intersections, timely and appropriate customer service
    information, and large comfortable buses that project a unique identity
    of the service.
        The new Small Starts program makes available an additional source
    of funding for BRT projects, both with and without fixed guideways.
    Under the Small Starts category, certain ``corridor-based bus capital
    projects'' are eligible for funding. Projects are limited to those with
    proposed Capital Program funds of less than $75,000,000 and a total
    project cost of less than $250,000,000. The Proposed Interim Guidance
    and Instructions for Small Starts has been released recently for public
    comment. The project justification criteria are simplified, focusing on
    three criteria: cost-effectiveness, public transportation that is
    supportive of land use policies, and the effect on local economic
    development. The criteria for local financial commitment have been
    simplified to focus only on a shorter term financial plan. The project
    development process for Small Starts is a three-step process:
    alternatives analysis, project development, and construction, rather
    than the four steps for the more elaborate New Starts projects.
        In cooperation with the National Bus Rapid Transit Institute, FTA
    has launched several information-gathering and outreach activities to
    promote BRT as a cost-effective alternative. FTA has been conducting
    several public outreach seminars and workshops to inform both transit
    agencies and the public on the attributes and benefits of BRT. FTA has
    also launched a program to update the document ``Characteristics of Bus
    Rapid Transit for Decision Making'' that was released in 2004 to add
    advances made in BRT systems. The update is slated for release in late
    2007. FTA has initiated cooperative working relationships with the U.S.
    Conference of Mayors and several non-profit organizations that are
    promoting BRT to share data and to extend the reach to more
    organizations, thereby resulting in greater interaction with the public
    in finding solutions for congestion mitigation in metropolitan areas.
    fmcsa partnership with the states in implementing safetea-lu provisions
        Question. Mr. Secretary, as you well know, as a result of SAFETEA-
    LU, the modal Administrations in your Department that oversee surface
    transportation have a considerable job to do in implementing many of
    the provisions in that legislation in both a regulatory and grant
    framework.
        In many cases, this requires a close working relationship and
    partnership with existing organizations representing State and local
    governments. It also requires the leveraging of resources and meeting
    venues with these groups. For example, this is accomplished in FHWA
    through its partnership with AASHTO. In public transit, it is FTA's
    partnership with groups such as APTA. In automobile safety, it is
    NHTSA's partnership with groups such as the Governor's Highway Safety
    Association.
        With respect to motor carrier safety, it is my understanding that
    one group that the Federal Motor Carrier Safety Administration (FMCSA)
    should be working closely with is the Commercial Vehicle Safety
    Alliance (CVSA) whose membership consists of State motor carrier safety
    enforcement agencies and those in Canada and Mexico.
        I have learned that FMCSA has chosen not to participate in one of
    the two international meetings that CVSA holds each year and that it
    has decided not to allow States to use MCSAP funds to attend CVSA
    meetings. This is troubling since FMCSA has a huge task in implementing
    SAFETEA-LU State motor carrier safety grant programs as well as the
    constant need to deal with safety and security issues at both our
    Northern and Southern borders. It is critical that FMCSA continue to
    maintain a consistent motor carrier safety and security policy
    throughout North America and involve the States in helping to make
    critical decisions since they are delivering the bulk of the motor
    carrier safety programs.
        In light of this, Mr. Secretary, can you tell me why FMCSA is not
    better leveraging taxpayer dollars and meetings with those of CVSA?
        Answer. The Federal Motor Carrier Safety Administration (FMCSA) and
    the Commercial Vehicle Safety Alliance (CVSA) have always worked
    closely and cooperatively to advance motor carrier safety on the
    Nation's highways. Through its Annual Spring Conference and the Fall
    Workshop, CVSA has provided a regular forum for State and Federal
    enforcement personnel and industry representatives to address critical
    issues confronting motor carrier safety. FMCSA values this relationship
    and will continue to participate in these forums. FMCSA leadership and
    staff will continue to work with State and industry members on CVSA's
    committees and will continue to participate on CVSA's Executive
    Committee at the Associate Administrator level. FMCSA is also meeting
    with CVSA's executive staff monthly to address immediate safety
    concerns and define issues for scheduled CVSA membership meetings.
        Over the past few years, DOT has focused increasingly on being an
    effective steward Federal grant funds. As a result, FMCSA has taken a
    more direct leadership role with its State partners to ensure grant
    funds are being applied with the highest safety benefit. On February 1,
    2006, FMCSA sent a letter to each State outlining the use of Motor
    Carrier Safety Assistance Program (MCSAP) funds for CVSA meetings. The
    letter stated fiscal responsibility dictates that grant funds could be
    used for two national meetings with our State partners each year--a
    CVSA conference and an FMCSA Annual MCSAP Conference. The effective
    date of the new policy was delayed until fiscal year 2007 to provide
    CVSA with an adequate planning period. In May 2006, FMCSA conducted its
    MCSAP Conference. Invitations were issued to the director of each
    State's lead agency in order to build a more effective working
    relationship with policy-level decision-makers. During the 2-day
    meeting, presentations focused on SAFETEA-LU provisions and guidance to
    the States on implementation of the new congressional requirements. The
    feedback received from that meeting indicates an overwhelmingly
    favorable response for continuance which FMCSA intends to do annually.
        Nearly half of FMCSA's budget is dedicated to grant programs to
    fund vital State enforcement and educational efforts. For that reason,
    FMCSA also works with other critical groups such as the American
    Association of Motor Vehicle Administrators (AAMVA), the International
    Association of Chiefs of Police (IACP), and the American Association of
    State Highway and Transportation Officials (AASHTO) to advance
    commercial motor vehicle safety.

                       OPEN ROADS FINANCING PILOT PROGRAM

        Question. I am glad to see the administration's fiscal year 2007
    budget adheres to the guaranteed highway funding levels called for in
    SAFETEA-LU. I feel strongly that we need to adhere to the commitments
    made to our States in that bill.
        Along those lines, I am intrigued by your proposed Open Roads
    Financing Pilot Program. First of all, I am wondering why the
    administration did not suggest this concept while we were in
    negotiations on last year's highway bill. More fundamentally, I am
    concerned that you are in effect proposing to divert $100 million that
    has been dedicated to surface transportation improvements to fund a
    series of initiatives that will not focus on infrastructure. I fully
    agree that we must begin to prepare for the transportation financing
    challenges of the future, and I look forward to seeing what the
    administration proposes in the way of revenue proposals for the
    aviation trust fund sometime this year.
        If the Open Roads Financing Pilot Program is such a priority for
    the administration, then why aren't you proposing an additional $100
    million for this initiative rather than suggesting cuts elsewhere?
        Answer. During the preparation of the fiscal year 2007 budget, the
    concept of the Open Roads Financing Pilot Program was developed to
    allow States to better leverage the resources provided in SAFETEA-LU
    and to inform the next reauthorization debate. The $100 million in
    funding proposed for the program will assist up to five States in
    evaluating innovative ways and to demonstrate the benefits of more
    efficient methods of charging for the use of major portions of their
    highway systems. Successful alternatives will include innovative
    mechanisms that can augment existing sources of State (not Federal)
    highway funding, enhance highway performance, and reduce congestion.
    The administration believes the activities for this program should be
    funded within the guaranteed levels enacted in SAFETEA-LU.

                          AIRPORT IMPROVEMENT PROGRAM

        Question. The administration's budget proposes a $765 million
    reduction in funding for the Airport Improvement Program. I recall that
    you requested a $500 million AIP cut in last year's budget, which this
    subcommittee rejected. While I am concerned that we are going down this
    road again, I have a more substantive question about this proposal.
        You have previously stated that your $2.75 billion AIP
    recommendation would be sufficient to fund all currently planned
    airport construction projects. At the same time, your agency is
    forecasting passenger air travel will increase 45 percent from 738.6
    million enplanements in 2005 to almost 1.1 billion in 2017. Given this
    dramatic growth in estimated travel, doesn't it make sense to begin
    expanding aviation infrastructure capacity right now to prepare for the
    future, rather than simply attempting to cover the minimum amount of
    investment needed today?
        Answer. The decision to request an Airport Improvement Program
    (AIP) funding level of $2.75 billion reflects the tough realities of
    the present budgetary climate. We took a hard look at the level of AIP
    funding that would be needed to meet our highest priorities and to keep
    the national airport system safe, secure and efficient.
        At the proposed $2.75 billion funding level, the Federal Aviation
    Administration (FAA) will be able to fund all high priority safety,
    capacity, and security projects. The FAA will be able to: fund all of
    its current and anticipated letter of intent commitments; improve
    runway safety areas; help airports meet their Part 1542 security
    requirements; and, continue work on phased projects.
        For the longer term, the FAA is reviewing the current and future
    structure and level of AIP in the context of reauthorization. AIP
    provides 20-25 percent of airport capital funding needs nationally.
    Therefore, the FAA is working to develop an AIP funding proposal that
    assures sufficient Federal funds to meet high priority airport capital
    funding needs that cannot be met through other sources.

     RULEMAKING ON SINGLE OCCUPANCY HYBRID ELECTRIC VEHICLE ACCESS TO HOV
                                   FACILITIES

        Question. What is the status of DOT's rulemaking on single
    occupancy hybrid electric vehicle access to HOV facilities? Has DOT
    consulted with EPA to determine vehicle criteria and requirements for
    single occupancy hybrid electric vehicle access on High Occupancy
    Vehicle lanes? Has EPA provided DOT vehicle certification, and
    guidelines and procedures for vehicle comparison and performance
    calculations, as required by the law? How is DOT enforcing State
    compliance with the HOV facility provisions in the new Federal highway
    law? What is DOT advising States like California and New York that have
    established HOV lane single occupancy vehicle exemptions in violation
    with Federal law?
        Answer. Section 1121 of the Safe, Accountable, Flexible, Efficient
    Transportation Equity Act: A Legacy for Users (SAFETEA-LU) adds section
    166 to title 23 of the United States Code. Section 166(e) requires the
    Environmental Protection Agency (EPA) to issue regulations concerning
    the certification and labeling requirements for low emission and
    energy-efficient vehicles and to establish guidelines and procedures
    for making the fuel efficiency comparisons and performance calculations
    described in new section 166(f). Section 166(f) establishes the minimum
    percentage gains in fuel efficiency that vehicles must achieve in order
    for States to be able to allow them to use an HOV facility. EPA
    certifies the percentage gain in fuel economy that qualifies vehicles
    under this subsection. A State may require a higher percentage gain in
    fuel economy than the Federal minimum. The Federal Highway
    Administration (FHWA) is working with EPA on this rulemaking.
        The statute is effective immediately, but the EPA rulemaking is not
    expected to be completed until the end of 2006. Thus, FHWA has granted
    conditional approval to States that demonstrate reasonable compliance
    with the SAFETEA-LU requirements. To date, conditional approvals have
    been provided to New York and California. FHWA recently clarified that
    both California and New York must ensure that more stringent fuel
    economy standards are based on a percentage gain in fuel efficiency and
    that these States must work toward correcting any inconsistencies with
    this requirement. Other States that wish to allow low emission and
    energy-efficient vehicles to use HOV facilities now may request a
    conditional approval on a similar basis. The programs that are
    conditionally approved may have to be changed to comply with the EPA
    final rule when that rule is issued.

                              NPRM AND OPEN SKIES

        Question. Secretary Mineta, one contentious issue that has emerged
    in a number of areas of late is the question of ownership and foreign
    control. Can you please explain for me the relationship between the
    notice of proposed rulemaking (NPRM) on ``actual control'' and the
    status of the Open Skies agreement between the United States and the
    EU?
        Answer. The goal of the NPRM proceeding is to realize the
    commercial and public benefits obtained by providing the airline
    industry with greater access to global capital markets, while ensuring
    that U.S. citizens remain in actual control of U.S. airlines. We are
    proposing to modify our interpretation of ``actual control'' because a
    change in the historic interpretation appears to be long overdue and in
    the best interests of the U.S. airline industry and the American
    public. The European Union has made it clear that it will not move
    forward on the agreement until it has the opportunity to assess the
    final outcome in DOT's ``actual control'' proceeding. However, this
    rulemaking was initiated, and is being pursued, based on its own merit.

                                     AMTRAK

        Question. Why does Amtrak not have a detailed multi-year financial
    plan? Wouldn't this planning document, similar to a TIP, or
    transportation improvement plan, help Amtrak identify year-to-year,
    what priorities for improvements are necessary to be made and help in
    the budget process?
        Answer. Amtrak has regularly developed multi-year investment plans
    in the past. The problem is that these plans have been developed in
    isolation, without involvement from the States, who are key drivers in
    planning for other modes of transportation. In addition, these plans
    have been built on unrealistic assumptions, not the least of which is
    that the Federal Government would fund whatever Amtrak asked for
    regardless of efficiency and/or effectiveness of Amtrak's proposed
    investments. In recognition of the need for meaningful plans, the
    Federal Railroad Administration (FRA) has made as a condition of its
    grant agreement with Amtrak the development of an infrastructure
    investment plan with substantial involvement of the States and other
    users of the infrastructure. FRA has also directed Amtrak to develop
    plans for improving the financial performance of long-distance trains
    and for identifying its equipment needs. If these requirements are
    satisfied, they can become a major part of the foundation for the
    detailed multi-year financial plan that is needed.
        Question. Realizing that Amtrak needs approximately $295 million to
    address its mandatory debt service, and zero is provided in this year's
    budget proposal, how would you propose to address the debt?
        Answer. The Federal Government does not guarantee the repayment of
    any of Amtrak's current debt. In this, Amtrak is the same as any other
    private company. Amtrak needs to look to its own resources, including
    the repayment of mandatory debt service.
                                     ______

                   Questions Submitted by Senator Mike DeWine

                            AIR TRAFFIC CONTROLLERS

        Question. In 1999, the FAA cut the number of Air Traffic Control
    Supervisors by 700 positions. Since this reduction in supervisor
    staffing, the number of operational errors and runway incursions has
    increased, prompting safety concerns documented by the Department of
    Transportation (DOT) Inspector General in reports in 2000 and in 2003.
        Reports accompanying the fiscal year 2004 and fiscal year 2005
    transportation appropriations measures directed the FAA to increase
    supervisory staffing levels by 120 positions per year to a floor of
    1,846 on September 30, 2005. Unfortunately, recent reports indicate
    that the FAA has not hired enough permanent supervisors to meet this
    floor. Finally, and most importantly, there appears to be a strong
    correlation between the number of supervisors and operational errors.
    The FAA's own fact book shows that as the FAA began to hire more
    supervisors in fiscal year 2004 and fiscal year 2005 in response to the
    committee's directions, the increase in the number of errors dropped
    significantly. The FAA Fact Book shows there were only 1,710
    supervisors on April 1, 2005. Moreover, it is my understanding that
    when the FAA made efforts to reach the 1,846 floor by the end of the
    fiscal year 2005, it did so with temporary promotions of controllers
    into supervisory ranks rather than permanent hires.
        Secretary Mineta, I have long been concerned about adequate
    supervisory staff for our air traffic control system, and the impact a
    lack of full-time supervisors has had on the safety of the flying
    public. In the past, this subcommittee has noted that as numbers of
    supervisors decreased serious operational errors and runway incursions
    have increased. We addressed this issue via committee reports in fiscal
    years 2002, 2003, 2004 and 2005. To fix the problem, Congress has
    mandated that the FAA have at least 1,846 supervisors on hand by
    September 30, 2005. What was the exact number of air traffic control
    supervisors on that date? Of this number how many were air traffic
    controllers temporarily appointed to supervisory positions? How many
    supervisors were in place on March 1, 2006? Were any of these
    supervisors temporary appointments? If so, how many?
        Answer. The FAA believes the need to hire supervisors should be
    based on organizational requirements tied to the operation. FAA is
    facing several years of anticipated controller retirements and its
    source of hires for supervisors comes from existing controller ranks.
    FAA calculates the number of controllers it needs based on traffic
    volumes and other criteria. The number of supervisors is tied to the
    number of controllers, and traffic volumes, which have been down for
    the past few years. FAA's Controller to Supervisory Ratio on September
    30, 2005 was 8.07:1 and is consistent with industry best practices.
        On September 30, 2005, the FAA had 1,801 Operations Supervisors on
    board. Of this total, 72 air traffic controllers were temporarily
    appointed to supervisory positions during that month. On March 1, 2006,
    there were 1,749 Operations Supervisors on board. There were 9
    temporary appointments to supervisor position in February 2006. On
    April 25, 2006 the FAA had 1,794 Operations Supervisors, an increase of
    45 over the March 1st total. The controller-to-supervisor ratio on
    April 25th was 8.1:1.
        Question. Secretary Mineta, the Department of Transportation's
    Inspector General Mead has repeatedly said that lack of adequate
    numbers of air traffic control supervisors has resulted in a dangerous
    rate of increase in controller operational errors and runway
    incursions. What is the FAA doing to fix this problem? Has the
    Department instituted a freeze on hiring/promoting new air traffic
    control supervisors, and if so, what has prompted this decision?
        Answer. There has not been any decision to freeze hiring or
    promoting of new air traffic control supervisors. The FAA is continuing
    to monitor all causal effects of operational errors and runway
    incursions in its facilities.
                                     ______

                Questions Submitted by Senator Richard J. Durbin

                    FAA'S TELECOMMUNICATIONS INFRASTRUCTURE

        Question. I understand that the FAA's Telecommunications
    Infrastructure (FTI) management of the Air Traffic Controller
    communications system has been plagued with significant problems. For
    example, there have been three outages at O'Hare on 11
    telecommunications lines between O'Hare and Elgin, two of which
    occurred in March of 2006.
        The DOT Inspector General will soon release a report on the FAA's
    management of the FTI contract. To help put the findings and
    recommendations of that report in the proper context, please answer the
    following questions regarding the Air Traffic Control elements of that
    contract.
        The current ``Leased Interfacility NAS Communication System''
    (LINCS) uses TDM technology. Will FTI create a new network for Air
    Traffic Control to replace LINCS using modern packet-based technology?
    Will the Air Traffic Control part of the FTI system be more reliable
    than the existing LINCS system? If not, why spend more than $300
    million on a new system?
        Answer. FTI implements a multi-services platform that provides a
    wide range of service offerings and enables the FAA to meet a range of
    challenges. FTI uses Time-Division Multiplexing (TDM) technology for
    services supporting critical Air Traffic Control operations. FTI uses
    packet-based technologies for non-critical Air Traffic Management
    applications to support the broad distribution of data required by
    those applications. Packet-based technologies provide a highly cost-
    effective means for enterprise-wide distribution of data because they
    are based on ``postalized'' pricing that is not distance sensitive.
    This type of capability is not available through the LINCS network.
        FAA requirements for the FTI network call for six levels of service
    availability in contrast to the two levels of service availability
    provided by LINCS. The highest service availability level provided by
    the FTI network exceeds the highest specified availability level for
    the LINCS network.
        Finally, it should be noted that the basis for the $300 million
    capital investment is not solely to improve service availability,
    rather, it is to replace services provided by: (1) leased service
    contracts (e.g., LINCS) that are expiring; and (2) FAA-owned networks
    that are reaching the end of their economic lifetimes.
        Question. Does the FTI contractor get paid when it installs FTI
    system elements, or when those elements have been tested and actually
    go into service?
        Answer. The FTI contractor can bill for network infrastructure once
    it has been successfully tested and demonstrated its readiness to
    support the implementation of telecommunications services. There is a
    separate billing for individual services that takes place after they
    have been successfully tested and demonstrated as ready for FAA use. It
    is an FAA responsibility to cutover the service to actual use.
        Question. Are the Department of Defense and Department of Homeland
    Security satisfied that the FTI currently meets the security and
    reliability standards for the DOD and DHS portions of the ATC
    communications network?
        Answer. Yes. The FTI network complies with all current
    certification standards to include the latest versions of Federal
    Information Processing Standards (FIPS) 199 standards and National
    Institute of Standards and Technology (NIST) guidelines. When the FAA
    establishes a memorandum of understanding with other government
    agencies to provide telecommunications services, the specific
    guidelines and standards are identified by name to ensure a common
    security posture on the interfaces with those agencies. The FAA is
    already providing FTI services to DOD facilities and there have not
    been any issues with information security.
        Question. An effective way to measure progress under the contract
    is by the number of LINCS switches and circuits which have been
    disconnected. From the beginning of the contract through February,
    2006, what is the average number of disconnects per month? What is the
    highest number of disconnects in a given month? The FAA is still saying
    that the FTI transition will be completed by December 2007. From March,
    2006 forward, how many disconnects per month need to occur in the LINCS
    system to finish the contract before the FAA's stated completion date?
        Answer. The transition of services did not begin immediately upon
    contract award; rather, it began after the FAA achieved the In-Service
    Decision (ISD) milestone for the program in December 2003. In addition,
    it should be noted that the FAA's transition approach called for the
    program to trial run its procedures at two pathfinder sites. As a
    result, transition activities did not begin in earnest until the first
    quarter of fiscal year 2005. From that point to February 2006, there
    were an average of 78 disconnect orders issued per month. The highest
    number of disconnects in a given month occurred in the most recently
    completed month (March 2006) when 255 disconnect orders were issued.
    The number of disconnect orders per month has increased by more than 60
    per month over the past 3 months. As of the end of March 2006, there
    were a total of approximately 1,550 legacy service disconnect orders
    issued since the FTI transition began.
        While the number of legacy service disconnects is one measure of
    progress, it does not capture the full scope of the work effort. For
    example, while the transition of legacy services has proceeded, the FAA
    has also implemented over 800 new services directly onto the FTI
    network thereby avoiding additional investments in the legacy network
    infrastructure.
        Finally, it should be noted that service disconnects are rate-
    limited by the number of legacy services transitioned to the FTI
    network and the number of service cutovers completed by the FAA. In
    recent months, the FTI contractor (Harris) has increased monthly
    service implementation rates by nearly 250 percent since the start of
    fiscal year 2006. In addition, the FAA has implemented a number of
    process improvements that resulted in an increase of 100 more service
    cutovers for each of the past 3 months.
        As of the beginning of March 2006, there were approximately 13,000
    LINCS circuits remaining in operation. Based on this quantity, an
    average of approximately 590 services would have to be disconnected per
    month over the remaining 22-month period to achieve the planned
    completion of December 2007.
        Question. When will the expected savings from the FTI contract
    recoup all the transition costs and first show net savings? Is that
    date before or after the end of the original 10-year contract in 2012?
    What will be the total net savings, after factoring in all the
    transition costs, over the first 10 years of the FTI contract, through
    mid-2012?
        Answer. To clarify, there has been no change to the duration of the
    FTI contract. When the FAA first released the Screening Information
    Request to initiate the FTI procurement, the contract duration was set
    at 15 years. It has not been changed. With respect to the expected
    savings, the FAA projects that it will recoup all of the transition
    costs and reach the breakeven point by 2012. However, by as early as
    fiscal year 2008, it is projected that the FAA's total
    telecommunications service costs will be less than they would have been
    if the FAA had not implemented the FTI network.
        Because the breakeven point occurs roughly in mid-2012, the total
    net cost savings will essentially be zero at that point. However, it
    should be noted that the FTI business case projects that FAA operating
    costs for telecommunications services will be $129 million less in
    fiscal year 2012 than they would have been if the FAA had not
    implemented the FTI network.
                                     ______

                Questions Submitted by Senator Patrick J. Leahy

                                     AMTRAK

        Question. The most recent grant request from Amtrak indicates that
    the struggling railroad needs $1.5 billion next year for capital and
    operational expenses. The President's budget request, though, only
    seeks $900 million in total funding. Since we have heard the
    administration proclaim that it is dedicated to passenger rail
    nationwide, how does this budget request add up to that commitment?
        Answer. It is important to separate the form of transportation--
    intercity passenger rail--from the provider of that service. The
    administration supports intercity passenger rail service as a component
    of this Nation's transportation system where it has the potential to
    enhance the mobility of our citizens. Unfortunately, the business model
    we use today to provide that service--Amtrak--is so flawed that that
    potential has not been realized. The administration is willing to
    invest in passenger rail service but not in an unreformed Amtrak. The
    $900 million request reflects the administration's view that there has
    been progress in reforming intercity passenger rail service but much
    more progress is needed.
        Question. My small State of Vermont has two State-sponsored
    trains--the Vermonter and the Ethan Allen Express. The State of Vermont
    paid $2.65 million to cover the operating losses this year and is
    slated to pay $4 million next year as Amtrak ramps up the share paid by
    the States. The Department of Transportation and Amtrak have said that
    they intend to develop public-private partnerships for the corridor
    service. How closely are you working with the individual States to
    improve equipment and service on these trains?
        Answer. As part of this year's grant agreement, Amtrak was required
    to initiate a pilot through which a State, or States, could assume the
    responsibility for parts of the service they deem important to help
    assure that such service was provided with the highest quality and in
    the most cost-effective manner as possible. The Federal Railroad
    Administration (FRA) has been in contact with Vermont as it developed
    its response to this request for proposals which will result in
    improved service over the route of the Vermonter. Specifically, FRA
    anticipates that Vermont will soon apply for a loan under the Railroad
    Rehabilitation and Improvement Financing program to acquire new
    equipment that will provide more cost effective and frequent service.
    But this is just a pilot. For the long-term, the U.S. Department of
    Transportation (DOT) believes that a reformed system of intercity
    passenger rail service would work best if it is modeled after the
    successful partnerships between the USDOT and the State DOTs that
    implement the highway and transit programs. In these programs, the
    States assume the lead for the planning and implementation of
    transportation projects they believe are most important. USDOT is a
    partner in these efforts, providing support for capital investments.
        Question. I am also concerned about the lack of presidential
    nominations to the Amtrak Board of Directors. With three open seats on
    the seven-member Board and with the current Board members all holding
    the same party affiliation, what is the status of the President's
    process in filling the empty slots? I do not think any of us want to
    see a repeat of the secretive action that the partisan Board took last
    September to authorize splitting off the Northeast Corridor from the
    rest of Amtrak's operations.
        Answer. The President has attempted to fill the vacant seats on the
    Amtrak Board. However, the Senate has not chosen to act on his
    nominations. In 2004, the President nominated four highly qualified
    persons to the Board including two who do not share his political
    affiliation, yet the Senate chose not to vote on the confirmation of
    any of these four. Currently, the President has nominated four highly
    qualified persons for the five existing vacancies on the Amtrak Board.
    Of these one does not share the President's political affiliation. I
    hope that the Senate will act timely on these nominations.
        Also, to clarify, the Amtrak Board's vote last September did not
    authorize splitting off of the Northeast Corridor (NEC) from the rest
    of Amtrak's operations. Rather, the Board authorized an evaluation of
    structural options to segment the finances of the NEC so that Amtrak
    could better understand the revenues and expenses associated with those
    operations, which are significantly different than the rest of Amtrak's
    operations.

                             ESSENTIAL AIR SERVICE

        Question. The President's budget requests only $50 million for the
    Essential Air Service program--less than half of the $110 million that
    was appropriated to the program by Congress last year. Since over 60 of
    the communities currently receiving EAS funding would be dropped from
    the program under the administration's proposal, the $50 million
    funding level is clearly insufficient to meet EAS communities' needs.
    How do you believe that the Essential Air Service program can survive
    with only $50 million in direct funding? How do you expect small
    communities around the country, like Rutland, Vermont, to be able to
    meet the 10-15 percent match you envision?
        Answer. We are proposing a fundamental change in the way the
    government supports transportation services to rural America. The EAS
    program subsidizes scheduled air service to communities that received
    scheduled service at the time of deregulation in 1978. There have been
    tremendous changes in the industry since then, but the program has
    remained static. Many communities benefiting from this program have
    done little to help make the service successful. Requiring a modest
    contribution from these communities may energize civic officials and
    business leaders at the local and State levels to encourage use of the
    service.
        For the most isolated communities, those more than 210 driving
    miles from the nearest large or medium hub airport, we propose to
    continue to subsidize air service to the extent of 90 percent of the
    total subsidy required. The least isolated communities, quantified as
    those that are 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; however,
    they would qualify for a Federal subsidy of 50 percent of the total
    cost for surface transportation. 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
    transportation departments to procure charter service, single-engine,
    single-pilot service, regionalized service, or ground transportation in
    cases where those options seem to be more responsive to communities'
    needs. Finally, our experience with the Small Community Air Service
    Development Program has been that small communities have been able to
    raise matching funds. In that regard, we note that the funds do not
    have to come from the city budget. Rather, the funds can come from the
    chamber of commerce, individual businesses, or even from the State.
    With these reforms, the Department's $50 million budget request would
    keep the most isolated communities connected to the national air
    transportation system.
                                     ______

     Questions Submitted to the Office of Inspector General, Department of
                                 Transportation

               Questions Submitted by Senator Christopher S. Bond

        Question. Why does Amtrak not have a detailed multi-year financial
    plan now? Wouldn't this planning document, similar to a TIP, or
    transportation improvement plan, help Amtrak identify year-to-year,
    what priorities for improvement are necessary to be made and help in
    the budget process?
        Answer. We have previously indicated that Amtrak needs to do a
    better job setting priorities for its capital dollars. For example, in
    our Assessment of Amtrak's 2003 and 2004 Financial Performance and
    Requirements, issued November 18, 2004, we made this point and stated
    further, ``For instance, programming millions of scarce capital dollars
    for fixing long-distance sleeper cars when bridges that Amtrak owns are
    beyond their functional and economic lives and must be refurbished or
    replaced is unacceptable.''
        Amtrak does produce lists of planned capital projects both for the
    upcoming year and for a 5-year period. The relative priorities among
    the projects on the lists are not clearly and explicitly stated. We
    believe it would be beneficial for Amtrak to publicly release a
    prioritized list of its capital projects, similar to a TIP, and,
    thereby, explicitly consider the tradeoffs among and competing demands
    for its limited capital resources.
        Question. Realizing that Amtrak needs approximately $295 million to
    address its mandatory debt service, and zero is provided in this year's
    budget proposal, how do you propose to address the debt?
        Answer. The Department of Transportation is best able to provide
    the rationale underlying its budget proposal.
        Question. What are you doing in terms of renegotiating your debt
    service rates?
        Answer. Amtrak is best able to describe its activities in this
    area.
        Question. The Inspector General's Office within the Department of
    Transportation has indicated that Amtrak's operating subsidy baseline
    is $586 million. Amtrak's fiscal year 2006 operating appropriation is
    $490 million. What specific savings has Amtrak identified to live
    within this amount?
        Answer. Our third quarterly assessment of Amtrak's savings from
    operational reforms, dated July 13, 2006, provides a detailed
    description of Amtrak's planned operational reforms, their progress to
    date in implementing those reforms, and their progress to date in
    closing the gap between Amtrak's operating subsidy baseline and its
    fiscal year 2006 appropriation. (A copy of that report is enclosed.)
        Amtrak has identified 15 operational reforms aimed at reducing its
    long-term operating losses. Amtrak has begun to implement five of these
    15 reforms in the areas of food and beverage service, train operations,
    corporate overhead, long-distance train service and Northeast Corridor
    operations. Amtrak has saved $46.3 million from these reforms through
    May 2006.
        Amtrak has realized another $52.7 million in savings from revenue
    increases, lower labor costs and other expense reductions.
        Question. What options, if any, are available for Amtrak to
    outsource its first class services? Under what scenario would Amtrak
    consider outsourcing its first class service on its long-distance
    routes?
        Answer. In our July 2005 report, ``Analysis of Cost Savings on
    Amtrak's Long-Distance Services'', we identified the cost of providing
    food service as a major driver of Amtrak's losses on its long-distance
    service, including first class sleeper service. Under current law and
    its existing labor contracts, Amtrak can outsource food and beverage
    services. Employee protections written into law limit the practicality
    of outsourcing other services associated with long-distance trains. We
    would encourage Amtrak to evaluate and pursue options for outsourcing
    its food and beverage service as a possible means of reducing costs on
    long-distance trains. Outsourcing these services could reduce the cost
    of both coach and first class sleeper service on long-distance trains.
        Question. Amtrak has indicated that it will update labor contracts
    to enhance customer service and provide greater efficiencies. I
    understand that currently, more than 80 percent of Amtrak's passenger
    revenues are consumed by labor and benefit costs alone. What are
    Amtrak's specific goals as it looks to update its labor contracts?
        Answer. Amtrak is best able to describe its goals in its labor
    negotiations.
                                     ______

                Questions Submitted by Senator Patrick J. Leahy

        Question. The most recent grant request from Amtrak indicates that
    the struggling railroad needs $1.5 billion next year for capital and
    operating expenses. The President's budget request, though, only seeks
    $900 million in total funding. Since we have heard the administration
    proclaim that it is dedicated to passenger rail nationwide, how does
    this budget request add up to that commitment?
        Answer. The Department of Transportation is best able to provide
    the rationale underlying its budget proposal.
        Question. My small State of Vermont has two State-sponsored
    trains--the Vermonter and the Ethan Allen Express. The State of Vermont
    paid $2.65 million to cover the operating losses this year and is
    slated to pay $4 million next year as Amtrak ramps up the share paid by
    the States. The Department of Transportation and Amtrak have said that
    they intend to develop public-private partnerships for the corridor
    service. How close are you working with the individual States to
    improve equipment and service on these trains?
        Answer. The Department of Transportation and Amtrak are best able
    to describe their activities in this area.

                                     AMTRAK

        Senator Bond. My apologies to the witnesses. I would ask
    that you all make your statements very briefly. We will accept
    the full statements for the record. Senator Murray and I will
    have a couple of questions before we have to race for a vote
    that should be starting now.
        Mr. Laney, welcome.

    STATEMENT OF DAVID M. LANEY, CHAIRMAN, AMTRAK BOARD OF
                DIRECTORS
        Mr. Laney. Thank you, Mr. Chairman and members of the
    subcommittee. I appreciate the opportunity to appear before you
    today to discuss Amtrak fiscal year 2007 funding needs and I
    will make it very brief.
        First of all, before I summarize the 2007 request, I would
    ask that the grant and legislative request to Congress and the
    full statement be included in the record of this hearing.
        Senator Bond. Without objection.
        Mr. Laney. Thank you. In short, I will make it very brief.
    Amtrak's Board and management are aggressively ushering in
    significant change at Amtrak. Every organization likes to
    consider itself an agent of change and progress, and I know you
    have heard it before from earlier incarnations of Amtrak, that
    there would be a new and improved railroad at hand. There have
    even been past projections or predictions of profitability.
        What I want to outline today is a step in the direction of
    material, tangible progress at Amtrak, and I will be the first
    to say that the jury is still out, but I have very good and
    reliable reasons to be optimistic. The indications are very
    encouraging and early results are already reflected in our
    operating budget.
        For Amtrak, change, as far as the Board is concerned,
    cannot come quickly enough. This year and next year are
    absolutely pivotal years for Amtrak in its implementation of
    strategic reform, but to continue and ultimately finish the job
    we started, we will need your continued support, especially in
    2007.
        The 2007 grant request is essentially a first installment
    on our promise to deliver on these goals. We have made progress
    in simplifying and reducing the cost of food and beverage
    service. We are pursuing efficiencies in our mechanical
    operations, as well as our stations and call center functions
    that could include the closing or consolidation of some
    facilities. We are reevaluating our fleet management practices.
    We are aggressively pursuing revenue growth through a top-to-
    bottom focus on improving customer service. We will look at
    ways to improve our service reliability where we can control
    the infrastructure and work with our railroad partners to the
    extent possible where we don't control it.
        We have also begun a long overdue and comprehensive review
    of our long-distance trains that includes establishing a set of
    metrics to measure, rank, and improve performance. This year,
    we will also reevaluate our entire long-distance route network
    with an eye to possible restructuring and reconfiguration.
        And ultimately, we have to reach agreement with our labor
    unions, some of which have been without new contracts for 6
    years. The key to that success is changes in work rules, some
    of which date to the steam engine era.
        As we said in our grant and legislative request, Amtrak has
    never in its history instituted so pervasive a reform effort so
    aggressively. The strategic reform initiatives are detailed in
    the legislative request and we will continue to update you on
    our progress, but let me make a couple of statements about the
    levels without going into detail as to capital, operating and
    debt service. To the extent you have questions, either I will
    answer them here or will be glad to respond to questions.
        As a point of reference, our fiscal year 2006 appropriation
    is about $1.3 billion. Amtrak's fiscal year 2007 grant request
    is $1.598, or rounded to 6. This amount would fund basic
    capital, operating and debt service needs. Our 2007 request for
    operating support is essentially flat to the 2006 appropriation
    and over $40 million less than last year's request. Our 2007
    capital request has increased, however, principally because of
    investments we consider essential to our strategic reform
    program, large and critical infrastructure projects, legal
    mandates, and compliance, a first installment, in effect, with
    ADA requirements.
        We have also requested minimal working capital for critical
    liquidity needs throughout the year, and without these large
    capital projects, or strategic reform funding requests, or
    working capital requests, our fiscal year 2007 grant request
    would be essentially flat to our 2006 appropriation. And again,
    I won't go into detail with respect to the various elements.
        What I would say, though, that what shapes the urgency and
    the direction of our reform efforts is our strategic plan, not
    the budget, not reports from the GAO or DOT or DOT IG, and I
    should say that I think for the first time since I have been on
    the Board, we have the most constructive, complementary
    partnership with the DOT, the FRA, and the DOT IG office that I
    think we have ever had.
        But to concentrate our energy and resources on the reform
    efforts, adequate funding will be essential so that we are not
    fighting a rear guard action to fend off liquidity crises or
    even insolvency.

                               PREPARED STATEMENT

        So in closing, let me just say that adequate funding for
    2007 is critical in terms of our continuing to be effective at
    implementing our strategic reform initiatives, and I would add
    how important it is, and I think you have heard it from
    Secretary Mineta, how important it is for Congress to pass a
    reauthorization for Amtrak that contains a capital match
    program which will bring States to the table with financial
    support for passenger rail, and I am sure it will.
        Thank you, Mr. Chairman.
        Senator Bond. Thank you very much, Mr. Laney. We look
    forward to seeing your strategic plan.
        [The statement follows:]

                      Prepared Statement of David M. Laney

        Mr. Chairman and members of the subcommittee, I appreciate the
    opportunity to appear before you today to discuss both the current and
    future state of Amtrak and our fiscal year 2007 funding needs.
        While I will briefly summarize our fiscal year 2007 request in a
    few moments, I would ask that our Grant and Legislative Request to
    Congress be included in the record of this hearing.
        In short, Amtrak's Board and management are aggressively ushering
    in change at Amtrak. Every organization, of course, likes to consider
    itself an agent of change and progress. I know you have even heard it
    before from earlier incarnations of Amtrak that a ``new and improved''
    railroad would soon become more efficient, that service would improve,
    and that expenses would fall. Someone in the not too distant past, I
    believe, even predicted profitability. What I briefly want to outline
    for you today is a step in the direction of material, tangible progress
    at Amtrak. I'll be the first to tell you that the jury is out; and
    until the results are in I am not about to assume a successful outcome.
    But I am optimistic. The indications are very encouraging--early
    results are already reflected in our operating budget.
        In its long history, the railroad industry has developed its own
    culture, uniquely resistant to change in many ways. As a result,
    changing settled practices is neither simple nor quick. But change has
    to come, and for Amtrak it cannot come quickly enough to satisfy our
    Board. You may recall in 2002 Amtrak survived its closest brush with
    insolvency. Since then the company has reorganized, begun to rebuild
    the plant and equipment and stabilized to a point where I believe we
    can now begin to address fundamental change aggressively in a number of
    areas. This year and next are truly pivotal years for Amtrak in its
    implementation of strategic reform.
        The fiscal year 2007 Grant Request is essentially the first
    installment on our promise to deliver on these goals.
      --We have made progress in simplifying and reducing the costs of the
            delivery of food and beverage service on our trains.
      --We are now exploring outsourcing options and looking at the
            delivery of food and beverage from every angle.
      --We are also pursuing efficiencies in our mechanical, stations and
            call center functions through a number of initiatives that
            could include the closing and consolidation of some facilities
            and outsourcing functions similar to what is being done in the
            industry.
      --We have begun the reevaluation of our fleet management practices
            and fleet utilization efficiencies; I expect significant
            improvement in that area.
      --We are aggressively pursuing ridership and revenue growth through a
            top-to-bottom focus on improving customer service.
      --We will look at ways to improve our service reliability where we
            control the infrastructure, and work with our railroad partners
            where we don't.
      --We have also begun a long overdue, comprehensive review of our
            long-distance trains, establishing a set of metrics by which we
            will measure, rank and improve performance, and a reevaluation
            of our entire long distance route network, with an eye to
            possible restructuring and reconfiguration.
      --Finally, we hope to reach agreement with our labor unions, some of
            which have been without new contracts for almost 6 years. Key
            to the success of our labor negotiations must be changes to
            work rules, some of which date to the steam engine era.
        Let me emphasize that our goal is to improve our customer service,
    to become more efficient at what we do, to reduce our unit operating
    costs while growing revenue, and to prepare ourselves for what we hope
    is a more competitive future environment for passenger rail.
        The initiatives I have described are discussed in more detail in
    the Grant and Legislative Request. Through our regular reports to
    Congress, the Federal Railroad Administration, the Department of
    Transportation's Inspector General and the Government Accounting
    Office, we will continue to update you on the progress we are making on
    each of these initiatives. It is the Board's intention to help lead and
    guide management in this process and to make certain that we do not
    slacken the pace of reform.
        One final comment, Mr. Chairman before I move to the grant request.
    Some of the challenges confronting Amtrak and passenger rail ultimately
    may be more in your court than ours. We are basically hemmed in on
    three sides: (1) I have mentioned labor--our current cost structure
    will impede the development of a competitive passenger rail industry
    and forestall any prospects for growth; (2) without a Federal capital
    matching grant program, States will remain very reluctant to invest in
    passenger rail--with such a program States will invest in passenger
    rail in areas where it is most needed; and finally, (3) capacity:
    outside the NEC we operate on the increasingly limited capacity of
    private freight lines--port and highway efficiency is dependent on
    adequate freight rail capacity; so is Amtrak.
        Now, let me turn to our grant request. As a point of reference, our
    fiscal year 2006 appropriation is about $1.3 billion. Our fiscal year
    2007 Grant Request for operating support is essentially flat to the
    fiscal year 2006 appropriation, and over $40 million less than last
    year's request. Our fiscal year 2007 capital request has increased,
    however, principally because of investments we consider essential to
    our strategic reform program, large and critical infrastructure
    projects, legal mandates, and compliance with Americans with
    Disabilities Act requirements. We have also requested minimal working
    capital support for critical liquidity needs throughout the year.
    Without such capital projects or working capital requirements, our
    fiscal year 2007 Grant Request would be essentially flat to our fiscal
    year 2006 appropriation.
        This year, Amtrak's Grant Request is $1.598 billion. This amount
    would fund basic capital, operating, and debt service needs as well as
    minimal working capital. As I mentioned, also included in this amount
    are the capital investment funds needed to accelerate implementation of
    our reform initiatives.
        In addition, the grant request includes a discussion on other
    investment options that would bring benefits well beyond Amtrak--
    options related to station accessibility issues mandated by the
    American's with Disabilities Act, network reliability improvements, the
    beginning of a modest Federal-State corridor development matching fund,
    and initial restructuring of Amtrak's debt. The inclusion of these
    items highlights the urgent need for Congress to complete work on an
    Amtrak reauthorization, which expired 3\1/2\ years ago.

                                CAPITAL PROGRAM

        The fiscal year 2007 capital grant request of $730 million
    continues Amtrak's investment in rolling stock and infrastructure,
    along with high-return strategic business initiative investments. While
    this request represents an increase in funding from the current fiscal
    year 2006 level of $495 million, it includes investment in our reform
    initiatives--all with near-term payoffs in operating efficiency--as
    well as investment in long deferred and now critical infrastructure
    projects. For example, the fiscal year 2007 request includes, in
    addition to ongoing state-of-good-repair needs, funding for the
    replacement of the nearly 100-year-old Thames River Bridge lift span
    and the upgrade of traffic control and signal systems.
    Infrastructure
        Amtrak owns or maintains 730 route miles of passenger rail right of
    way nationwide, including 400 miles of high-speed main line between
    Boston and Washington. Critical areas that must continue to be
    addressed include:
      --Wood ties on main tracks and through switches and interlockings are
            costly to maintain in a high-traffic environment and must be
            replaced with more durable concrete ties;
      --The catenary system dating from the early part of the last century
            must be fully rehabilitated or replaced; and
      --Major portions of the power supply systems are reaching the end of
            their useful lives and must be replaced to avoid outages and
            address increased power demand.
    Rolling Stock
        Amtrak's passenger fleet ranges in age from 5 to over 50 years old.
    Because of financial constraints in the late 1990's through 2002,
    investment in major overhaul work on much of Amtrak's 1,700 car
    passenger fleet was deferred. Predictably, the reliability of Amtrak
    services declined as en-route failures mounted due to deferred
    investment.
        While much work has been done to improve fleet reliability,
    Amtrak's goal for fiscal year 2007 is to continue the major fleet
    overhauls that we initiated in 2003 to improve train comfort and
    reliability.

                                OPERATING BUDGET

        Amtrak's request for operating support in fiscal year 2007 is $498
    million, which represents less than one-fifth of our total operating
    budget. By achieving efficiencies and increasing revenues we have first
    contained, then reduced our operating loss. It is important to note
    that Amtrak's operating requests have decreased over the past 3 years
    from $768 million in fiscal year 2004, to $570 million in fiscal year
    2005, to a projected $540 million in fiscal year 2006.
        The fiscal year 2007 estimated operating budget will embody the
    first full year of benefits of revenue enhancement and cost reduction
    associated with a variety of the strategic initiatives. In total, these
    initiatives are expected to reduce total annual operating needs by over
    $40 million next year, and increasing amounts in subsequent years.
        This request of $498 million is an aggressive goal for us, leaves
    little room for error and heightens the acute importance of our working
    capital request. However, we are mindful that one measure of success in
    our reform efforts is a continued reduction of the need for Federal
    operating support.

                                WORKING CAPITAL

        Included in our grant request is $75 million for working capital,
    which amounts to about 2.5 percent of the company's annual operating
    budget. Seventy-five million dollars also represents about 7 days of
    cash requirements. No company the size or complexity of Amtrak would
    responsibly allow its cash balances to decline below that level without
    assured prospects of new funding. As I am sure you recognize, too
    little liquidity poses high-risks for all Amtrak stakeholders. Last
    year's operating problem with the Acela braking system, for instance,
    jeopardized the company's cash position, and we certainly know from
    that and other experiences that Amtrak should have at least a minimal
    level of working capital for unanticipated business risks. Amtrak's
    need for cash reserves is in part dictated by the fact that the company
    has no access to a working line of credit to cover unexpected short
    term costs.

                                  DEBT SERVICE

        The amount requested for debt service, $295 million, is needed for
    fiscal year 2007 debt service payments, including some contractually
    required lease buyouts. In addition, we have proposed an optional
    restructuring program for certain long-term equipment leases which, if
    you choose to fund it, would reduce future debt payments. While we
    carry a sizeable amount of debt, it is worth noting that we have
    reduced it by about $300 million during the last 3 years, and since
    2002 there has been no new borrowing.
        That, in summary, is our Grant and Legislative Request. In closing,
    let me say that all of us at Amtrak believe that the service we provide
    is increasingly valuable to the many regions and communities we serve.
    Our job is to continue to build Amtrak's credibility from your
    standpoint and Amtrak's attractiveness as a transportation option from
    our passengers' perspective. We will continue to press forward with our
    strategic initiatives, but we will absolutely need your continued
    support to finish the job.
        Finally, I cannot emphasize enough how important it is for Congress
    to pass a reauthorization for Amtrak this year that contains a capital
    match program which brings States to the table with financial support
    for passenger rail.

                          DEPARTMENT OF TRANSPORTATION

                        Federal Railroad Administration

    STATEMENT OF JOSEPH H. BOARDMAN, ADMINISTRATOR
        Senator Bond. Now, Mr. Boardman, the FRA Administrator.
        Mr. Boardman. Mr. Chairman, Ranking Member Murray, Senator
    Bennett, I won't repeat the numbers that the Secretary put on
    the table, but the Department has been and continues to be
    consistent in believing that Amtrak's business model is flawed
    and must be reformed.
        Amtrak does not yet have effective budget discipline. They
    are not subject to the rigors of the need to turn a profit and
    they do not prepare a public budget in the tradition of a city,
    a county, or even a transportation authority. By falling into a
    unique in-between category of existence, Amtrak has managed to
    avoid discipline that normally governs either public or private
    corporations.
        While the present Board of Directors--and I like David--has
    made the first tentative steps in developing discipline, much
    more needs to be done. Improvements to date have only occurred
    because the demand for reform by this administration and
    support for that reform by this committee. We need to be
    steadfast in fiscal year 2007 and following years if a true
    change in the Amtrak culture is to be achieved. There have been
    too many false starts and empty promises. Amtrak must do better
    and we should be partners in making sure that they do.
        This committee embraced the spirit of that reform last year
    with its provision that the Secretary shall determine and
    assess fees on commuter railroads operating in the Northeast
    Corridor. They would cover the capital and maintenance costs
    attributable to those same commuter railroads. This idea would
    promote fair and equitable access for all operators. The
    committee's leadership in reforming this aspect of a very
    complex Amtrak picture has been accepted and embraced by the
    administration as a significant opportunity to develop a key
    principle of the administration's approach to reforming
    intercity passenger rail service.
        With the assessment of the commuter fees, the States should
    have a strong incentive to partner with the Federal Government
    in establishing both policy standards and service warrants,
    along with investment policies, that would maintain the
    infrastructure at a maintenance level that meets the needs of
    business travelers, commuters, tourists, and freight operators.
    This kind of policy-level attention will help to strengthen and
    extend the economic opportunities provided by the mobility and
    reliability of rail service in the Northeast Corridor and
    continue to enhance the region's globally competitive
    advantages in the financial, insurance, and real estate
    industry.
        By combining those levies with the Department's proposed
    $500 million capital budget for Amtrak and including State and
    Federal policy and planning goals for infrastructure investment
    in the Northeast Corridor, this new partnership will benefit
    intercity passenger rail for all interested stakeholders. This
    then opens up opportunities, as have been expressed by
    Secretary Mineta, that with the right Amtrak reforms, this
    administration will not only support infrastructure
    improvements in the Northeast Corridor, but could assist State
    partners that are ready to improve intercity passenger rail
    services in other areas.
        We are at a point in this administration, together with
    Congress, that we can demonstrate both a significant progress
    in reforming Amtrak and a major progress in advancing goals for
    improved intercity passenger rail, even in Utah.
        Amtrak must find new ways to operate competitively. Even
    from the earliest times of discussion and debate over several
    administrations and several congressional periods, there have
    been both general and specific suggestions made to improve
    Amtrak's operational performance. Amtrak's core business is to
    provide a safe, clean, efficient transportation service that is
    on time and placed in the appropriate market at the right time
    to provide a connected and reliable service to fair-paying
    customers.
        With that clear focus, Amtrak can be successful and
    competitive. Amtrak's internal reform must progress quickly to
    allow a clear operating focus with effective financial
    discipline. The Department and the States must progress quickly
    to find success in forming a partnership in the Northeast
    Corridor infrastructure and operation and this committee has
    opened that opportunity for us to do that.

                               PREPARED STATEMENT

        The public demands real accomplishment in this partnership,
    not only in the Northeast, but in the South, Midwest, and far
    West. Intercity passenger rail, when delivered in partnership
    and focused on being effective and seamless, has the potential
    to improve our environment and strengthen our economy. As
    Federal Railroad Administrator, I will work with this
    committee, other committees, Amtrak, the States, and
    stakeholders to make that happen. Thank you very much.
        Senator Bond. Thank you very much, Mr. Boardman.
        [The statement follows:]

                    Prepared Statement of Joseph H. Boardman

        Chairman Bond, Ranking Member Murray and other members of the
    subcommittee, it is my pleasure today to represent Secretary of
    Transportation Norman Y. Mineta to discuss the Bush Administration's
    budget request for fiscal year 2007 as it relates to subsidies for the
    National Railroad Passenger Corporation, better known as Amtrak.
        As Secretary Mineta has already stated, the budget promotes
    continued transformation of intercity passenger rail. The President
    requests $900 million to help Amtrak make the transition to a new and
    better model of intercity passenger rail. Five hundred million dollars
    of that request is for capital needs and maintenance. The remaining
    $400 million would be available as Efficiency Incentives tied directly
    to continued reform.
        The Department has been and continues to be consistent in believing
    that Amtrak's business model is flawed and must be reformed. Amtrak
    does not yet have effective budget discipline. They are not subject to
    the rigors of the need to turn a profit, and they do not prepare a
    public budget in the tradition of a city or a county, or even a
    transportation authority. By falling into a unique in-between category
    of existence, Amtrak has managed to avoid the discipline that normally
    governs either private or public corporations. While the present Board
    of Directors has made the first tentative steps in developing
    discipline, much more must be done. Improvements to date have only
    occurred because of the demand for reform by this administration and
    support for that reform by this committee. We need to be steadfast in
    fiscal year 2007 and following years if a true change in the Amtrak
    culture is to be achieved. There have been too many false starts and
    empty promises. Amtrak must do better, and we should be partners in
    making sure that they do.
        This committee embraced the spirit of that reform last year, with
    its provision that the Secretary shall determine and assess fees on
    commuter railroads operating on the Northeast Corridor (NEC) that would
    cover the capital and maintenance costs attributable to those same
    commuter railroads. This idea would promote fair and equitable access
    for all operators. The committee's leadership in reforming this aspect
    of the very complex Amtrak picture has been accepted and embraced by
    the administration as a significant opportunity to develop a key
    principle of the administration's proposed approach to reform of
    intercity passenger rail service.
        With the assessment of the commuter fees, the States should have a
    strong incentive to partner with the Federal Government in establishing
    both policy standards and service warrants, along with investment
    policies that would maintain the infrastructure at a maintenance level
    that meets the needs of business travelers; commuters; tourists; and
    freight operators. This kind of policy level attention will help to
    strengthen and extend the economic opportunities provided by the
    mobility and reliability of rail service on the NEC, and continue to
    enhance the region's globally competitive advantages in the financial,
    insurance and real estate industry. By combining those levies with the
    Department's proposed $500 million capital budget for Amtrak, and
    including State and Federal policy and planning goals for
    infrastructure investment on the NEC this new partnership will benefit
    intercity passenger rail for all interested stakeholders. This then
    opens up opportunities as have been expressed by Secretary Mineta that
    with the right Amtrak reforms, this administration will not only
    support infrastructure improvement on the NEC, but could assist State
    partners that are ready to improve intercity passenger rail services.
        We are at a point where this administration, together with Congress
    can demonstrate both significant progress in reforming Amtrak, and
    major progress in advancing goals for improved intercity passenger
    rail. Amtrak must find new ways to operate competitively. Even from the
    earliest times of discussion and debate over several administrations,
    and several Congressional periods, there have been both general and
    specific suggestions made to improve upon Amtrak's operational
    performance. Amtrak's core business is to provide a safe, clean,
    efficient transportation service that is on-time and placed in the
    appropriate market at the right time to provide a connected and
    reliable service to fare paying customers. With that clear focus Amtrak
    can be successful and competitive.
        Amtrak's internal reform must progress quickly to allow a clear
    operating focus with effective financial discipline. The Department and
    the States must progress quickly to find success in forming a
    partnership on the NEC infrastructure and operation this committee has
    opened an opportunity for us to do that. The public demands real
    accomplishment in this partnership, not only in the Northeast, but in
    the South, and Midwest and far West. Intercity passenger rail--when
    delivered in partnership and focused on being effective and seamless--
    has the potential to improve our environment and strengthen our
    economy. As Federal Railroad Administrator I will work with this
    committee; other committees; Amtrak; States; and Stakeholders to make
    that happen.
        Mr. Chairman, thank you for this opportunity. I would be happy to
    answer any questions at this time.

                          Office of Inspector General

    STATEMENT OF MARK R. DAYTON, SENIOR ECONOMIST
        Senator Bond. Mr. Dayton, we are going to call on you for
    the rest of the story and then we will have opportunities for
    one question each. I turn to my colleague, Senator Murray, for
    the first one after Mr. Dayton.
        Mr. Dayton. Thank you, Mr. Chairman and members of the
    subcommittee.
        Senator Murray. They have called, so we are in a very short
    time frame here.
        Mr. Dayton. Once again, as with last year, the work of this
    subcommittee and your colleagues in the House will be the key
    to maintaining fiscal discipline at Amtrak. In fact, the
    provisions established by this committee this year are having
    an impact. Amtrak's Board and management seem committed to
    reform and Amtrak is beginning to realize some reductions in
    the need for operating subsidies.
        But the heavy lifting has just begun. Commitment to these
    reforms will need to be sustained for many years. Indeed, it
    will be several years before we see most of the financial
    benefits from current initiatives.
        Without a fundamental restructuring of the company through
    reauthorization, the Appropriations Committees will need to
    continue to pressure Amtrak for reform, specifically by
    limiting the funds made available to subsidize its operating
    losses, and by making Federal support contingent upon further
    restructuring.
        The bottom line is this. Just to maintain the system as it
    is currently configured, in a steady state of repair, and
    assuming that current reform efforts will begin to pay off,
    Amtrak would need an appropriation in fiscal year 2007 of about
    $1.4 billion. This would include $485 million for operating
    losses, $600 million for capital spending, and $295 million for
    debt service. These amounts would continue the pressure for
    reform but would not yield any significant improvement in the
    overall state of good repair.
        This 2007 appropriation would be nearly 7 percent over what
    was enacted last year, but would be a very tight budget that
    leaves little or no margin for error in either operations or
    investment. If an operating problem were to arise that affected
    revenue or expenses--like the Acela brake problem; or an
    unexpected capital expense--like a bridge failure on the
    Northeast Corridor, Amtrak could face insolvency.
        Private companies of Amtrak's size generally have access to
    lines of credit or maintain sufficient cash reserves to reduce
    the risk associated with such events. Amtrak has no such safety
    net.
        A separate working capital appropriation of $125 million
    would help address these risks, but if Congress were to provide
    such support, the funds should be subject to controls that
    prevent Amtrak from using them for ordinary business
    activities. One approach would be to use a constraint similar
    to that in this year's Efficiency Incentive Grants that would
    require approval by the Secretary before the year-end level of
    working capital could fall below $125 million.
        This 2007 funding picture depicts the fundamental
    dysfunction we face with Amtrak: just to maintain the current
    state of repair, without addressing the backlog of
    infrastructure needs, without investing in short-distance
    corridors that have been discussed today, and without
    recapitalizing the equipment fleet, would require nearly a $100
    million increase in Amtrak funding in fiscal year 2007. And to
    avoid an increased risk of insolvency would require more than a
    $200 million increase in that funding.
        So what are the solutions? As we have testified before, the
    current system needs to be fundamentally restructured. This
    will require new authorizing language for Amtrak programs. We
    see three key goals for successful reform of intercity
    passenger rail. First, continuous improvements in the cost
    effectiveness of services provided. Second, devolution of the
    power to determine those services to the States. And third,
    adequate and stable sources of Federal and State funding.
        Absent reauthorization, the appropriations process can
    provide necessary fiscal discipline over Amtrak's operating
    losses. In 2006, the Appropriations Committee established a
    process to achieve operational reforms. We believe this process
    is of considerable value and strongly encourage you to continue
    it in 2007.
        Specifically, the 2006 bill directed Amtrak to achieve
    savings through operating efficiencies, including changes to
    its food and beverage service. The bill also reduced Amtrak's
    operating subsidy, applying further pressure to cut its costs.
    The committee also required our office to report quarterly on
    Amtrak's progress to this end.
        As part of our oversight effort, we have seen that Amtrak
    is beginning to show improvement. For example, the company has
    made strides in reforming its food and beverage service, which
    could become a break-even or even marginally profitable in the
    next 5 to 6 years.
        Much work remains, however, to eliminate the losses on
    first class sleeper service. I would emphasize, we continue to
    find any Federal subsidy for first class passengers
    unacceptable and have yet to see plans for even pilot programs
    aimed at restructuring these services. Outsourcing of
    reservation and maintenance services has become widespread in
    the transportation sector and Amtrak has only begun to scratch
    the surface on assessing their potential.

                               PREPARED STATEMENT

        Congress should mandate accelerated efforts in these areas
    as a condition to taxpayer support in any fiscal year 2007
    appropriation, particularly if the funding approaches this $1.5
    billion level. Such a requirement----
        Senator Bond. Thank you, Mr. Dayton.
        Mr. Dayton. Okay.
        Senator Bond. Your statements will be included in full in
    the record.
        [The statement follows:]

                      Prepared Statement of Mark R. Dayton

        Mr. Chairman and members of the subcommittee, we appreciate the
    opportunity to present the views of the Office of Inspector General on
    Federal funding for Amtrak in fiscal year 2007.
        Once again, as with last year, the key to maintaining fiscal
    discipline at Amtrak will be the work of this subcommittee and your
    colleagues in the House. We can report today that the provisions the
    committee put in place for this fiscal year are having an impact: the
    Amtrak Board of Directors and current management seem committed to
    reform, efficiency improvements are beginning to be implemented, and
    some reductions in required operating subsidies are being realized. But
    the heavy lifting has just begun and current reform efforts will
    require many years of sustained commitment. Indeed, much of the
    financial benefits in the form of significant operating loss savings
    will not occur for several years.
        Absent a fundamental restructuring of the company through
    reauthorization, it will fall to the Appropriations Committees to
    continue the pressure for reform, specifically by limiting the funds
    made available to subsidize operating losses and by making Federal
    support conditional upon further operational restructuring.
        The Bottom Line.--To maintain the currently configured system in a
    steady state of repair and after accounting for the reform efforts
    already underway, the fiscal year 2007 appropriation for Amtrak would
    need to be about $1.4 billion. This includes $485 million for cash
    operating losses, $600 million for capital spending, and $295 million
    for debt service. The operating subsidy amount would continue the
    pressure on Amtrak for reform put in place by Congress last year, the
    capital amount would simply keep the system from falling into further
    disrepair, and the debt service amount is Amtrak's fixed costs for
    repayment of principal and interest.
        Despite this being almost a 7 percent increase over the fiscal year
    2006 enacted level, it is a tight budget that would leave little or no
    margin for error in neither operations nor investment. If an operating
    problem arose that affected revenue or expenses, such as the Acela
    brake problem, or if an unexpected capital expense arose, such as a
    bridge failure on the Northeast Corridor (NEC), Amtrak could face
    insolvency, particularly if the problem were to occur late in the
    fiscal year after the majority of funds had been spent or committed.
    Private companies of Amtrak's size often have access to lines of credit
    to reduce the risk associated with these unforeseeable events or
    maintain cash reserves in an order of magnitude larger than that
    typically held by Amtrak.
        Working capital of $125 million would help address the risks Amtrak
    faces from these unforeseeable events. To ensure these funds are used
    to cover fluctuations in operations and not for ordinary course
    expenditures, appropriate controls should be established. One approach
    for dealing with this problem is to impose the same constraints on use
    of these funds as those in this year's Efficiency Incentive Grants
    whereby approval of the Secretary would be required before the year-end
    level of working capital could fall below $125 million. Alternatively,
    a unanimous vote of the Board of Directors could be required in the
    same event. In either case, if Congress were to provide these funds,
    additional funds would not be needed for this purpose in future years.
        These funding requirements illustrate the fundamental dysfunction
    that we face with Amtrak: just to maintain the current state of
    repair--not to address the backlog of infrastructure needs, not to
    invest in short-distance corridors around the country, not to
    recapitalize the equipment fleet--requires an $86 million increase in
    Amtrak funding in fiscal year 2007 and an increase of over $200 million
    to avoid increased risks of insolvency, should Congress decide to
    provide $125 million for working capital.
        How Did We Get Here?.--Amtrak's funding requirements actually have
    not changed appreciably over the past 9 years--only the source of those
    funds has changed. External funding to Amtrak (in addition to revenue
    and State support) totaled $11.6 billion from 1998 through 2006 or
    almost $1.3 billion per year.\1\ Therefore, the current $1.4 billion
    estimate of requirements is in line with past years. It differs,
    however, in that now all of it must come from direct appropriations,
    whereas in past years some came from borrowing and some from the
    Taxpayer Relief Act of 1997. Because debt service increased
    significantly during this same time period, the $1.4 billion actually
    provides less funding for operations and investment than prior year
    average subsidies.
    ---------------------------------------------------------------------------
        \1\ This consists of $7.7 billion in Federal appropriations; $2.2
    billion in capital funds from the Taxpayer Relief Act of 1997; and $1.7
    billion in net, non-defeased (that is, not pre-funded) borrowing.
    ---------------------------------------------------------------------------
        What Are the Solutions?.--As we testified previously, the current
    system needs to be fundamentally restructured. Such a restructuring
    requires new authorizing language for Amtrak programs and funding
    support. We have enumerated three key goals for successful reform of
    intercity passenger rail service: (1) continuous improvements in the
    cost-effectiveness of services provided, (2) devolution of the power to
    determine those services to the States, and (3) adequate and stable
    sources of Federal and State funding.
        These goals can be achieved through six programmatic changes:
    formula grants to States for capital and operating costs of intercity
    passenger services, restoration of the forward-going system to a state
    of good repair, capital matching grants to States for corridor
    development, establishment of adequate Federal and State funding,
    resolution of the legacy debt issues, and resolution of NEC ownership
    and control.
        Until a reauthorization is forthcoming, there is much that Amtrak
    management and its Board can do to achieve these goals and program
    changes, assisted by this committee. The company has made strides in
    reforming its food service provision and may have in place process that
    will achieve break-even or marginally profitable provision of food
    service on its trains in the next 4 to 5 years, if it follows through
    on these initial steps.
        Much work remains, however, to eliminate the losses on first class
    sleeper service. We continue to find unacceptable any Federal subsidy
    for first class passengers and have yet to see plans for pilot programs
    to restructure these services. Outsourcing of reservation and
    maintenance services has become widespread in the transportation
    sector, but Amtrak has only begun to scratch the surface on assessing
    its potential. As a condition to taxpayer support in any fiscal year
    2007 appropriation, particularly at levels approaching $1.5 billion,
    accelerated efforts in these areas should be mandated. Such
    requirements for fiscal discipline from this committee and the Congress
    will keep Amtrak moving in the right direction so that when a
    reauthorization is finally enacted, the company will be poised to
    provide better, more efficient services for the country.
        I will now discuss these issues in greater detail.

      AMTRAK'S FINANCIAL CONDITION REMAINS PRECARIOUS BECAUSE IT HAS NOT
               STRUCTURED ITS SERVICES TO MATCH AVAILABLE FUNDING

        The current model for providing intercity passenger service
    continues to produce financial instability and poor service quality.
    Despite multiple efforts over the years to change Amtrak's structure
    and funding, we have a system that limps along, is never in a state-of-
    good-repair, awash in debt, and perpetually on the edge of collapse. In
    the end, Amtrak has been tasked to be all things to all people, but the
    model under which it operates leaves many unsatisfied.
        Operating Losses.--Amtrak continues to incur substantial operating
    losses. It ended fiscal year 2005 with an operating loss of $1.235
    billion. On the positive side, during the first 4 months of fiscal year
    2006, Amtrak's net operating loss was $49 million less than last year
    and its cash operating loss, excluding interest and depreciation, was
    $74 million less than the same period last year. It remains to be seen
    if these improved financial results can be sustained for all of fiscal
    year 2006. In fact, Amtrak has indicated that operating within the $485
    million operating subsidy for this year will likely require some one-
    time actions in spite of its performance to date.
        Putting these results in perspective, the system continues to
    suffer operating losses on all but a handful of routes. Operating
    losses on long-distance trains, excluding interest and depreciation,
    were $529 million in fiscal year 2005. Losses on some long-distance
    trains (excluding depreciation and interest) exceed $400 per passenger.
    For the last 5 years, annual cash losses have exceeded $600 million,
    though their persistence at this level primarily is attributable to
    increased interest expense. Amtrak has made some progress in
    controlling its cash operating loss, excluding interest.

        Debt Burden.--Amtrak is carrying a large debt burden. Its total
    debt peaked at $4.8 billion in fiscal year 2002 and has declined only
    slightly in the past 2 years. For the foreseeable future, Amtrak's
    annual debt service will approach $300 million.

        Revenue and Ridership.--While ridership increased to 25.4 million
    in fiscal year 2005, passenger revenues declined to $1.292 billion, and
    remain below the $1.340 billion achieved in 2002. For the first 4
    months of fiscal year 2006, passenger revenues were $31 million higher
    than the same period in fiscal year 2005, mainly due to fare increases.
    Ridership growth during this period was less than 1 percent.

        On-Time Performance.--On-time performance fell from 74 percent in
    fiscal year 2003 to 70 percent in fiscal year 2005, with even Amtrak's
    premier service--Acela Express--achieving on-time performance of only
    76 percent. On-time performance for long-distance trains averaged 41.4
    percent last year, with the poorest performing train, the Sunset
    Limited, having an on-time performance of only 7 percent. Systemwide
    on-time performance through January 2006 was 66 percent, compared to 72
    percent for the first 4 months of fiscal year 2005.

     ABSENT REAUTHORIZATION, THE APPROPRIATIONS PROCESS CAN PROVIDE NEEDED
                FISCAL DISCIPLINE OVER AMTRAK'S OPERATING LOSSES

        The system needs to be fundamentally restructured through a
    reauthorization. In the absence of a reauthorization last year, the
    Appropriations Committee established a process in fiscal year 2006 to
    achieve meaningful, but incremental, operational reforms. We believe
    this process is not a substitute for reauthorization, but it is of
    considerable value nonetheless; and we strongly encourage Congress to
    continue it in fiscal year 2007.
        The fiscal year 2006 Appropriations bill specifically directs
    Amtrak to achieve savings through operating efficiencies, including,
    but not limited to, modifications to food and beverage service and
    first-class service. The bill also exerts pressure on Amtrak to reform
    by reducing Amtrak's operating subsidy from the fiscal year 2005 level
    of $570 million to $495 million. (A 1 percent rescission, $4.95
    million, and a designation of $5 million for the development of a
    managerial cost accounting system, combined to reduce the funds
    available to subsidize ongoing operations to $485 million.) In
    addition, $31.7 million was made available for an efficiency grant
    program aimed at providing additional capital investments if Amtrak
    reduces operating costs to live within its fiscal year 2006 Federal
    operating subsidy.
        The fiscal year 2006 Appropriation bill also requires our office to
    report quarterly to this committee and its counterpart in the House on
    whether or not and to what extent Amtrak has achieved savings as a
    result of operational reforms. We must certify whether or not Amtrak
    has achieved such savings by July 1, 2006 if Amtrak is to continue its
    use of fiscal year 2006 appropriated funds to subsidize the net losses
    from food, beverage, and sleeper car service on any Amtrak route.
        In our January 5, 2006 report to this committee, we set Amtrak's
    overall operating subsidy baseline at $586 million. This baseline
    represents Amtrak's fiscal year 2006 projected operating loss after
    accounting for anticipated costs and revenue adjustments. It also
    reflects the savings resulting from initiatives implemented in fiscal
    year 2005 and fiscal year 2006 prior to our issuing the report.
        This fiscal year, Amtrak will need to achieve $101 million in
    savings from the $586 million operating loss baseline to operate within
    its Federal subsidy. In addition to sustainable operational reforms,
    Amtrak plans to rely on one-time actions, and revenue increases to meet
    its end of year budget goals. One-time actions will not be considered
    as part of our July certification process. It is our opinion that
    Congress intended us to consider only those savings from sustainable,
    structural reforms when we decide in July whether or not Amtrak has
    achieved enough savings from operational reforms to warrant
    certification.

        AMTRAK NEEDS TO RESPOND AGGRESSIVELY TO THE APPROPRIATIONS BILL
          REQUIREMENTS AND SEE THESE INITIATIVES THROUGH TO COMPLETION

        To address needed savings from operational reform, Amtrak has
    developed an implementation plan for 15 new initiatives. These include
    a plan for restructuring its food and beverage service and dining and
    lounge car operations over several years; adopting a reliability-
    centered maintenance approach to increase fleet maintenance
    efficiencies; consolidating maintenance facilities and reducing
    maintenance overtime; outsourcing and reducing staff at stations;
    improving fuel efficiency; renegotiating labor agreements to eliminate
    outsourcing and work rule restrictions; and reducing outside legal
    fees. Other initiatives such as restructuring long-distance train
    services, improving financial management systems, and improving service
    reliability on the Northeast Corridor are only in the beginning
    planning stage. Our Quarterly Reports will examine Amtrak's reform
    efforts to determine whether Amtrak is fully addressing potential
    reform opportunities and whether planned initiatives are meeting their
    stated goals and are sustainable over the long-term.
        The initial focus of Amtrak's reform efforts is its food and
    beverage service. The company has made strides in reforming its food
    service provision and may have in place a process that will achieve
    break-even or marginally profitable provision of food service on its
    trains. Amtrak plans to implement its strategic initiatives, including
    food and beverage service, over a 6-year period, with some not fully
    implemented until fiscal year 2012. Once fully implemented, Amtrak
    projects savings of $190 million a year from these initiatives.
        Our preliminary analysis of Amtrak's operating savings for the
    first 4 months of fiscal year 2006 indicate that only about $20 million
    in such savings can be expected this fiscal year. These savings amount
    to only 20 percent of the savings Amtrak must achieve to live within
    its fiscal year 2006 Federal operating subsidy. Amtrak plans to close
    the remaining gap with one-time actions and budget adjustments,
    spending the remaining fiscal year 2005 year-end cash reserves, and
    better-than-projected revenue performance.
        These short-term gap-closing actions will not reduce Amtrak's need
    for subsidies in fiscal year 2007 or beyond. In addition, Amtrak
    initially planned to rely on the $31.7 million Efficiency Incentive
    Grant to make ends meet in fiscal year 2006 and reduce the need for
    further operational savings. As we stated in our January Quarterly
    Report, we do not believe it would be appropriate to anticipatorily
    count these discretionary grants toward achieving the required savings.
    Congress should require a business plan from Amtrak that does not rely
    on these savings and specifically identifies all the savings required
    to operate within its fiscal year 2006 resources. Congress should also
    continue the pressure on Amtrak to be expansive and aggressive in the
    scope and pace of implementing long-term, structural operating reforms.
        As mentioned earlier, Amtrak needs to address the cost of providing
    long-distance service, and, in particular, first-class sleeper service.
    In July 2005, we reported that Amtrak could save between $75 million
    and $158 million in annual operating costs by eliminating sleeper car
    service, outsourcing food and beverage service, and eliminating other
    amenities on long-distance trains. The plan Amtrak is preparing on how
    to improve the operational and financial performance of these trains
    needs to fully address these areas for potential significant savings.

     REAUTHORIZATION IS A BETTER COURSE FOR REFORMING INTERCITY PASSENGER
                                  RAIL SERVICE

        Incremental operating savings over the next 5 or 6 years will not
    be sufficient to fund the significant increases in capital investment
    required to return the system to a state-of-good-repair and promote
    corridor development. This mismatch of funding sources and needs
    requires a long-term solution that can be achieved only by changing the
    model for intercity passenger rail.
        To create a new model for intercity passenger rail, a comprehensive
    reauthorization that provides new direction and adequate funding is
    needed. The problem with the current model extends beyond funding--
    there are inadequate incentives for Amtrak to provide cost-effective
    service; state-of-good-repair needs are not being adequately addressed;
    and States have insufficient leverage in determining service delivery
    options, in part because Amtrak receives Federal rail funds, not the
    States.
        Reauthorization should establish meaningful reforms that ensure
    greater cost-effectiveness, responsiveness, and reliability in the
    delivery of passenger rail transportation. Three central themes will
    drive successful reform.
      --Improvements in Cost-Effectiveness.--Amtrak, as the sole provider
            of intercity passenger rail service has few incentives, other
            than the threat of budget cuts or elimination, for cost control
            or delivery of services in a cost-effective way. Amtrak has not
            achieved significant costs savings since its last
            reauthorization.
      --States Need a Larger Voice in Determining Service Requirements..--
            The current model for providing intercity passenger service
            does not put States in a position to decide upon the best mix
            of service for their needs--what cities are served, schedules
            and frequency of service, and what amenities should be
            provided. Those decisions are made by Amtrak, and they are not
            always in the best interests of the States served. Intercity
            passenger rail would be better served with State-led
            initiatives as to where and how intercity passenger rail
            service is developed. States are best able to determine the
            level of passenger rail service required to meet their
            strategic transportation needs and State sponsorship will
            become increasingly important as they will be asked to provide
            increased operating and investment support. Capital funding
            decisions, as with mass transit, should ultimately reside with
            the Department of Transportation, based on congressional
            direction and in partnership with the States.
      --Adequate and Stable Federal Funding is Essential.--None of the
            corridors around the country, including the Northeast Corridor,
            can provide the type of mobility needed without significant
            capital investment. In the NEC, this means bringing the
            existing facilities to a state-of-good-repair with no match
            requirement. In other corridors around the country, it means
            creating the infrastructure for high-frequency services in
            partnership with freight railroads and commuter authorities. A
            robust Federal program of capital matching grants will be
            essential if these corridors are to be developed. In addition,
            long-distance services that provide connections between
            corridors require recapitalization if they are to be run
            efficiently and are to provide the high quality services their
            passengers deserve. None of this, however, implies giving more
            money directly to Amtrak, especially under the current model.
        In our view, a framework for reauthorization requires the
    incorporation of six core elements.
        Formula Grants to States for Capital and Operating Costs.--This
    program would address the needs of areas served by long-distance routes
    that have little corridor development potential, while simultaneously
    creating incentives for States to encourage operating efficiencies from
    the service operator. Formula funds can be used for operating expenses,
    capital maintenance, and/or capital improvements at the discretion of
    the States and have no match requirement.
        Restoration of the Forward-Going System to a State-of-Good-
    Repair.--This program would provide Federal funds, with no match
    required, to address the accumulated backlog of deferred investment and
    maintenance on the NEC and in fleet and facilities outside the NEC.
    After a state-of-good-repair has been achieved, capital funds with a
    reasonable State match would be available for capital maintenance.
        Capital Matching Grants to States for Development of Corridor
    Services.--This program would give States the ability to improve and
    expand routes and service on their supported corridor routes through a
    Federal capital funding program with a reasonable State match
    requirement.
        Setting Federal and State Funding of These Programs at Adequate
    Levels.--Federal funding levels, along with State contributions have
    not been sufficient to subsidize operations, address deferred capital
    needs, and significantly improve service along the existing rail
    network. It will require minimum Federal funding of $2.0 billion a year
    to restore the system to a state-of-good-repair and provide funding for
    new corridor development.
        Resolution of the Legacy Debt Issue.--This element would give the
    Secretary the authority to evaluate Amtrak's debt and to take action in
    the best interest of intercity passenger rail that is economically
    advantageous to the United States Government.
        Resolution of Northeast Corridor Ownership.--The NEC is of
    considerable interest in reauthorization. Unlike the rest of the
    passenger rail system, Amtrak owns the infrastructure between Boston
    and Washington, DC. The Federal Government may decide to take on the
    responsibility of restoring the NEC to a state-of-good-repair, and its
    debt--if it is determined to be in the public's interest to do so. Once
    the NEC is returned to a state-of-good-repair, the States can take a
    larger responsibility in directing and managing ongoing operations and
    maintenance. In return for fully funding the corridor, the Federal
    Government may decide to take title to Amtrak's assets. Although Amtrak
    may very likely remain the operator for NEC, we will be in a better
    position to decide what is the best use and ownership structure of NEC
    assets by the end of the reauthorization period.
        This framework would require cost efficiencies as Federal funds
    available to cover operating losses would decline over the 5-year
    reauthorization period. Specifically, it would give States greater
    responsibility for passenger rail investments with oversight of capital
    investment vested in the Department. Additionally, it would focus
    Federal funding on stable and robust capital investment programs that
    would bring the system to a state-of-good-repair, maintain it in that
    condition, and provide for the development of corridors throughout the
    country.
        Mr. Chairman, that concludes my statement. I would be happy to
    answer any questions at this time.

        Senator Bond. My sincere apologies, but this is the way the
    Senate functions. I turn to Senator Murray for her questions.
        Senator Murray. I would just say that this presents us a
    great dilemma because Mr. Laney has said we need a $300 million
    increase in order to enact reforms. Mr. Boardman has said we
    need to cut it by $400 million to make reforms happen. And Mr.
    Dayton says that we are in a tight budget with no margin for
    error at $1.4 billion. So in writing, I would like back from
    each one of you how you explain your thesis on this, because we
    need to understand that and it is clear it is very
    controversial.
        But I would like to ask the one question I have for Mr.
    Dayton. Your testimony appears to be advocating different
    treatments for States depending on whether those States are in
    the Northeast Corridor or in other regions of the country. The
    taxpayers of my State provide a lot of revenue to maintain the
    Cascadia service, and in fact, on a per passenger basis,
    provide the highest State subsidies of any in the country.
    There are plans to improve the rail corridor between Vancouver
    and Eugene that will even add to that.
        You say that capital contributions from the Federal
    Government to improve rail corridors should require a State
    match, but your testimony says that billions of dollars are
    needed to bring the investment in the Northeast Corridor up to
    a good state of repair, but the States along the Northeast
    Corridor should not be required to put up a match. Well, the
    people I represent are asking why we should be required to have
    a Federal match and the Northeast Corridor should not. I would
    like a short answer from you and a longer one in writing on
    whether or not the States in the Northeast Corridor should be
    required to make some kind of contribution, considering the
    fact that 46 percent of the train miles used on that corridor
    are used by commuter rail agencies of the States and not by
    Amtrak.
        Mr. Dayton. Clearly, all States should be contributing to
    the capital portion of their services. I would say that the
    Northeast Corridor actually does produce an operating profit
    and that profit does go to cover some of the losses on the
    short-distance corridors around the country and the long-
    distance corridors. And so to the extent that Amtrak reduces or
    eliminates those losses through, as we have said, eliminating
    sleeper service and reforming food and beverage service. The
    reason that we advocate those is to free up funds that can be
    put into capital.
        Senator Murray. I am sorry, you say they have an operating
    profit, but I know that they have millions of dollars in
    capital costs and that they are in deficit. So how do you say
    that?
        Mr. Dayton. There is an operating profit in terms of just
    the cost of operations, but you are right, the capital
    investment in the Northeast Corridor is greater than that
    operating profit. That is true. If that operating profit were
    not covering losses elsewhere, it could be reinvested in the
    corridor itself, so that the passengers in those States that
    are using the corridor would, in fact, be supporting the
    capital investment.
        Senator Murray. I know my time is short. That wouldn't even
    come close to dealing with the dilemma that I think we need to
    understand, and I would appreciate a long answer from you since
    we are unfortunately short on time.
        Mr. Dayton. We will provide it.
        Senator Bond. Thank you very much, Senator Murray.
        I understand that the IG in November 2005 reported that the
    Amtrak Board of Directors indicated in writing that they would
    be launching a number of pilot projects, including reforms to
    first class service on its long-distance routes that would
    enable Amtrak to achieve savings. I gather that has not been--
    no pilot projects have come forward. I would like to ask Amtrak
    where those pilot projects are. What do you contemplate in this
    area?
        Mr. Laney. Senator, we have pilot projects in the works, I
    think, on a State basis and I believe they are scheduled for
    presentation to the Board in our April Board meeting, which is
    the first week of April, unrelated to the first class service.
        First class service is a little more difficult. It is an
    essential piece of the puzzle for overnight travelers, and a
    lot of our trains are overnight trains. But we, at least I
    share with the IG the concern about any Federal dollars
    subsidizing first class passengers, because there are losses,
    significant losses, involved in that. We have looked at some
    opportunities and been a little frustrated by some labor cost
    structure difficulties in bringing in alternatives to Amtrak's
    providing that service. But we have got a ways to go and we
    have not wrestled that to the ground.
        Senator Bond. Mr. Laney, Mr. Boardman, Mr. Hughes, Mr.
    Dayton, our sincere apologies. We would invite your further
    comments in writing. We will look forward to continuing these
    discussions. I may even have some options that, while they may
    be distasteful, they may be effective and I would like to
    discuss those with you.
        We thank our witnesses.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Leahy. I just wanted to submit a couple of
    questions for the record.
        Senator Bond. Senator Leahy will be submitting questions
    for the record, and obviously, we would like you to take those
    questions, as well. Thank you very much.
        [The following questions were not asked at the hearing, but
    were submitted to Amtrak for response subsequent to the
    hearing:]

                         Questions Submitted to Amtrak
               Questions Submitted by Senator Christopher S. Bond

        Question. Why does Amtrak not have a detailed multi-year financial
    plan now? Wouldn't this planning document, similar to a TIP, or
    transportation improvement plan, help Amtrak identify year-to-year,
    what priorities for improvements are necessary to be made and help in
    the budget process?
        Answer. Amtrak has a multi-year plan for capital improvements and
    also a multi-year projection of funds required for debt service. In
    connection with the company's ``Strategic Reform Initiatives and Fiscal
    Year 2006 Grant'' request, the company also provided its first 5-year
    projection of operating funds required. This document did describe the
    yearly priorities for improvement, as well as the legislative changes
    required, to achieve the target numbers.
        Question. Realizing that Amtrak needs approximately $295 million to
    address its mandatory debt service, and zero is provided in this year's
    budget proposal, how would you propose to address the debt?
        Answer. Debt service must be honored each year to avoid default.
    Accordingly, the company would have to curtail its capital expenditures
    and/or reduce its net operating loss by $295 million. To reduce capital
    expenditures by this magnitude will jeopardize the system state of good
    repair: to reduce the net operating loss by this magnitude will likely
    require significant curtailment of existing services.
        Question. What are you doing in terms of renegotiating your debt
    service rates?
        Answer. Some small debt obligations have provisions for early
    repayment and, if the penalties are not onerous, the company is
    exercising these early payment options (when cash is available).
    However, there is no opportunity to renegotiate the interest rates on
    existing debt without (1) a ``stick'' that threatens the lenders unless
    they co-operate and reduce rates or (2) a ``carrot'' that gives lenders
    some incentive to reduce rates. We have been unsuccessful in urging
    Congress to selectively grant Amtrak debt a ``full faith and credit''
    guarantee (a meaningful carrot) in return for financial concessions
    from lenders.
        Question. The Inspector General's Office within the Department of
    Transportation has indicated that Amtrak's operating subsidy baseline
    is $586 million. Amtrak's fiscal year 2006 operating subsidy baseline
    is $586. Amtrak's fiscal year 2006 operating appropriation is $490
    million. What specific savings has Amtrak identified to live within
    this amount?
        Answer. We believe we will be able to fully fund operations with
    the $490 million appropriation because of: (1) better than expected
    ridership that is the result of increases in automobile gasoline
    prices, (2) lower wages, salaries and benefits expense that is the
    result of slower rates of hiring for replacements (i.e. working with
    higher vacancy rates and lower actual headcount), (3) realized
    improvements in the financial results of our food and beverage business
    activity, (4) lower than expected professional fees and (4) lower FELA
    and liability claims costs.
        Question. What options, if any, are available for Amtrak to
    outsource its first class services? Under what scenario would Amtrak
    consider outsourcing its first class services on its long-distance
    routes?
        Answer. Under current law, Amtrak may outsource food and beverage
    services. Outsourcing of other services, such as sleeping car services
    on long-distance trains, requires negotiations with Amtrak's labor
    unions under the Railway Labor Act if the outsourcing would result in
    the layoff of Amtrak employees. See Public Law No. 105-134, sec. 121.
        Subject to applicable law, Amtrak will consider outsourcing
    services if it appears that outsourcing will reduce the cost and/or
    improve the quality of the services without adversely impacting safety
    or customer service.
        Question. Amtrak has indicated that it will update labor contracts
    to enhance customer service and provide greater efficiencies. I
    understand that currently, more than 80 percent of Amtrak's passenger
    revenues are consumed by labor and benefit costs alone.
        What are Amtrak's specific goals as it looks to update it labor
    contracts?
        Answer. Amtrak's specific goals with every union that has not had
    an agreement through December 31, 2004 are to achieve health care cost
    containment and premium contribution, work rule changes to improve
    productivity and lower costs and, in return, a fair increase if the
    those goals are met. Three unions representing approximately 35 percent
    of the employees represented at Amtrak have entered such agreements
    with the company.
                                     ______

                  Questions Submitted by Senator Conrad Burns

        Question. Mr. Laney, a lot of attention has been focused recently
    on the improvements and upgrades to long-distance trains, in order to
    increase ridership. We have seen the benefits of those commitments on
    the Empire Builder, and I wonder if you could discuss what steps you
    plan to take to continue this process.
        Answer. In August 2005, the Empire Builder was relaunched with
    upgraded equipment, enhanced on board amenities, improved customer
    service and a renewed marketing focus. The improvements have been well
    received by passengers, who are paying the planned higher fares for a
    perceived better valued product. As a result, ticket revenues (October
    through May) are up 18 percent versus last year, and sleeping car
    revenues are up 28 percent. Year-to-date ticket revenues are favorable
    to the budget by $1.8 million. With just 10 months' experience, the
    project is on track to improve the train's bottom line by about $4.8
    million by the end of fiscal year 2007. In conjunction with the
    restructuring of its long-distance services, Amtrak is looking for
    additional opportunities to provide enhanced services on other long-
    distance routes where there is the potential for a positive financial
    contribution.
        Question. As you know, I was very disappointed in the decision to
    fire David Gunn. I am sure the Board had its reasons, but I am
    concerned that part of the impetus to push him out the door was his
    understanding that long-distance trains are an essential part of the
    Amtrak network. Can you give me a sense of the Board's commitment to
    preserving long-distance trains, especially in communities where public
    transportation options are so limited?
        Answer. The Board has stated publicly its commitment to a
    responsible and systematic evaluation of Amtrak's long-distance
    network, focusing on all facets of long-distance service, including
    service quality, function, optimal network configuration and economics.
    The fact that long-distance train operations are valued by many
    communities in which transportation options are more limited will
    invariably be factored into the Board's evaluation process. Mr. Gunn's
    departure was unrelated to his positions regarding long-distance
    trains.
        Question. You mention in your testimony a concern about freight
    rail capacity issues. I share those concerns. Do you believe that
    capacity issues require more rail to be laid down, or can improved
    technology and better management accomplish those goals?
        Answer. Increased rail line capacity can come from many sources
    other than laying more rail. Some examples:
      --Additional locomotives;
      --Additional crews;
      --Additional yard capacity to keep trains from backing up on main
            lines;
      --Signal and operating rule changes allowing running both directions
            on existing multiple track lines, allowing trains to operate
            closer together (shortening signal spacing), or allowing
            greater dispatcher control (Centralized Traffic Control);
      --Improved dispatching systems, possibly broken into regions rather
            than large centralized systems;
      --Changed dispatching practices, including less turnover among
            dispatchers and more dispatcher training trips to create
            familiarity with physical territory;
      --Positive train control systems;
      --Directional running on parallel lines;
      --More frequent crossovers or sidings, or reconfigured crossovers and
            signals allowing movements at higher speeds;
      --Better maintenance of existing lines reducing slow orders;
      --Better maintenance of existing signal systems reducing signal
            failure delays;
      --Better maintenance of locomotives and cars to avoid failures;
      --Better train handling practices to avoid failures; and,
      --Realignment of existing lines or curvature elevation to increase
            speeds or make speeds more uniform.
        Generally, a railroad will choose adding more rail lines as the
    least desirable, last resort to add capacity, since new rail lines are
    expensive and cannot be easily redeployed if traffic patterns shift.
                                     ______

                Questions Submitted by Senator Patrick J. Leahy

        Question. The most recent grant request from Amtrak indicates that
    the struggling railroad needs $1.5 billion next year for capital and
    operational expenses. The President's budget request, though, only
    seeks $900 million in total funding. Since we have heard the
    administration proclaim that it is dedicated to passenger rail
    nationwide, how does this budget request add up to that commitment?
        Answer. If the actual grant to Amtrak were reduced to $900 million,
    it would inevitably require a reduction in capital expenditures, a
    curtailment of existing services or both. From any appropriation,
    Amtrak's first legal obligation is to make debt service (principal and
    interest) payments amounting to almost $300 million. If only $600
    million in Federal funds remained, they would be insufficient to fund
    the necessary capital maintenance program and support the existing
    level of services: each of these activities will require almost $500
    million during the current fiscal year.
        Question. My small State of Vermont has two State-sponsored
    trains--the Vermonter and the Ethan Allen Express. The State of Vermont
    paid $2.65 million to cover the operating losses this year and is
    slated to pay $4 million next year as Amtrak ramps up the share paid by
    the States. The Department of Transportation and Amtrak have said that
    they intend to develop public-private partnerships for the corridor
    service. How closely are you working with the individual States to
    improve equipment and service on these trains?
        Answer. Amtrak works closely with the 13 States that provide
    funding for State-supported services operated by Amtrak. For example,
    Amtrak is currently working with Vermont on an initiative to improve
    food service quality and reduce food service costs borne by the State.
        In May, Amtrak solicited proposals from States that fund Amtrak
    services for a pilot trial of State and/or private participation in the
    provision of some of the services required for the operation of their
    State-supported services. Federal funding in the amount of $2.48
    million is available for a pilot project that can be demonstrated to
    reduce the cost of providing the services at issue. Amtrak received
    responsive proposals from a number of States that fund State-supported
    services, including Vermont. Amtrak expects to make selection(s) from
    among these proposals for the pilot project by the end of July.

                              SUBCOMMITTEE RECESS

        Senator Bond. The hearing is recessed.
        [Whereupon, at 10:54 a.m., Thursday, March 16, the subcom-
    mittee was recessed, to reconvene subject to the call of the
    Chair.]

      DEPARTMENTS OF TRANSPORTATION, TREASURY, THE JUDICIARY, HOUSING AND
    URBAN DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR
                                      2007

                                  ----------

                            THURSDAY, APRIL 6, 2006

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:37 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Christopher S. Bond (chairman)
    presiding.
        Present: Senators Bond, Murray, and Dorgan.

                           DEPARTMENT OF THE TREASURY

                            Office of the Secretary

    STATEMENT OF JOHN W. SNOW, SECRETARY

                OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Good morning. The Subcommittee on the
    Appropriations Committee on Transportation, Treasury,
    Judiciary, HUD and Related Agencies will come to order.
        This morning, the Senate committee will conduct its budget
    hearing on the fiscal year 2007 budget on the Department of the
    Treasury. In addition, due to the important role of the
    Treasury in fighting the war on terrorism, today's hearing also
    will focus on the Treasury's Office of Terrorism and Financial
    Intelligence. Senator Murray is on the way, but her staff has
    graciously agreed to allow me to proceed, even though she will
    miss part of my opening statement. I will promise to give it to
    her in full when she gets here later on. But because of the
    schedule, and we have a vote scheduled at 10:30, Mr. Secretary,
    if it is all right with you, we would like to finish up your
    part of the testimony by 10:15. I am going to wield the gavel
    so we can have the second panel testify before we have to go to
    the vote. If you don't mind, we will try to keep it short and
    get you out of here at 10:15 to accommodate our schedule.
        As I said, we have two panels. On the first panel, Treasury
    Secretary John Snow, and we welcome Secretary Snow back, and we
    look forward to hearing his views on the accomplishments and
    challenges facing Treasury. After Secretary Snow, we will hear
    from a second panel of high-level Treasury officials who help
    lead the Department's efforts on combatting terrorists'
    financing. Specifically, we will hear from Under Secretary for
    Terrorism and Financial Intelligence Stuart Levey, and
    Assistant Secretary for Intelligence and Analysis Janice
    Gardner.
        I have had the great pleasure of getting to know both Mr.
    Levey and Ms. Gardner through my work on the Senate Select
    Committee on Intelligence. Both have done an outstanding job of
    bringing together the unique capabilities and resources of the
    Treasury Department in intelligence gathering and analysis. The
    result has made the Department a key player and a true asset in
    the intelligence community and in the war on terrorism.
        A lot has changed at the Treasury since our hearing last
    year, Mr. Secretary. One year ago, the Department was
    floundering due to a vacancy overload at its most senior-level
    positions. Now most of these vacancies have been filled and the
    Department is currently playing a much more significant and
    visible role in many important areas, especially having
    reestablished its role as a leader in combatting elicit
    financing with regard to money laundering and terrorist
    financing.
        Mr. Secretary, I congratulate you and the President for
    responding to our concerns and filling these important
    positions. I am pleased by the Treasury's commitment to these
    important challenges, and I am especially impressed with the
    quality of leadership at the Office of Terrorism and Financial
    Intelligence, TFI. If anybody can follow all of these acronyms
    during the discussion, you are a little bit quicker than I am,
    but I have a cheat sheet to read them from.
        That said, I remain concerned about the Department's
    ability to handle its management responsibilities, particularly
    in the IT area since the Office of Inspector General continues
    to cite management as a major challenge area, especially due to
    the recent failure of the BSA Direct Information Technology
    Project. It is a critical system, intrinsic to the success of
    the Financial Crimes Enforcement Network, or FinCEN's mission,
    and I am very frustrated that it did not receive greater
    oversight and support prior to and during its development. I
    intend to ask the GAO and the Inspector General, or the OIG, to
    review this issue and to provide some specific recommendations
    for preventing this kind of problem.
        I acknowledge your current management team is relatively
    new, and to some degree they are still getting their feet wet.
    However, on your watch, Mr. Secretary, BSA Direct and other
    large capital-investment projects like the Treasury Building
    and Annex repair and restoration, HR Connect and the Treasury
    Communications Enterprise have experienced significant
    problems.
        In terms of the latest failure, BSA Direct, I am fully
    committed to working with FinCEN's director Bob Werner in
    fixing these problems, and I credit the Director for taking
    action. However, we need to understand why your team did not
    act sooner, or at least ask questions on why milestones were
    being missed and costs were exceeding the original award
    amount. Senator Murray and I expect answers, Mr. Secretary, not
    excuses.
        We also want your commitment, Mr. Secretary, to assist
    Director Werner in ensuring that these types of problems do not
    happen again. Finally, this subcommittee expects a clear action
    plan designed to address these IT management issues. The action
    plan should be submitted no later than 45 days of this hearing,
    but I expect, because I know this is a high priority for you,
    as it is for us, that it will be sooner than that.
        Let us be clear, we expect better management, better
    oversight, and better accountability from the Department or
    else the chairman, and I believe I speak for my ranking member,
    will be reluctant to appropriate any additional funds for IT
    projects at the Treasury or Treasury priorities. This is that
    important to us.
        Turning to the Treasury's budget request, the
    administration requests some $13.1 billion for the Department
    for 2007. About $11.6 billion falls under the purview of this
    subcommittee. For the THUD account, the budget requests a $24.7
    million or 0.2 percent increase over the 2006. Most of the
    Treasury's budget and the budget increases are for the Internal
    Revenue Service, which compromises some 92 percent of the
    Department's budget under the THUD Subcommittee--a significant
    budget request in a very tight budget year. We will not be
    rubber-stamping any budget proposals because we do not have the
    money to do it. Instead, a budget anchored by a demonstrated
    commitment and comprehensive justification is expected. Because
    of the budget emphasis and the importance of the IRS, the
    subcommittee plans to hold a separate hearing on the IRS later
    this month, and we will focus on the IRS at that time.
        There are a couple of IRS items, Mr. Secretary, I want to
    bring to your attention. First, the IRS budget request is
    disappointing. While the administration proposes an $18.1
    million increase for IRS in 2007, the increase is, frankly,
    insufficient in taking a serious bite out of the $340 billion
    tax gap. Further, the budget request is filled with a number of
    budget gimmicks, which, if unattained, could result in
    significant cuts to IRS programs and core services in both
    taxpayer service and enforcement.
        I also raise our serious concern with the proposed cut to
    the IRS's Business Systems Modernization, or BSM, program. BSM
    still has its challenges and risks, but led by the new
    Associate CIO and his team, BSM is beginning to show results,
    and for the administration to propose reductions to BSM now
    makes little sense to us. In fact, cutting BSM greatly damages
    the momentum built up over the past 2 years. This is a classic
    example of punishing good behavior.
        The second point we raise is with IRS proposed regulations
    on disclosure and use of taxpayer information. There appears to
    be growing concerns about taxpayer privacy being compromised by
    the proposed regulation. Some concerns seem to be based on
    misunderstandings, whereas others are legitimate issues
    regarding the disclosure of confidential taxpayer information.
    It is a complex issue, filled with a lot of land mines.
    Nevertheless, I hope that Treasury and the IRS can balance out
    the needs and problems to ensure the maximum confidentiality of
    all taxpayer information to the greatest extent possible.
        The last point I raise is on taxpayer service. The 2006
    THUD appropriations laid out some clear directives that
    restrict the IRS from reducing taxpayer services until a plan
    for adequate alternative services is provided, and the Treasury
    Inspector General for Tax Administration, TIGTA, to offer
    another acronym, provides a review. I understand the IRS is
    complying with his directive, and I am optimistic that we will
    not have problems in the future.
        My strongest area of interest within Treasury is in its
    activities in fighting the war on terror, and in particular,
    terrorist financing. The Treasury has a long and storied
    history of successfully combatting organized crime from the Al
    Capone days, to the Nazis in World War II, and more recently,
    to the drug lords of Central America. These past and ongoing
    experiences have helped the Treasury develop a unique set of
    skills in understanding, deterring, and eliminating a wide
    variety of elicit funding. For example, the Treasury's Office
    of Foreign Assets Control, or OFAC, and its predecessor
    organizations, have had a long history of administering and
    enforcing economic and trade sanctions beginning with the War
    of 1812, through the Civil War, and the First and Second World
    Wars.
        In modern times, OFAC has helped combat intelligence
    narcotics traffickers, and now as a key operational component
    of TFI, it is also taking on terrorists and WMD proliferators.
    Due to the Treasury's long experience and its unique role,
    Congress authorized the creation of the Treasury Office of
    Terrorism and Financial Intelligence, or TFI, not just to
    recognize the Treasury's expertise or reorganize existing
    intelligence, but to take the Treasury with its unique
    experience to a new level to play a greater role in the war on
    terror.
        As a part of TFI, Congress created the Office of
    Intelligence and Analysis, or OIA, which is charged with
    analyzing intelligence and financial information, producing
    high-level products for administration and Treasury officials,
    for, as we all know too well from past experiences, there is a
    lot of information available. The problem is being to put the
    information together, or connecting the dots.
        Since its creation, TFI and OIA are beginning to show some
    real results. In fact, last December, the 9/11 Commission
    graded various aspects of the Federal Government on fighting
    the war on terrorism and gave an A-minus in the area of
    combatting terrorist financing. That is a pretty good score
    compared with what everybody else got, and TFI and the Treasury
    Department deserve a lot of credit. TFI deserves credit and
    recognition for its strong role in combatting financing due to
    the excellent work in support of the Department's efforts to
    designate terrorist entities, shut down financial flows, to
    individuals from rogue regimes, and uncover clandestine
    financial networks.
        In 2005, the Department designated a number of banks and
    foreign officials in troubling areas like Syria, North Korea,
    and Iran. Last December, the Department designated Banco Delta
    Asia under section 311 of the PATRIOT Act. It is a powerful new
    tool authorizing the Department to designate various foreign
    and financial institutions as a primary laundering concern, and
    to impose sanctions. Under Secretary Levey stated that, ``Banco
    Delta Asia has been a willing pawn for the North Korean
    government to engage in corrupt financial activities through
    Macau, a region that needs significant improvement in its money
    laundering controls. By invoking our USA PATRIOT Act
    authorities, we are working to protect U.S. financial
    institutions, while warning the global community of the illicit
    financial threat posed by Banco Delta Asia.''
        This bank was a key hub, and having made visits to our
    officials and our resources in that area, I can tell it has had
    a major impact from the people doing the job in that area. They
    are telling me how important and significant this was. The DRPK
    under Kim Jong-il has bemoaned the action, stating to the
    President of China that, ``The regime might well collapse under
    the weight of U.S. sanctions.'' It would be a shame, wouldn't
    it?
        TFI has also been able to assist foreign governments in
    taking their own actions. It is creating a new unit to tackle
    terrorists financing in innovative ways. Last year we funded
    the Joint DOD/Treasury Finance Cells. The pilot cell in
    Baghdad, known as the Iraq Threat Finance Cell, ITFC, enhances
    collection, analysis, and dissemination of intelligence. Since
    I serve on both Appropriations and Intelligence, I am very
    encouraged to see OIA is up and running strong within the
    government. I believe it is key to winning the war on terror.
    It is a focal point for the Department for compartmented
    intelligence analysis and support, and the critical
    intelligence it is providing during weekly targeting meetings
    is very important. It is going to deal with the use of hawalas.
    Those are the traditional Arab money-transfer and changing
    organizations. They are now too often being used by terrorist
    organizations. We need to know how they work and how to
    regulate them. The Office of Terrorist Finance and Financial
    Crime, TFFC, is looking at the use of hawalas by terrorist
    organizations and is working with other Federal agencies and
    international counterparts, for example, in tackling illicit
    financial flows associated with Afghan narcotics.
        I am pleased with the TFI's progress, but it has to adapt
    to the continually changing efforts to defeat our efforts. Now,
    the financing is fragmented into a constellation of small
    entities, transferring smaller amounts. The experts tell us the
    9/11 attacks cost $500,000, the March 11 bombings in Spain cost
    about $15,000, and the recent attacks in London last July cost
    the terrorists as little as $2,000. Therefore, combatting
    terrorist financing has to remain front and center. It is going
    to be a critical part of our counterterrorism efforts. We have
    to anticipate the imagination of terrorists because they will
    go through any means to cause chaos.
        One final point before I close. The Committee on Foreign
    Investment in the United States, or the CFIUS process, in
    regard to the recent Dubai Ports World controversy: my strong
    opinion is that DPW was treated very badly since a perfectly
    legitimate company owned by one of our closest allies in the
    Middle East was slapped in the face. I can tell you from
    visiting with foreign officials that that has not only affected
    our allies in the UAE, but our allies around the world. There
    are definitely some significant questions about the CFIUS
    process, they are already being addressed, and I think that
    some of the intelligence concerns can be addressed by OIA
    within Treasury. Congress is going to be working on updating
    that, and I am pleased that the Senate Banking Committee is
    taking on this issue and has recently passed legislation to
    reform CFIUS. Notwithstanding any legislation, I believe that
    Treasury needs to develop a better system of communicating to
    the Hill on the deals it is considering. Mr. Secretary, we saw
    a classic example of that wonderful process on DPW of ready,
    fire, and aim. Perhaps some additional information to Congress
    would allow Congress to aim before firing, and I hope we can do
    that in the future.
        Now with apologies, I turn to my colleague, Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you very much, Mr. Chairman. Today we
    are joined by Treasury Secretary John Snow, and I want to
    welcome him here this morning.
        Most Americans view the Treasury Secretary as the leading
    Cabinet official for our Nation's fiscal policy. Indeed, the
    Treasury Secretary plays a critical role on overseeing our
    financial markets and coordinating policy with our
    international partners. The Secretary is responsible for taking
    the lead on tax policy and overseeing the collection of tax
    revenues.
        As members of this subcommittee, we have a special
    obligation to look at another important role of the Treasury
    Secretary, namely, as the administrator of the funds
    appropriated by this subcommittee. We have the job of
    evaluating whether the tax dollars we have appropriated have
    been well spent, and whether taxpayers have gotten value for
    their money. In that regard, the record of this Treasury
    Department is deeply disturbing. Time after time, this
    subcommittee has been required to sound the alarm about
    misguided, multimillion-dollar initiatives that have resulted
    in lengthy delays and massive cost overruns. At this hearing
    last year, I talked about the unfortunate history of the TBARR
    program--the Treasury Department's building modernization
    project. That program is now nearing completion, but not before
    it spent almost $100 million more than initially budgeted, and
    taking 3 years longer than we were promised when we made our
    initial appropriation.
        Last year we also talked about Treasury's so-called HR
    Connect program, an initiative to modernize the human resources
    information system at the Treasury Department. That initiative
    has also been plagued with costly delays and cost overruns.
        As we observe the Treasury Department's performance over
    the last year, we are faced with still more examples of
    mismanagement and waste. The Treasury Department has been
    attempting to launch a Treasury Communications Enterprise, or
    TCE, initiative. As far as we can tell, absolutely nothing has
    gone right with this program since its inception. The GAO found
    fault with the competition process, so the Treasury Department
    decided to terminate its contract and procure services through
    the General Services Administration. The Treasury Department
    then reversed its decision and decided to launch a separate
    competition process for the TCE initiative, despite the fact
    that the GSA system will have the services Treasury needs at a
    lower cost. The Treasury Inspector General found that the
    entire project was fraught with poor planning and execution.
    The Treasury IG also observed that there was little evidence of
    adequate senior management oversight of the project.
        Even more disturbing have been the missteps that directly
    affect services to taxpayers, and our ability to combat
    terrorist financing. Last year, Secretary Snow's IRS
    Commissioner proposed to eliminate more than 60 Taxpayer
    Assistance Centers across the country. I opposed that
    initiative. He intended to close those centers in order to free
    up money for enhanced tax law enforcement. Now, while I support
    efforts to collect the taxes that are owed, I do not believe
    that enhanced enforcement should come at the cost of services
    to taxpayers. Despite my opposition and that of many
    legislators, the IRS Commissioner persisted. In the end, we
    included bill language prohibiting him from closing these
    Taxpayer Assistance Centers until the Inspector General could
    review the methodology and data that he used to determine which
    centers to close.
        We now have the results from the Inspector General. He
    found that the IRS was using faulty data or data that was not
    the most current data. He also found that the IRS did not have
    the necessary management information systems to interpret this
    data. Had this been allowed to go through, the Commissioner
    would have, quite possibly, been closing the wrong Taxpayer
    Assistance Centers, leaving taxpayers who need help in the
    lurch.
        Finally, when it comes to the area of terrorist financing,
    we have the deeply troubling efforts of Treasury launching its
    new computer communications system for administering the Bank
    Secrecy Act, known as BSA Direct. As recently as February 17,
    2006, the Treasury Department maintained that this new IT
    system would be a critical and essential new tool to provide
    greater access and analytical capability. Indeed, our
    subcommittee attached such importance to this initiative that
    we provided $5 million that the Treasury Department did not
    request to expedite the deployment of this critical new system.
    Now, just this past March, a new agency head was put in charge.
    He found numerous problems surrounding this initiative and
    issued a stop-work order. It remains to be seen whether BSA
    Direct should be continued and will add any real value to our
    efforts to combat terrorist financing. It might make sense for
    Treasury to use the IRS's new BSA data management system that
    is already up and running at a fraction of the BSA Direct.
        The bottom line is this: just because the Treasury
    Department prints the Nation's money and collects the Nation's
    tax dollars, it does not give the Department the right to waste
    those dollars. This Department has an obligation to learn from
    its mistakes, and as far as I can tell, these mistakes with
    major procurements are happening over, and over, and over
    again. The Treasury Secretary is responsible for many critical
    matters of international finance. He is also responsible for
    every dollar we appropriate to his Department. I hope and
    expect that he will have clear answers for us today about why
    we continue to encounter these repeated management failures and
    waste of taxpayer dollars in the Department.
        Finally, Mr. Chairman, I want to thank you for scheduling a
    separate panel of witnesses so that we can deal with the matter
    of terrorist financing. There is certainly no greater calling
    on the part of this agency than its effort to cut off the
    financial lifeline from those terrorists who wish to do us
    harm. It is one of the reasons that I am so disturbed by the
    Department's failure in the BSA Direct program. Thank you, Mr.
    Chairman.
        Senator Bond. Thank you very much, Senator Murray. Now Mr.
    Secretary, we have outlined a few areas of concern. We would
    welcome your comments.

                       SUMMARY STATEMENT OF JOHN W. SNOW

        Secretary Snow. I thank you, Mr. Chairman, and Senator
    Murray. It is always a privilege and a pleasure to appear
    before you, to hear your comments, exchange views and get your
    insights and have an opportunity to talk to you about these
    important issues. You have raised a lot of good issues, both
    you and Senator Murray. We put in place, I think, a set of
    processes that are going to get at these issues more
    effectively.
        First of all, we have identified a pretty good team. I
    appreciate some of your good comments, frankly, on that team.
    It is encouraging to hear that from the chairman of this
    committee. So getting the right team in place, you know, you
    are right, a year ago we had vacancies across the board, and
    today, virtually all of those vacancies are filled, and filled
    with really top-flight people.
        On the IT issues, we recognize we have got to do better. We
    know that, again, getting the right people in place and the
    right management structures. I have had a lot of experience,
    Senator Murray and Mr. Chairman, over the years, probably at
    least as much as you have, in overseeing and managing IT
    systems. The Government's IT systems are more complex than any
    you ever see in the private sector, and when it comes to
    something like BSA, go to your corner software store and you
    can't pick it up off the shelf. You got to develop these
    systems on your own, and they are inherently very, very
    complex. I am not making excuses. We are going to do better. We
    have realigned the CIO under the Assistant Secretary for
    Management. We are going to apply the lessons that we have
    learned from past mistakes.
        One of those lessons is you put in place real project
    management and you understand going in what you are trying to
    accomplish. You know your requirements. You lay out your
    requirements. You have milestones. You follow the success in
    achieving those milestones, all those things that are good
    management, and providing better coordination across all the
    functions. I am confident that we are going to do better on
    that score.
        Let me say, you know this Department has changed enormously
    over the few years that I have been here. When I came in, it
    was going through that massive restructuring to create Homeland
    Security. We did not have the TFI functions fully developed,
    and I want to thank you for your support in helping us put in
    place this strong TFI function.
        What is Treasury all about? It has an important role, as
    Senator Murray said, in trying to keep the American economy on
    the right path, and in dealing with counterparts in the global
    economy. I think we do that pretty well. The American economy
    today you know is performing very well. We are growing at close
    to 4 percent for the last nearly 3 years since the Jobs and
    Growth Bill went into effect, 5 million new jobs, and I think
    we are going to continue on that good path. The Treasury
    Department's counsel with the President and putting in place
    the Tax Program of 2003 I think has a lot to do with that. So I
    hope Congress will move to extend those reductions on dividends
    and cap gains, and do it soon.
        We also have an important role in securing our country from
    terrorist threats. You have alluded to that and I will not go
    into it except to say it is a top priority with me, and I think
    we have the right people in place to drive those efforts.
        The Treasury stands at the center of the national and the
    global fiscal policy issues, the Current Account issues, global
    growth issues, all of those. We participate in the G-7 and the
    G-20 and APEC, and we lead this country's efforts at the World
    Bank and the IMF, all critically important functions. Senator
    Murray, I take seriously your comments about the deficit. We
    are a voice for restraining spending and keeping the economy
    strong to get revenues coming in, and revenues, of course, are
    now at an all time high for the United States Government, and
    on a path as a percent of GDP to achieve their historic level.
        You have raised other issues that I will look forward to
    getting into in the Q and A. On the 7216 question, that
    regulation, Mr. Chairman, you are right, that has been grossly
    misperceived in the press. It is actually a tightening of the
    rules on privacy, not a weakening of those rules. We can get
    into that later.

                               PREPARED STATEMENT

        Again, I very much value the close working relationship
    with this committee and your excellent staff. We take seriously
    their comments, we take seriously the GAO's comments, and
    working together, I think we will continue to make good
    progress at the Department. I thank you.
        [The statement follows:]

                       Prepared Statement of John W. Snow

        Chairman Bond, Senator Murray, and members of the subcommittee, I
    appreciate the opportunity to appear before you today to discuss the
    President's fiscal year 2007 budget for the Department of the Treasury.
        The President's budget for Treasury in fiscal year 2007 reflects
    the Department's dedication to promoting economic opportunity,
    strengthening national security and exercising fiscal discipline. The
    budget supports activities that help ensure all Americans will have the
    opportunity to live in a Nation that is more prosperous and more
    secure.
        The Treasury appropriations request for fiscal year 2007 is $11.6
    billion, slightly above the fiscal year 2006 enacted budget. This
    request is consistent with the President's overall goal of cutting our
    deficit in half by 2009. The Treasury Department is committed to fiscal
    austerity and to the most efficient and effective use of taxpayer
    dollars while at the same time boosting revenues through continued
    economic growth.
        Mr. Chairman, we have provided the committee with a detailed
    breakdown and justification for the President's fiscal year 2007 budget
    request for Treasury. I would like to take the opportunity today to
    highlight portions of our request and then I would be happy to take any
    questions you may have.

                 PROMOTING A PROSPEROUS AND STABLE U.S. ECONOMY

        The Treasury Department plays a predominant role in the development
    and implementation of the President's goals for domestic and
    international economic growth, and the communication of his agenda. To
    reach our greatest potential, the economy must increase its rate of
    growth and create new, high quality jobs for all Americans.
        The legal and regulatory framework must also support this growth by
    providing an environment where businesses and individuals can grow and
    prosper without the burdens and costs of unnecessary taxes and
    regulations. In addition, the role of the tax system in supporting
    economic growth is critical. The economic indicators since the
    President signed the Jobs and Growth Act in May 2003 provide validity
    to this notion. Since that time, we have seen 11 straight months of
    positive business investment; nearly 5 million jobs have been created;
    the unemployment rate stands at a remarkable 4.8 percent; and now we
    are also seeing a rise in American's income and wealth. What's also
    impressive is the fact that tax revenues are surging; Federal revenues
    for fiscal year 2005 totaled $2.15 trillion--the highest level ever.
        The budget addresses the need to consider the economy when
    considering tax policy with the proposed creation of a new Dynamic
    Analysis Division within Treasury's Office of Tax Policy. Understanding
    the full range of behavioral responses to tax changes, including how
    tax changes affect the size of the economy and, eventually, tax
    revenues, is critical to designing meaningful, effective tax policy,
    and tax reform. This small expenditure will have a substantial pay-off
    for the American taxpayer.
        Treasury's Office of International Affairs also plays a key role in
    supporting growth by advancing our Nation's interests in an
    increasingly complex world economy. The office improves access to
    foreign markets for U.S. financial service firms, promotes domestic
    demand-led economic growth abroad, and fosters economic restructuring
    and stability. These activities contribute to rising standards of
    living in both the United States and other countries.
        As globalization has progressed, Treasury's on-the-ground presence
    in international finance and economic centers has steadily receded. The
    $9.4 million requested to increase Treasury's overseas presence will
    enable the Department to carry out its international mission in the
    global economy more effectively. Treasury attaches will work in tandem
    with the Office of International Affairs and the Office of Terrorism
    and Financial Intelligence to build relationships with foreign
    officials and work with local U.S. industry and agency representatives
    to advance U.S. interests. They will also provide much-needed
    intelligence and expertise to U.S. officials in Washington formulating
    policy on international economics, trade, finance, and terrorist
    finance.
        The budget also seeks $7.8 million for the Community Development
    Financial Institutions (CDFI) Fund to administer the New Markets Tax
    Credit and manage the existing loan portfolio. The budget proposes to
    consolidate CDFI's remaining programs into the Strengthening America's
    Communities Initiatives (SACI) within the Departments of Commerce and
    Housing and Urban Development.

       FIGHTING THE GLOBAL WAR ON TERROR AND SAFEGUARDING OUR FINANCIAL
                                    SYSTEMS

        While promoting financial and economic growth at home and abroad,
    Treasury performs a critical and far-reaching role in homeland
    security. The Department battles national security threats by
    coordinating financial intelligence, targeting and sanctioning
    supporters of terrorism and proliferators of weapons of mass
    destruction (WMD), improving the safeguards of our financial systems,
    and promoting international coordination to attack the financial
    underpinnings of terrorist and other criminal networks. To support
    these efforts, the President requests $388.7 million for fiscal year
    2007.
        The Office of Terrorism and Financial Intelligence (TFI) supports
    Treasury's national security efforts by safeguarding the U.S. financial
    systems against illicit use. TFI provides financial intelligence
    analysis, develops and implements anti-money laundering measures,
    administers the Bank Secrecy Act, and enforces economic and trade
    sanctions. In addition, TFI provides policy guidance for the Internal
    Revenue Service's (IRS) Criminal Investigation staff. IRS special
    agents are experts at gathering and analyzing complex financial
    information from numerous sources and applying the evidence to tax,
    money laundering, and Bank Secrecy Act violations. These agents support
    the national effort to combat terrorism and participate in the Joint
    Terrorism Task Forces and similar interagency efforts focused on
    disrupting and dismantling terrorist financing.
        Financial intelligence exposes the infrastructure of terrorist and
    criminal organizations. It provides a roadmap for investigators to find
    those who help facilitate criminal activity. These investigations lead
    to the recovery and forfeiture of illegally obtained assets and create
    broad deterrence against criminal activity. Treasury plays a crucial
    role in linking law enforcement and intelligence communities with
    financial institutions and regulators. To support these efforts,
    Treasury requests an increase of $16.9 million for the Financial Crimes
    Enforcement Network to improve coordination with State and local
    regulators, strengthen regulatory training and outreach, and enhance
    Bank Secrecy Act collection, retrieval, analysis, and sharing.
        Treasury exercises a full range of intelligence, regulatory,
    policy, and enforcement tools in tracking and disrupting terrorists'
    support networks, proliferators of weapons of mass destruction, rogue
    regimes and international narco-traffickers, both as a vital source of
    intelligence and as a means of degrading the terrorists' ability to
    function. Treasury's actions include:
      --Freezing the assets of terrorists, drug kingpins, and support
            networks;
      --Cutting off corrupt foreign jurisdictions and financial
            institutions from the U.S. financial system;
      --Developing and enforcing regulations to reduce terrorist financing
            and money laundering;
      --Tracing and repatriating assets looted by corrupt foreign
            officials; and
      --Promoting a meaningful exchange of information with the private
            financial sector to help detect and address threats to the
            financial system.
        The fiscal year 2007 President's budget requests $7.8 million to
    enable Treasury to continue to enhance its abilities to identify,
    disrupt, and dismantle the financial infrastructure of networks of
    terrorists, proliferators of WMD, narco-traffickers, criminals, and
    other threats. Treasury will also improve its analytical capabilities,
    to provide actionable intelligence and to target, designate and
    implement sanctions against the financiers of WMD proliferation.
        This budget request funds Treasury's national and homeland security
    mission at a level that provides increasingly effective support to the
    war on terror. Treasury will enhance this support with an increased
    international presence funded in this request. Treasury attaches
    located at critical embassies throughout the world will enable close
    liaison with the international financial institutions and foreign
    governments to promote the national and economic security interests of
    the United States.

            COLLECTING TAXES AND MANAGING THE GOVERNMENT'S FINANCES

        Treasury's strategic goal to manage the U.S. Government's finances
    effectively is the largest part of the President's fiscal year 2007
    request for the Department. The budget request of $10.9 billion--the
    majority of which is for the Internal Revenue Service--underscores
    Treasury's commitment to provide quality service to taxpayers and
    enforce America's tax laws in a balanced manner.
        The Internal Revenue Service (IRS) provides taxpayers with top-
    quality services by helping them understand and meet their tax
    responsibilities through a commitment to integrity and fairness. The
    IRS supports the administration's goal of reducing the Federal deficit
    by increasing tax receipts collected through taxpayer services,
    enforcement compliance, and identifying improvements that will reduce
    the cost of revenue collection. Treasury's enforcement efforts yielded
    a record $47.3 billion in enforcement revenue in fiscal year 2005. The
    fiscal year 2007 budget will provide funding to continue the IRS's
    dedication to service and maintain efforts to improve the enforcement
    of tax laws.
        Increasing compliance with the tax code is at the heart of the
    Treasury's enforcement programs. The IRS will continue to expand
    enforcement efforts by targeting its casework and enforcement
    activities to deliver results more effectively. The IRS will continue
    to analyze tax information and data from compliance research studies to
    better understand and counter the methods and means of those taxpayers
    who fail to report or pay what they owe. The IRS is focusing on
    discouraging and deterring non-compliance such as corrosive activity by
    corporations and high-income individual taxpayers. In order to ensure
    funding for tax enforcement, the administration is again proposing a
    program integrity cap adjustment. I am pleased that the Senate Budget
    Committee included this adjustment in their Budget Resolution.
        To reinforce this effort, the budget proposes new tax legislation
    that will improve the ability of the IRS to identify underreporting and
    collect unpaid taxes, while minimizing the burden on those who comply
    with the tax code. These legislative proposals strategically target
    areas where research reveals the existence of substantial compliance
    issues. The improvements will burden the taxpayers as little as
    possible, and the changes support the administration's broader focus on
    identifying legislative and administrative changes to increase
    compliance with the tax code.
        The IRS continues to make progress with the Business Systems
    Modernization (BSM) program. BSM aims to modernize the tax system by
    providing real business benefits to taxpayers and IRS employees through
    new technology. In fiscal year 2006 and continuing in fiscal year 2007,
    BSM is revising its modernization strategy to emphasize the incremental
    release of projects to deliver business value sooner and at lower risk.
        The Treasury Inspector General for Tax Administration (TIGTA)
    continues to partner with the IRS in increasing compliance with the tax
    code by ensuring that the IRS can pursue the effective administration
    of Federal tax laws without hindrance from internal and external
    attempts to corrupt the tax system. TIGTA serves to highlight
    opportunities for cost savings in IRS operations, protect taxpayer
    rights and privacy, and generally promote the economy, efficiency and
    effectiveness of tax administration.
        The Alcohol and Tobacco Tax and Trade Bureau (TTB) also works to
    ensure that taxes due become taxes collected. TTB is the Nation's
    leader on regulating alcohol, tobacco, firearms, and ammunition excise
    taxes. The bureau is responsible for the collection of approximately
    $15 billion annually. TTB ensures that alcohol beverages are labeled,
    advertised, and marketed in compliance with the law. TTB's efforts
    assure the public that alcohol and tobacco products reaching the
    marketplace are unadulterated, thereby providing marketing and sales
    value to the industry. The budget proposes to establish user fees to
    cover a portion of the costs of these regulatory functions.
        Treasury also works to disburse, manage, and account for the
    Nation's monies as it distributes payments, finances public services,
    and balances the government's books.
        The Financial Management Service (FMS) is the government's
    financial manager and as such administers the government's payments and
    collections systems. In fiscal year 2005, FMS issued over 952 million
    non-defense payments valued at $1.5 trillion, of which 76 percent were
    made electronically. The President's budget includes proposed
    legislation that would enhance non-tax debt collection opportunities,
    including allowing FMS to collect an estimated $3.8 billion in past due
    unemployment compensation debts over the next 10 years.
        The Bureau of the Public Debt (BPD) facilitates Treasury's debt
    financing operations by issuing and servicing Treasury securities. BPD
    will continue its goals of increased efficiency and achieve its mission
    to borrow the money needed to operate the Federal Government and to
    account for the resulting debt.

                      STRENGHENING FINANCIAL INSTITUTIONS

        Treasury, through the Office of the Comptroller of the Currency
    (OCC) and the Office of Thrift Supervision (OTS), maintains the
    integrity of the financial system of the United States by chartering,
    regulating, and supervising national banks and savings associations.
    Ongoing supervision and enforcement ensure that each national bank or
    saving association is operating in a safe and sound manner, which
    enhances the reliability of the U.S. financial system. In fiscal year
    2005, OCC and OTS oversaw assets held by these insured depository
    institutions totaling $7.3 trillion.
        The United States Mint and the Bureau of Printing and Engraving
    (BEP) share the responsibility of meeting global demand for the world's
    most accepted coins and currency. Neither the U.S. Mint nor the BEP
    receive any appropriated funds from Congress. In fiscal year 2005, the
    Mint returned $775 million to the Treasury's General Fund. The U.S.
    Mint continues its work to streamline operations and remain highly
    effective, while providing coins for circulation and numismatic
    purposes. BEP continues its work of developing new methods of designing
    our currency to guard against counterfeiting. The bureau plans to
    release the redesigned $100 dollar bill later this year.

                         MANAGING TREASURY EFFECTIVELY

        The President has requested $219.8 million to ensure proper
    stewardship of the Department. Treasury is committed to using the
    resources provided by taxpayers in the most efficient manner possible.
        The Departmental Offices and Department-wide Systems and Capital
    Investments Program (DSCIP) account funds technology investments to
    modernize business processes throughout Treasury, helping the
    Department improve efficiency. In fiscal year 2007, the President's
    budget requests $34 million for ongoing modernization and critical
    information technology projects and to invest in other new technologies
    that will improve efficiency and service. Included in this request is
    $21.2 million to complete the redesign and modernization of Treasury's
    Foreign Intelligence Network (TFIN), a Top Secret/Sensitive
    Compartmented Information system critical to the support of Treasury's
    national security mission.
        Included in this budget request is $17.4 million to fund the
    Department's Office of Inspector General (OIG) audit and investigative
    programs. The budget also includes $136.5 million for the Treasury
    Inspector General for Tax Administration (TIGTA) and its efforts to
    oversee the Nation's tax administration.
        The Treasury Franchise Fund, recognized as a Financial Management
    Center of Excellence, is a self-supporting business-like entity that
    provides common administrative services to other Federal agencies on a
    fully reimbursable basis. The Fund will continue to support Treasury's
    stewardship of the Department by promoting excellence in its management
    and increase competition for government and financial services.

                 TREASURY AND THE PRESIDENT'S MANAGEMENT AGENDA

        Treasury is meeting the President's challenge to improve the
    management of the Department's people and resources. On the most recent
    President's Management Agenda (PMA) scorecard, the Department achieved
    a Green progress score in five out of six initiative areas, indicating
    that plans are in place and implementation is progressing to accomplish
    the PMA objectives.
        The Office of Management and Budget's Program Assessment Rating
    Tool (PART) is intended to improve program performance. Treasury made a
    strong commitment to improve its program performance, and PART scores
    subsequently have improved. Currently, 70 percent of Treasury's PART
    evaluations have scored ``adequate'' or better and Treasury has set a
    target of 76 percent scoring ``adequate'' or better in fiscal year
    2006.
        Treasury will continue to work closely with the Office of
    Management and Budget and other stakeholders to make improvements in
    implementing the initiatives set forth in the President's Management
    Agenda.

                                   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 2007. We have hard work ahead of us and I am hopeful that together
    we can work to make the Treasury a model for management and service to
    the American people, and continue to generate economic growth, increase
    the number of jobs for our citizens, and keep our financial systems
    strong and secure.
        Thank you again for the opportunity to present the President's
    budget for the Treasury Department today. I would be pleased to answer
    your questions.

                              INFORMATION SYSTEMS

        Senator Bond. Mr. Secretary, thank you very much. Let's get
    right to the questions.
        We have talked about BSA Direct, raising serious questions
    about the Treasury's ability to procure, manage and oversee IT.
    Can you give me your personal commitment that high-risk
    projects like the Treasury Financial Intelligence Network,
    critical for the TFA analysts to perform their jobs, will not
    experience the same problems as BSA Direct? How can you assure
    us that there will be the necessary support and resources for
    TFIN and other IT projects based on the lessons learned?
        Secretary Snow. There are lessons learned here. I think the
    major lesson learned is get those requirements well specified
    in advance, and have somebody with knowledge about IT matters
    watching it closely. I have asked the Assistant Secretary for
    Management to make that a priority, and I have asked her,
    working with the CIO, to make sure they keep me regularly
    posted on these IT projects. There are a number of them, TFIN
    and others, that will get my personal attention. They will be
    managed by people who know a lot more about the management of
    IT than I do, but as somebody who has been in this world for a
    long time, I think I can see problems, spot problems, and help
    keep us on the right track. I pledge to you I am going to do
    everything I can.

                          INCREASED OVERSEAS PRESENCE

        Senator Bond. Thank you, sir. As you know, I have supported
    the major expansion of the Overseas Attache Program. Can you
    describe your short-and long-term goals for it, how it will
    help the American people, and describe the coordination efforts
    between the Office of International Affairs and the Office of
    Terrorism and Financial Intelligence in this program?
        Secretary Snow. Absolutely, Mr. Chairman, and I appreciate
    the chance to do so.
        Treasury today has attache posts at a limited number of
    places, Baghdad, I think Kabul, Afghanistan, and Tokyo. At one
    point we had many more, and we see a real need to expand the
    number to go to critical places on the globe. The attaches
    would have a dual role. It would be advancing the objectives of
    good economic policies in those countries, but also the TFI
    objectives of coordinating on terrorist finance issues,
    coordinating on issues of putting place better regulatory
    regimes in many countries. The United States is way ahead of
    most of the rest of the world in having the PATRIOT Act and 311
    and 326 and the various rules we have that allow us to freeze,
    block and get at terrorist monies. Augmenting the effort to
    fight terrorists' finances will be a big part of these
    attaches' roles as well. And they are going to critical places
    in the Middle East as well as to financial centers around the
    world.
        Senator Bond. I am delighted to see that you are looking at
    Southeast Asia where I think there are lots of problems, and I
    would also suggest you look at Pakistan where there could be
    some real challenges.

                              IRS 7216 REGULATIONS

        Moving very quickly to 7216, do you think the proposed
    regulations adequately address consumer-protection issues? And
    how are they stronger than current regulatory protections?
        Secretary Snow. Thank you very much, Mr. Chairman. They are
    much stronger than current law. Current law does not prescribe
    the form of a warning, and 7216 does prescribe the form of a
    warning, a much stronger warning. It also puts time limits on
    the period through which the third party can use that data of 1
    year. It had been open-ended. I think the testimony of the fact
    that this protects taxpayers better is that Nina Olson, the
    National Taxpayer Advocate, has supported the issuance of these
    regulations. So I think there was a miscommunication, and the
    real facts are this tightens privacy with respect to use of
    taxpayer information.

                           OFFICE OF DYNAMIC ANALYSIS

        Senator Bond. Mr. Secretary, the budget proposes $500,000
    to create a new Dynamic Analysis Office within the Treasury.
    What types of analysis would this office conduct that is not
    being conducted now? I have a personal feeling about the need
    for this, but what is the long-term plan for the office in
    terms of funding and staffing?
        Secretary Snow. When we come to you, Mr. Chairman, with tax
    proposals, you have the right to say to us: ``What will that do
    to GDP? What will that do to growth? What will that do to
    macroeconomic variables?'' The Dynamic Analysis Office will
    develop models to enable us to answer those questions so that
    when we come forward with major tax analyses, major tax
    proposals, we will have analyses behind those proposals to
    answer questions about the broad macroeconomic effects.
        Senator Bond. I think we have seen it demonstrated that
    strict, static budget analysis leads to some very bad guesses
    about future performance.

                                    TAX GAP

        Finally, I would like to ask you about the tax gap, a $345
    billion tax gap. That is the amount of money estimated that is
    owed and that is not collected. That means those of us who are
    sweating as hard as we can to pay the taxes we owe by April 15
    are carrying the burden for some slugs who are out there not
    paying the $345 billion. How can we take a bite out of that
    with the reduction in the money for the IRS?
        Secretary Snow. Mr. Chairman, the budget proposal includes
    five new specific legislative proposals that I think would
    help. The Commissioner I think you know is keen on
    strengthening enforcement and has done a good job of doing so,
    with more audits, more enforcement activity, more focus on the
    enforcement side. We always have to get that balance right,
    though, between enforcement and taxpayer service. We are just
    going to continue to do the best we can, and in Commissioner
    Everson we have somebody who is absolutely dedicated to this
    purpose.
        Senator Bond. Thank you very much, Mr. Secretary. Senator
    Murray.

                          TAX PREPARATION ERROR RATES

        Senator Murray. Mr. Secretary, let me start by addressing
    some of the problems that exist at our major tax preparation
    companies. Just 2 days ago the GAO reported that there may be
    some serious problems with the accuracy of the tax returns
    prepared by many of the private tax preparation companies. The
    GAO found that these companies often prepared returns that were
    incorrect, with tax consequences that were sometimes
    significant. Some of these mistaken returns could have exposed
    taxpayers to penalties for things like negligence and willful
    or reckless disregard of tax rules. What are you doing now to
    rectify that situation?
        Secretary Snow. This is a recurring issue, Senator, as you
    know. I think every year about this time we see newspaper
    accounts of this. I do not think it is an intent to defraud
    anybody. I think the problem that you are talking about is the
    result of the bewildering complexity of the Code itself. You
    can get 15 tax people of impeccable credentials looking at one
    tax return and coming up with 15 different results. I think
    that that is fundamental in the nature of the Code, and we have
    to address the complexity of the Code.
        Senator Murray. That could be, but still we have people who
    go to a tax preparer and believe that they know what they are
    doing, and I think it is of serious consequence if we do not
    have an aggressive agency that is doing something to help
    regulate these tax preparation companies.
        Secretary Snow. Senator, to put this in a little
    perspective, the IRS itself gives differing interpretations, so
    that the issue here, and I think it is really a serious one, is
    not an effort to defraud anybody. It is a reflection of the
    inherent complexity.
        Senator Murray. People in your agency give different
    interpretations? Is that not a problem in itself?
        Secretary Snow. It is a problem of how complex the Code is.
    My wife is a volunteer to the IRS to help elderly people and
    poor people prepare their tax returns. She came back to me
    after a session recently and said, ``John, you cannot imagine
    how bewildering and confusing the Tax Code is. How do you
    expect people to comply with the Tax Code when I, a reasonably
    intelligent person who has had a course in taxes, can hardly
    figure it out myself?'' I think that is a common refrain.
        Senator Murray. I have to disagree with you a little bit.
    It may be a complex Tax Code, but when we have private tax
    preparation companies and an IRS that has a function to make
    sure that they have the correct information, we cannot just say
    that that is an excuse for giving taxpayers penalties for being
    negligent. I think we have to do our job better, I think your
    agency has to do its job better, and I think we have to manage
    these tax preparation companies and have aggressive oversight
    with them. Do you disagree with that?
        I will tell you if a math teacher gives a complex question
    to a bunch of high school students and they come back and say:
    ``Gosh, it is complex'', I do not think you would accept it,
    and I know I would not.
        Secretary Snow. Senator, every year your local newspaper
    and local newspapers all over the country go out with one tax
    return, take it to acknowledged tax experts, and the tax
    experts differ themselves on what the amount owed is. Albert
    Einstein said, and he was a pretty smart fellow, the one thing
    that he ever encountered that was entirely incomprehensible to
    human intelligence was the Internal Revenue Code. If it is
    tough for Einstein, you can see why it is tough for the rest of
    us.

                              IRS 7216 REGULATIONS

        Senator Murray. Mr. Secretary, I do not think anybody would
    disagree that the complexity of the Tax Code is a challenge for
    all of us, but it is a challenge we have to aggressively be on
    top of. Following-up on the chairman's question on the proposed
    regulations on revising section 7216, I heard you say that some
    of that improves protection of taxpayer information. That may
    well be true, but it also very clearly loosens some of the tax
    preparer companies' obligations and may very easily by just
    someone accidentally swiping their pen in the wrong place, they
    lose their private information. I would like to know from you
    if you are going to follow-up on that, if you are going to take
    a look at those regulations, take into concern that this has
    opened up the real question of whether or not taxpayers'
    private information may accidentally be used without their
    knowledge?
        Secretary Snow. Senator, absolutely. We have a duty to
    protect the information of taxpayers, and I pledge to you that
    we are going to take those responsibilities with the utmost
    seriousness. This particular regulation was actually an effort
    on the part of the IRS and the Commissioner to tighten up this
    regulation.
        Senator Murray. And I am going to be asking him about it
    next week, I assure you.
        Secretary Snow. The rulemaking is still open. We invite
    comments, we invite your comments and others to comment on it.
        Senator Murray. This has raised serious alarms.
        Secretary Snow. Right.
        Senator Murray. Since you oversee that division, I wanted
    you to be aware of it. I want to know that you are aware of it
    and I want to know that you are following up on it.
        Secretary Snow. And I align myself with your comments on
    it. It is very important that we protect taxpayer information.

                          TAXPAYER ASSISTANCE CENTERS

        Senator Murray. I just have 1 minute left here, and I want
    to ask about the reference that I made in my opening comments
    to closing some Taxpayer Assistance Centers, and we found out
    that that was based on faulty data. I would like to find out
    from you whether we should just accept the IRS's arguments on
    other recommendations, or should we now be questioning all of
    those? Since that was based on faulty data, that gives us a lot
    of concern.
        Secretary Snow. I think you have important oversight
    responsibilities, and we benefit from your challenging us and
    raising questions.
        Senator Murray. Has your Department now abandoned any of
    your plans to close any of the Taxpayer Assistance Centers?
        Secretary Snow. Yes, there will be no reduction in service
    contemplated in this budget.

                                   BSA DIRECT

        Senator Murray. Let me just comment in my last 10 seconds
    here on the BSA Direct program, and I heard your comments to
    the chairman. With all due respect, I really do appreciate your
    commitment to do better on those procurements, but it is what
    we heard last year. So I would like to follow up with you, I
    know I am out of time, but hear from you what we are going to
    do to make sure we are not sitting here year after year hearing
    the same story on these complex procedures.
        Secretary Snow. Senator, the new Director, Mr. Werner, came
    in and looked at the program and saw that it was missing
    milestones and put a pause on it.
        Senator Murray. Right.
        Secretary Snow. As he follows through on his analysis, I
    will keep the committee fully posted on what we think should be
    done.
        Senator Murray. Thank you very much, Mr. Secretary.
        Senator Bond. Mr. Secretary, I said we were going to
    suspend your testimony at 10:15, but Senator Dorgan has come
    in. Senator, I apologize. We are trying to get the second panel
    on, but if you would like to take 2 minutes for your statement-
    question-presentation, and then we will come back after the
    vote to question the second panel.
        Senator Dorgan. Mr. Chairman, that is fair. Senator Burns
    and I have been running another Appropriations subcommittee
    just across the hall.
        Senator Bond. I hope you are doing good things for us. We
    have some ideas.
        Senator Dorgan. We have the Missouri provision in our bill,
    so we think it is going to go pretty well.
        I will be very brief and just make two points to the
    Secretary. I understand the point has already been made about
    the sale of taxpayer information by private preparers to third
    parties. I have sent you a letter about that. Despite the
    explanations of it, I think it is a horrible idea. I think we
    ought to have a pretty aggressive public discussion about
    whether tax preparers under any condition ought to sell
    taxpayer information that they glean in preparing tax returns
    to third parties. I understand that that has been raised.

                                  TAX SHELTERS

        I want to show you a picture. This is, Mr. Secretary, a
    picture of a building on Church Street in the Cayman Islands.
    It is called the Ugland House. You may be familiar with it. The
    Ugland House on Church Street is the official residence,
    according to David Evans who did a story at Bloomberg News, for
    12,748 corporations. I know they are not in there, but it's
    what they claim to be their official residence. Why would they
    claim that? There is one purpose, to avoid paying U.S. taxes.
    This is a real crisis. I do not think we have the ability,
    resources or capability at this point to nearly begin to
    address this.
        Here we are in 2006 with 12,748 companies claiming this one
    building as their residence. Trying to force these companies to
    pay taxes is like connecting the ends of two plates of
    spaghetti. The way the IRS goes about it is pretty incompetent
    in my judgment. Second, the law by-and-large favors and gives
    opportunity to companies to do this.
        I hope very much that we will at the Treasury Department
    decide to blow a hole in this kind of practice because it is
    costing us a great deal of lost revenue. It is also unfair to
    ask working families to pay their taxes and then have these
    companies park their address simply for residence purposes at a
    building in the Caymans to avoid paying taxes.
        Secretary Snow. Senator, I look forward to a chance to have
    a good discussion with you on that. The IRS has tried to
    tighten up its enforcement activities in this area, but I
    think, as you said, this also reflects the state of the law,
    and I would hope is part of the broad-based tax reform efforts
    we would look at these issues very, very closely. I agree with
    you.
        Senator Dorgan. It is both the law and enforcement. Maybe
    you and I should just fly down to Church Street at the Caymans
    and park in the lobby there and see who comes and goes from
    that building. Thanks, Mr. Secretary.
        Secretary Snow. Thank you, Senator.
        Senator Bond. Senator Dorgan, I think there is some good
    fishing down there, so maybe we could spend a couple hours down
    there and then see about the other resources.
        Mr. Secretary, thank you very much for being here. Now we
    will call Mr. Levey and Ms. Gardner, and do as much as we can
    before the vote starts.
        Senator Bond. Thank you very much, and we will begin with
    Mr. Levey. Sir.

                 Office of Terrorism and Financial Intelligence

    STATEMENT OF STUART LEVEY, UNDER SECRETARY
    ACCOMPANIED BY:
            JANICE GARDNER, ASSISTANT SECRETARY, OFFICE OF INTELLIGENCE AND
                ANALYSIS
            ROBERT W. WERNER, DIRECTOR, FINANCIAL CRIMES ENFORCEMENT
                NETWORK
        Mr. Levey. Thank you, Mr. Chairman, Senator Murray, and
    Senator Dorgan. Thank you for the opportunity to speak before
    you today about the President's 2007 year request for the
    Office of Terrorism and Financial Intelligence at the Treasury
    Department. And thank you especially, Mr. Chairman, for all the
    kind remarks you made in your opening statement. I hope we can
    live up to them.
        The funding that is in the President's budget will provide
    us with the resources needed to support the Department's
    essential and growing terrorist financing, money-laundering,
    WMD proliferation, narco-trafficking, and economic sanctions
    programs, as well as the intelligence capabilities that are
    critical to the success of those programs.
        Treasury has continued, with the strong support of this
    committee, to build much needed resources for the Office of
    Terrorism and Financial Intelligence, and we have achieved some
    important successes. I attribute those successes to the
    unbelievably dedicated work force that I have been blessed
    with, and an extraordinary management team that I work with,
    including Assistant Secretary Gardner, as well as Assistant
    Secretary O'Brien who is here today, the Director of FinCEN,
    Bob Werner who is here, and the Acting Director of OFAC,
    Barbara Hammerle who is also here today, they make my job a
    very easy one.
        Over the past year alone, TFI has designated and
    financially isolated front companies, nongovernmental
    organizations, and facilitators supporting terrorist
    organizations such as al Qaeda, Jemaah Islamiyah, and Egyptian
    Islamic Jihad. We have implemented targeted financial sanctions
    under a new Executive Order aimed at North Korean, Iranian, and
    Syrian facilitators of WMD proliferation, and we have struck a
    deep blow to North Korea's illicit conduct and ability to abuse
    the international financial system to facilitate that conduct.
    Those accomplishments are only the tip of the iceberg, but they
    demonstrate without question not only that our resources are
    being put to good use, but that the Treasury Department is
    fulfilling its vitally important role.
        On terrorist financing, as you note, Mr. Chairman, the 9/11
    Commission's Discourse Project awarded its highest grade, an
    A-, to the U.S. Government's efforts to combat terrorist
    financing. This praise truly belongs to the dedicated
    individuals not only in the Office of Terrorism and Financial
    Intelligence, but our partner agencies around the government
    who aggressively track and combat this threat.
        As you know, Mr. Chairman, from your service on the
    Intelligence Committee, it is very hard to measure success in
    an area like terrorist financing. The meaningful indicators of
    our success are typically complex and not readily quantifiable,
    such as anecdotal reporting about terrorist cells having
    difficulty raising money or paying operatives. We focus on
    those intelligence reports, even though they are often
    fragmentary, and try to identify the difficulties that the
    terrorists are having raising or moving money and adjust to it.
    In recent months we have seen at least one instance of what we
    look for most, a terrorist organization indicating that it
    could not pursue sophisticated attacks because it lacks
    adequate funding.
        We have also seen success, in my view, in preventing
    terrorist financing by deterring would-be donors. In my
    opinion, if we are going to succeed in our fight against
    terrorist financing, we need potential donors to know that
    responsible governments will treat them as the terrorists that
    they are. Those who reach for their wallets to fund terrorism
    must be pursued and punished in the same way as those who reach
    for a bomb or a gun.
        This requires cooperation from other governments, and in
    that regard, I was heartened by a recent statement by the Saudi
    Arabian Foreign Minister, Prince Saud al-Faisal, who publicly
    called for those who support terrorism to be held to account.
    If Saudi Arabia and others in the region see this commitment
    through, it will send a powerful message of deterrence to
    would-be terrorist financiers.
        In other areas of this fight, to be honest, we are not
    where we need to be. State sponsors of terrorism like Iran and
    Syria present a very difficult problem, providing not only
    money and safe haven to terrorists, but also financial
    infrastructure through which terrorists can move, store, and
    launder their funds. Secretary Rice had it right when she
    referred to Iran in particular as the ``central bank of
    terror.''
        While this is a daunting challenge we face, the impact of
    our actions over the past year with respect to Syria show that
    we can make progress in isolating state sponsors of terrorism.
    Among other things, we finalized the designation of the
    Commercial Bank of Syria under section 311 of the PATRIOT Act
    in part because of the risk of terrorist financing posed by a
    bank owned and controlled by an active and defiant state
    sponsor of terror like Syria.
        Success in all of our efforts depends on cooperation from
    responsible financial institutions both in the United States
    and abroad. The recent announcement by UBS that it would cut
    off all business with Iran and Syria provides a notable example
    of a financial institution making clear that the business of
    terrorist states is just not worth the risk. Other financial
    institutions are similarly reviewing their business
    arrangements and taking special precautions to ensure that they
    do not permit terrorist financiers or WMD proliferators, which
    are increasingly able to identify and combat using our new
    authorities, access to the global financial system. On WMD
    proliferation, Mr. Chairman, the exposure of a WMD
    proliferation network headed by A.Q. Khan provided the world
    with a window into one of the most frightening scenarios that
    we face.
        The U.S. Government is doing everything in its power to
    deter, disrupt and prevent the spread of weapons of mass
    destruction and ensure especially that they do not fall into
    the hands of terrorists, and the reason for this is that
    proliferators, just like terrorists, require a substantial
    network to support them. And by cutting off the supply lines of
    that network, we can isolate the individual proliferators,
    paint a clear picture of how and with whom they operate, and
    erode the infrastructure that supports them.
        In June 2005, the President issued a new Executive order
    which allows us to do just that, essentially to apply the same
    tools that we do against terrorist financiers to WMD
    proliferators. A designation under this Executive order cuts
    the target off from access to the U.S. financial and commercial
    system, and puts the international community on notice about
    the threat it poses. Thus far, we have designed a total of 20
    entities for proliferation related to Iran, Syria, and North
    Korea. Our efforts to prepare additional designation packages
    are ongoing, and will continue through the end of this year and
    next. One of our major initiatives in the President's budget is
    a request for 10 additional analysts to work on this program.
        As you noted also, Mr. Chairman, in September 2005, we
    exercised a new authority under the PATRIOT Act, section 311 of
    the PATRIOT Act, to list Banco Delta Asia as a primary money-
    laundering concern. The regulatory action against this bank
    that was facilitating a range of North Korean illicit activity
    has dealt a blow to North Korea's ability to engage in illicit
    conduct and obtain financial services to facilitate that
    conduct. As a result of that 311 action against this bank, and
    our office's subsequent and continuing outreach efforts, a
    number of responsible jurisdictions and institutions have taken
    steps to ensure that North Korean entities engaged in illicit
    conduct are not receiving financial services. In fact, press
    reports indicate that some two-dozen financial institutions
    across the globe have cut back or terminated their financial
    dealings with North Korea, thereby constricting the flow of
    dirty cash to Kim Jong-il's regime.

                               PREPARED STATEMENT

        If there is time in the questions and answers, I would like
    to explain to the committee how that worked in more detail.
        Mr. Chairman, I look forward to working closely with you
    and your staff, and thank you again for the opportunity to
    testify today.
        [The statement follows:]

                       Prepared Statement of Stuart Levey

        Chairman Bond, Ranking Member Murray, and other distinguished
    members of the subcommittee, thank you for the opportunity to speak
    before you today about the President's fiscal year 2007 request for the
    Office of Terrorism and Financial Intelligence (TFI) at the Department
    of the Treasury. This funding will provide us with the resources needed
    to support the Department's essential and growing terrorist financing,
    money laundering, WMD proliferation, narco-trafficking, and economic
    sanctions programs, as well as the intelligence capabilities that are
    critical to the success of these programs.
        As you know, TFI is a relatively new office. It was created in 2004
    to oversee the Treasury Department's enforcement and intelligence
    functions aimed at severing the lines of financial support to
    international terrorists, WMD proliferators, narcotics traffickers, and
    other criminals. The office consolidates the policy, enforcement,
    regulatory, and analytical functions of the Treasury and adds to them
    critical intelligence components by bringing under a single umbrella
    the Office of Intelligence and Analysis (OIA), the Office of Terrorist
    Financing and Financial Crimes (TFFC), the Financial Crimes Enforcement
    Network (FinCEN), the Office of Foreign Assets Control (OFAC), and the
    Executive Office for Asset Forfeiture. TFI also works closely with the
    IRS-Criminal Investigative Division in its anti-money laundering,
    terrorist financing, and financial crimes cases.
        Together, we leverage a wide range of tools to pressure
    obstructionist regimes. Using various authorities, we also have the
    ability to freeze the assets of terrorists, proliferators, and other
    wrongdoers. We use regulatory authorities to help banks and other
    institutions implement systems to detect and halt corrupt money flows.
    And, diplomatically, we work with other governments and international
    institutions, urging them to act with us against threats and to take
    critical steps to stem the flow of illicit finances.

                                KEY ACHIEVEMENTS

        As Treasury has continued--with your support--to build much-needed
    resources for this new office, we have achieved some important
    successes. Over the past year alone, TFI has designated and financially
    isolated front companies, non-governmental organizations, and
    facilitators supporting terrorist organizations, such as al Qaeda,
    Jemaah Islamiyah, and Egyptian Islamic Jihad; implemented targeted
    financial sanctions under a new Executive order against North Korean,
    Iranian, and Syrian facilitators of WMD proliferation; and struck a
    deep blow to North Korea's illicit conduct and ability to abuse the
    international financial system to facilitate that conduct. These
    efforts have required a contribution from all of TFI's components, as
    well as the hard work of other Departments and agencies.
        These accomplishments are only the tip of the iceberg, but they
    demonstrate without question not only that our resources are being put
    to good use, but that the Treasury Department is fulfilling its vitally
    important role to play in deterring and defending against our country's
    greatest national security challenges. Our financial authorities
    complement other national security instruments, providing policymakers
    with a range of options for isolating and pressuring hostile regimes,
    terrorists, and proliferators of weapons of mass destruction. When we
    are confronted with a foreign threat that is not susceptible to
    diplomatic pressure, financial authorities are among the rare tools
    short of military force that we can use to exert leverage.
        I would like to highlight some of TFI's key achievements in greater
    detail.
    Terrorist Finance
        The 9/11 Commission's Public Discourse Project awarded its highest
    grade, an A-, to the U.S. Government's efforts to combat terrorist
    financing. This praise truly belongs to the dozens of intelligence
    analysts, sanctions officers, regional specialists, and regulatory
    experts in the Treasury's Office of Terrorism and Financial
    Intelligence (TFI) who focus on terrorist financing, along with their
    talented colleagues in other agencies--law enforcement agents who
    investigate terrorism cases, Justice Department prosecutors who bring
    terrorist financiers to justice, foreign service officers in embassies
    around the world who seek cooperation from other governments and many
    others from the intelligence community. You will not find a more
    talented and dedicated group of people, with a complete focus on the
    mission.
        Teamwork across agencies has translated into effectiveness. We have
    continued to improve our ability to track key targets and to take the
    most appropriate action against the terrorist target. Sometimes that
    means that the Treasury will take public action, sometimes it involves
    persuading another country to take action, and sometimes we decide to
    continue to quietly collect intelligence to better map out the
    terrorist network. From the formation of TFI, we have been committed to
    that philosophy, resisting the application of metrics to our activities
    that would distort our incentives, for example, by emphasizing the
    number of terrorism designations.
        The meaningful indicators of our success are typically complex and
    not readily quantifiable, such as anecdotal reporting about terrorist
    cells having difficulty raising money or paying salaries or benefits.
    In recent months, we have seen at least one instance of what we look
    for most--a terrorist organization indicating that it cannot pursue
    sophisticated attacks because it lacks adequate funding.
        Typically, though, the information we receive is not as clear. As
    an example, one interesting trend that we have witnessed is a decrease
    in the average amount of transactions that we learn about. Obviously,
    we are only privy to a subset of the total transactions, but this
    observation carries across various financial conduits and terrorist
    organizations and we have no reason to believe that it is
    unrepresentative. Interpreting this indicator is more difficult. It
    could reflect an overall decrease in the amount of money moving to and
    from terrorists. Just as easily, it could indicate that terrorists are
    breaking their transactions out into smaller sums, fearing
    interception. Alternatively, the trend could be an outgrowth of a
    movement by terrorist organizations away from banks towards less formal
    mechanisms, like cash couriers. These couriers may offer concealment,
    but some get caught and some get greedy, and so it is very risky to
    entrust them with large sums of money. Any of these alternatives would
    indicate that our efforts are having an impact and this trend may bear
    out our assessment that terrorists who fear using the banking system do
    not have a ready and reliable alternative for moving large sums of
    money. We will continue to monitor developments, but I hope this
    provides a sense of how complex a task it is to assess the overall
    impact of our efforts to combat terrorist financing.
        In specific areas, we can point to more concrete indicators of
    success. We have made dramatic progress in combating terrorist abuse of
    charities. Prior to 9/11 and even afterwards, terrorists used charities
    as safe and easy ways to raise and move large sums of money. Al Qaeda
    and Hamas, in particular, relied on charities to funnel money from
    wealthier areas to conflict zones with great success. Through a
    combination of law enforcement and regulatory actions against several
    corrupt charities, both at home and abroad, we have taken out key
    organizations and deterred or disrupted others. In tandem, active
    engagement with the legitimate charitable sector has succeeded in
    raising transparency and accountability across the board.
        We have thus far designated more than 40 charities worldwide as
    supporters of terrorism, including several U.S. charities such as the
    Holy Land Foundation, the Global Relief Foundation, the Benevolence
    International Foundation, the Al Haramain Islamic Foundation, and the
    Islamic African/American Relief Agency (IARA). The impact of these
    actions is serious, and sometimes decisive. IARA once provided hundreds
    of thousands of dollars to Osama bin Laden. More recently, IARA country
    offices have experienced increased pressure and its leaders have
    expressed concern about the organization's future.
        Our most recent action targeted KindHearts, a purported charity in
    Ohio that was supporting Hamas. In that instance, we took coordinated
    action with DOJ prosecutors and the FBI, which executed a search
    warrant at the moment that we froze the group's assets. Although we
    generally do not disclose specific blocked asset information,
    KindHearts has stated that over $1 million of its assets were blocked.
    Overall, engagement with the charitable sector combined with
    enforcement actions against bad organizations have radically altered
    the dynamic, leaving dirty charities isolated and imperiled.
        Another important measure of our progress is an increase in the
    number of countries approaching the U.N. Security Council to seek the
    designation of terrorist supporters. This global designation program,
    overseen by the U.N.'s 1267 Committee, is a powerful tool for global
    action against supporters of al Qaeda. It envisages 191 U.N. Member
    States acting as one to isolate al Qaeda's supporters, both physically
    and financially. Increasingly, countries have begun to look to this
    committee, and administrative measures in general, as an effective
    complement to law enforcement action. In 2005, 18 Member States
    submitted names for the Committee's consideration, many for the first
    time, and we will continue to support this process and encourage others
    to do so as well.
        In other arenas of this fight, however, we are not where we need to
    be. State sponsors of terrorism, like Iran and Syria, present a vexing
    problem, providing not only money and safe haven to terrorists, but
    also a financial infrastructure through which terrorists can move,
    store, and launder their funds. While this is a daunting challenge, I
    believe that the Treasury Department's tools, combined with cooperation
    from responsible financial institutions, can make a difference. In the
    past year, for example, we have designated top Syrian officials,
    including the then-interior minister Ghazi Kanaan and the head of
    Syrian Military Intelligence, Assaf Shawkat, in part for their support
    to terrorist organizations. Also, on March 9, we issued a final rule
    under Section 311 of the PATRIOT Act confirming that the Commercial
    Bank of Syria (CBS) is a ``primary money laundering concern'' and
    forbidding U.S. financial institutions from holding correspondent
    accounts for CBS. Among our reasons for that action was the risk of
    terrorist financing posed by a significant bank owned and controlled by
    an active and defiant state sponsor of terror like Syria.
        We have ample reason to believe that responsible financial
    institutions around the world pay close attention to such actions and
    other similar indicators and adjust their business activities
    accordingly, even if they are not required to do so. A recent example
    of interest was the announcement by the international bank UBS that it
    intended to cut off all business with Iran and Syria. Other financial
    institutions are similarly reviewing their business arrangements and
    taking special precautions to ensure that they do not permit terrorist
    financiers or WMD proliferators--which we are increasingly able to
    identify and combat using a new authority--access to the global
    financial system.
    WMD Proliferation
        The exposure of the WMD proliferation network headed by A.Q. Khan--
    father of Pakistan's nuclear bomb and, more recently, nuclear
    technology dealer to Libya, Iran, and North Korea--provided the world
    with a window into one of the most frightening scenarios that we face.
    The U.S. Government is doing everything in its power deter, disrupt,
    and prevent the spread of weapons of mass destruction and ensure that
    they do not fall into the hands of terrorists. Treasury plays a key
    role in this effort.
        Proliferators, like terrorists, require a substantial support
    network. By cutting off the support lines of that network, we can
    isolate individual proliferators, paint a clearer picture of how, and
    with whom, they operate, and erode the infrastructure that supports
    them. In June 2005, the President issued Executive Order 13382, which
    allows us to do just that.
        This Executive Order authorizes the Treasury and State Departments
    to target key nodes of WMD proliferation networks, including their
    suppliers and financiers. A designation under this Executive Order cuts
    the target off from access to the U.S. financial and commercial systems
    and puts the international community on notice about the threat it
    poses. Based on evidentiary packages prepared primarily by OFAC, the
    President initially designated a total of eight entities in North
    Korea, Iran, and Syria. Continuing investigations by OFAC resulted in
    the subsequent designation of eight additional North Korean, and two
    additional Iranian, entities. And, just last week, Treasury designated
    two more proliferators, Kohas AG and its president, Jakob Steiger.
    Kohas AG, a Swiss company, acts as a technology broker in Europe for
    the North Korean military and has procured goods with weapons-related
    applications. Nearly half of the company's shares are owned by a
    subsidiary of Korea Ryonbong General Corporation, a previously-
    designated North Korean entity that has been a focus of U.S. and allied
    efforts to stop the spread of controlled materials and weapons-related
    goods, particularly ballistic missiles.
        OFAC's efforts to prepare additional designation packages--with the
    support of the Office of Intelligence and Analysis--are ongoing and
    will continue throughout fiscal years 2006 and 2007. In fact, one major
    OFAC initiative for 2007, which I will discuss shortly, relates
    directly to the WMD program.
        This new authority provides a powerful tool to combat the financial
    underpinnings of WMD proliferation and also underscores the President's
    commitment to work with our international partners to combat this
    threat. We hope our program can provide a model for other governments
    to draw upon as they develop their own laws to stem the flow of
    financial and other support for proliferation activities, as called for
    in U.N. Security Council Resolution 1540 and by the G-8 at Gleneagles.
        The Treasury and State Departments have been engaged in aggressive
    international outreach in order to promote this important concept.
    Assistant Secretary Pat O'Brien, Deputy Assistant Secretary Daniel
    Glaser, and I have met with our counterparts in a number of countries
    in Europe, Asia, and the Middle East to urge them to ensure that U.S.-
    designated proliferators are not able to do business in their countries
    and to develop their own 13382-like authorities.
        Although our WMD program is in its early stages, and while I am
    limited in what I can say in this public forum, I am pleased to be able
    to assure you that, through cooperation with both governments and the
    private sector, we are already seeing an impact on our targets. Indeed,
    this program has significantly enhanced the U.S. Government's overall
    counterproliferation efforts.
    Section 311 Designation of Banco Delta Asia SARL
        In September 2005, not long after the President signed this new WMD
    Executive Order, the Treasury Department used a separate authority--
    Section 311 of the USA PATRIOT Act (PATRIOT Act)--to list Banco Delta
    Asia SARL (BDA) as a ``primary money laundering concern.'' This
    regulatory action against a bank facilitating a range of North Korean
    illicit activities has dealt a blow to Pyongyang's ability to engage in
    illicit conduct and obtain financial services to facilitate that
    conduct. Along with our offensive targeting of several entities under
    E.O. 13382 for supporting North Korea's WMD and missile proliferation-
    related activities, it has frustrated North Korea's efforts to conduct
    proliferation-related transactions.
        Section 311 authorizes the Secretary of the Treasury--in
    consultation with the Departments of Justice and State and appropriate
    Federal financial regulators--to find that reasonable grounds exist for
    concluding that a foreign jurisdiction, institution, class of
    transactions, or type of account is of ``primary money laundering
    concern'' and to require U.S. financial institutions to take certain
    ``special measures'' against those jurisdictions, institutions,
    accounts, or transactions. Potential measures include requiring U.S.
    financial institutions to terminate correspondent relationships with
    the designated entity. Such a defensive measure effectively cuts that
    entity off from the U.S. financial system. It has a profound effect,
    not only in insulating the U.S. financial system from abuse, but also
    in notifying financial institutions and jurisdictions globally of an
    illicit finance risk.
        The success of the BDA action offers an instructive case study of
    the impact of this authority. BDA provided financial services for over
    20 years to North Korean government agencies and front companies, some
    of which were engaged in illicit activities, including currency
    counterfeiting, narcotics trafficking, production and distribution of
    counterfeit cigarettes and pharmaceuticals, and the laundering of the
    associated proceeds. We also know that North Korean entities engaged in
    WMD proliferation, including Tanchon Bank--the primary financial
    facilitator of North Korea's ballistic missile program--held accounts
    at BDA. BDA tailored its services to the needs and demands of North
    Korean entities with little oversight or control. In fact, bank
    officials intentionally negotiated a lower standard of due diligence
    with regard to the financial activities of these clients.
      --BDA helped North Korean agents conduct surreptitious, multimillion
            dollar cash deposits and withdrawals without question for the
            basis of those transactions.
      --BDA knowingly accepted counterfeit currency from North Korean
            companies. In that regard, it is worth noting that the U.S.
            Secret Service has been investigating North Korean
            counterfeiting since 1989, and, over the past 16 years, has
            seized more than $48 million in high quality U.S. currency, or
            ``supernotes.''
      --A well-known North Korean front company that has been a client of
            BDA for over a decade has conducted numerous illegal
            activities, including distributing counterfeit currency and
            smuggling counterfeit tobacco products. In addition, the front
            company has also long been suspected of being involved in
            international drug trafficking.
        Treasury's ongoing investigation of BDA has not only confirmed our
    original concerns about BDA's complicity in facilitating this type of
    conduct, but has shed additional light on the wide spectrum of North
    Korea's corrupt and dangerous activities, as well as its vast illicit
    financial network.
        As a result of the 311 action against BDA and TFI's subsequent and
    continuing international outreach efforts, a number of responsible
    jurisdictions and institutions have taken proactive steps to ensure
    that North Korean entities engaged in illicit conduct are not receiving
    financial services. Press reports indicate that some two dozen
    financial institutions across the globe have cut back or terminated
    their financial dealings with North Korea, constricting the flow of
    dirty cash into Kim Jong Il's regime.
        Treasury's efforts with respect to Banco Delta Asia, specifically,
    and combating North Korea's illicit activities, more generally, are
    ongoing. The Internal Revenue Service--Criminal Investigation Division
    is leading an investigation to exploit underlying North Korean account
    information at Banco Delta Asia provided by the Macau authorities. This
    investigation will allow the United States to gain an even greater
    understanding of the illicit activities highlighted in our Section 311
    designation, and to uncover additional leads regarding DPRK entities of
    concern. Additionally, TFI officials continue international outreach
    efforts to raise awareness of North Korea's illicit conduct, explain
    the actions that Treasury has taken, and encourage governments and
    institutions to not to do business with individuals and entities
    engaged in illicit conduct. By all accounts, that outreach is working.

                  OVERVIEW OF THE FISCAL YEAR 2007 TFI REQUEST

        The 2007 request of $135.2 million for TFI, including $89.8 million
    for the Financial Crimes Enforcement Network, provides critical funding
    to expand TFI's ability to combat terrorist financing and other key
    national security challenges. It will allow us to continue and build
    upon these past achievements and current efforts. I know the members of
    the subcommittee are aware of this request in detail, so I will just
    touch on a few important highlights of new initiatives.
    Office of Intelligence and Analysis
        TFI's Office of Intelligence and Analysis (OIA) was created to
    focus expert analytical resources on the financial and other support
    networks of terrorists, WMD proliferators, and other key national
    security threats. Over the past year, OIA has assumed an increasingly
    important role in the Treasury's efforts to combat key national
    security threats in Iran, Syria, and North Korea. OIA's top strategic
    priority is to provide policymakers with relevant intelligence and
    expert analysis to support policy formulation and carry out the
    Treasury's role in the war on terror. Other OIA strategic priorities
    include providing intelligence support to senior Treasury officials on
    the full range of economic and political issues and communicating with
    other members of the Intelligence Community.
        As Assistant Secretary Janice Gardner will describe shortly, the
    2007 request provides funding for OIA to continue its efforts to build
    Treasury's intelligence capabilities by improving its key
    infrastructure and adding to its analytic breadth and expertise.
    Office of Foreign Assets Control
        The Office of Foreign Assets Control (OFAC) administers and
    enforces economic and trade sanctions based on U.S. foreign policy and
    national security goals against targeted foreign countries, terrorists,
    international narcotics traffickers, and those engaged in activities
    related to the proliferation of weapons of mass destruction. Since
    receiving expanded designation authority in 2001, the United States has
    designated 428 terrorist-related individuals and entities; 320 of those
    designations have been carried out in coordination with our allies and
    designated at the United Nations. The fiscal year 2007 budget provides
    additional resources for OFAC to monitor and update existing
    designations and track the development of new support structures and
    funding sources. It includes:
      --Ten additional positions to continue to implement and administer
            the new Executive Order 13382, combating the proliferation of
            weapons of mass destruction.
      --Fifteen additional positions to monitor and update existing
            terrorist designations. This is critical given that Specially
            Designated Global Terrorists and their support networks
            continuously seek new ways of evading U.S. and international
            sanctions by changing the names and locations of front
            companies and altering their financing methods.
    Office of Terrorist Financing and Financial Crime
        As the policy development and outreach office for TFI, the Office
    of Terrorist Financing and Financial Crime (TFFC) collaborates with the
    other elements of TFI to develop policy and initiatives for combating
    money laundering, terrorist financing, WMD proliferation, and other
    criminal activities both at home and abroad. TFFC works across the law
    enforcement, regulatory and intelligence communities and with the
    private sector and its counterparts abroad to identify and address the
    threats presented by all forms of illicit finance to the international
    financial system. TFFC advances this mission by promoting the
    transparency of the financial system and by developing and facilitating
    the global implementation of targeted financial authorities to identify
    and intercept those illicit actors that operate within the financial
    system. TFFC's efforts focus on:
      --developing and facilitating the implementation of global anti-money
            laundering and counter-terrorist financing standards, primarily
            by working with and through the Financial Action Task Force the
            various regional bodies, including the IMF and World Bank and
            each of the regional development banks;
      --promoting the development of effective targeted financial sanction
            regimes and the use of other targeted financial authorities
            through the G7, G20, FATF, United Nations, European Union, and
            bilaterally with countries of strategic importance;
      --addressing financing mechanisms of particular concern by developing
            AML/CFT protective measures, initiatives, and best practices in
            vulnerable sectors such as charities, alternative value
            transfer systems and emerging payment systems; and
      --conducting direct outreach to the domestic and international
            private sector to facilitate and improve development and
            implementation of sound AML/CFT controls.
        In all of these areas, TFFC relies on and works closely with other
    elements of TFI, the Treasury Department, the interagency and
    international communities to effectively combat the threats that
    illicit finance presents to the international financial system.
    Recently, for example, TFFC worked closely with 16 Federal bureaus and
    offices from across the law enforcement, regulatory, and policy
    communities to produce the U.S. Government's first-ever Money
    Laundering Threat Assessment. This working group pulled together arrest
    and forfeiture statistics, case studies, regulatory filings, private
    and government reports, and field observations. The report analyzes
    more than a dozen money laundering methods and serves as a first step
    in a government-wide process to craft strategic ways to counteract the
    vulnerabilities identified.
        The fiscal year 2007 request continues the administration's support
    of TFFC's important efforts.
    Treasury Overseas Presence
        Treasury attaches serve as the U.S. Treasury's representatives in
    key economies overseas. Because of their technical expertise, Treasury
    attaches enjoy unique access to foreign Ministries of Finance and
    Central Banks. This access provides the U.S. Government with a direct
    channel to key decisionmakers on economic policy issues, including
    foreign exchange policy and financial service regulatory policies.
    Working in tandem with TFI and Treasury's Office of International
    Affairs, Treasury attaches will be working to prevent the abuse of the
    international financial system for terrorist finance, money laundering,
    or other illicit purposes.
      --Treasury proposes to increase its overseas presence from 5 attaches
            to 18 attaches in fiscal year 2007.
    Financial Crimes Enforcement Network
        TFI's Financial Crimes Enforcement Network (FinCEN) helps to
    safeguard the U.S. financial system from the abuses of financial crime,
    including terrorist financing, money laundering, and other illicit
    activity. This is accomplished primarily through the Bank Secrecy Act,
    which requires financial institutions to report financial transactions,
    such as suspicious activities that may be indicative of financial
    crimes. FinCEN also supports law enforcement, intelligence, and
    regulatory agencies through sharing and analysis of financial
    intelligence, and building global cooperation with financial
    intelligence units (FIUs) in other countries. The fiscal year 2007
    request provides additional resources to FinCEN to streamline data
    processing and enhance its e-filing capabilities to increase the ease
    of compliance with regulations and improve its abilities to track
    users' needs. It includes:
      --Enhancing components of the BSA Direct Umbrella System, including
            electronic filing and secure access components. Although FinCEN
            has entered a stop work order with respect to development of
            the data storage and retrieval component of the BSA Direct
            system in order to permit it to assess delays in deploying this
            component, both the electronic filing component and secure
            access components are presently operational and need to be
            upgraded to allow direct input of the BSA filings into the
            collection system and meet expanded user base.
      --Development funding for FinCEN's Cross-Border Wire Transfer System
            Initiative. The authorizing language (Section 6302 of the
            Intelligence Reform Act of 2004 (S. 2845 Public Law 108-458))
            presents the Bureau with two tasks: (1) a feasibility study to
            be completed as soon as practicable; and (2) the implementation
            of enabling regulations and a technological system for
            receiving, storing, analyzing, and disseminating the reports,
            to be completed by December 2007. The feasibility study will
            address whether it is possible to complete the development and
            implementation of the system by the statutory deadline of
            December 2007. We anticipate delivery of the study to the
            Secretary of the Treasury by late spring 2006.

                                   CONCLUSION

        Mr. Chairman, the Treasury Department--working closely with other
    Departments and agencies across the U.S. Government--is playing a key
    role in deterring and defending against the greatest threats to our
    security. Indeed, we have achieved some important successes in our 2-
    year history. I look forward to working closely with you, other members
    of the committee, and your staff to ensure that TFI has the resources
    it needs in fiscal year 2007 to build upon that success. Together we
    can work to maximize the Treasury Department's ability to protect the
    American people.
        Thank you again for the opportunity to testify today.

        Senator Bond. Thank you, Mr. Levey.

                          STATEMENT OF JANICE GARDNER

        Ms. Gardner. Good morning, Chairman Bond and Ranking Member
    Murray. I thank you for the opportunity to testify today on the
    budget for the Office of Intelligence and Analysis.
        I would like to request a copy of our report for fiscal
    year 2006 to 2008, our Strategic Direction, to be entered into
    the record. We produced this report for your committee in
    response to the conference report accompanying the fiscal year
    2006 appropriations bill. The report defines our mission,
    establishes strategic objectives, and outlines OIA's priorities
    and direction for the next several years.
        Senator Bond. Without objection.
        [The information follows:]

        Ms. Gardner. In addition, it describes the role that OIA
    plays in the Treasury Department's intelligence activities, and
    expands on OIA's efforts to better integrate the office with
    the rest of the Intelligence Community.
        As you know, OIA was established by the intelligence
    authorization bill in 2004, and prior to the creation of OIA,
    Treasury did not have an in-house dedicated intelligence
    analytical element. Our mission is to support the formulation
    of policy and execution of Treasury's authorities, and it is
    twofold. One is to support TFI in providing expert analysis of
    intelligence on financial and other support networks for
    terrorist groups, proliferators, and other key national
    security threats. But also to provide timely, accurate and
    focused intelligence on the full range of economic, political,
    and security issues for the Secretary, the Deputy Secretary,
    and the Office of International Affairs.
        While we are still a fairly new entity, we have taken a
    number of significant steps in 2005 toward building the robust
    intelligence and analytical program necessary to fulfill our
    mission. We are trying to transform Treasury from a passive
    consumer of analytical and intelligence products, to becoming a
    full member of the Intelligence Community, and we are building
    a foundation to become a true center of expertise on material
    support to terrorist organizations.
        The funding allocated by Congress for fiscal year 2006 is
    allowing us to make significant additional improvements in a
    number of areas. For example, we have completed a research and
    production plan for fiscal year 2006 to help guide our
    activities during the upcoming year. The plan was coordinated
    with our primary customers including within TFI, but also the
    entire Intelligence Community and the National Security Council
    to ensure that our priorities are aligned with the
    administration.
        In particular, we are trying to improve our understanding
    of insurgency financing in fiscal year 2006 primarily through
    the Baghdad-based Iraq Threat Finance Cell that you had
    mentioned, Mr. Chairman, for which Treasury serves as the co-
    lead with CENTCOM at DOD. ITFC was established to enhance the
    collection, analysis, and dissemination of intelligence to
    combat the Iraqi insurgency, and that kind of intelligence is
    really critical to support and strengthen U.S. and Iraqi
    coalition efforts to disrupt and eliminate financial and other
    material support to the insurgency. In fact, the Treasury's
    presence in Iraq on ITFC is already paying some dividends. More
    and better detailed information on the insurgency financing
    issues is becoming available. In addition, the financial
    intelligence analysts have provided great support to the
    military in identifying trends and patterns in insurgency
    financing in the context of a cash-based economy like Iraq.
        The funding request for fiscal year 2007 will enable OIA to
    continue its efforts to build our intelligence capabilities by
    improving key infrastructure and adding to our analytical
    breadth and depth on terrorist financing and the financial
    underpinnings of other national security threats.
        Let me just briefly mention the initiatives that we have.
    The first one was one that you had mentioned, the Treasury
    Foreign Intelligence Network, which is the sole source of top
    secret information into the Treasury Department. When TFI was
    created, our counterterrorism-related responsibilities were
    expanded dramatically, and the current system has not been
    modified or updated to keep pace with changes in either
    intelligence user or technological requirements. The operating
    system is no longer supported, and our frequent crashes have
    been preventing senior Treasury officials from receiving
    intelligence in a timely manner. What we will be doing in
    response to some of your concerns on the IT management, we have
    tried to leverage the expertise of the Intelligence Community,
    so they are helping us so that we are not reinventing the
    wheel, and we are taking off-the-shelf software and hardware.
    We are also using the CIA to help do the project management for
    us, so we have two levels of oversight. We have asked the DNI's
    office, the Director of National Intelligence, to also take a
    look. They have a new CIO, and they are coming also to take a
    look at us to make sure that we are on the right track. So we
    are ensuring that we do have the proper project management
    discipline in place that the Secretary has mentioned.
        In addition to TFIN, we have an initiative for All Source
    Analysis Capability. As Under Secretary Levey mentioned, over
    the past year as OIA has grown, policy makers both at Treasury
    and at the White House have become more aware of Treasury's
    capabilities, and OIA has increasingly been tasked with
    addressing the most pressing national security issues. Given
    our small size, we have gone from zero analysts in the
    beginning of fiscal year 2005, to 53 analysts, and will
    hopefully have 15 more. Bringing these new analysts on board as
    quickly as possible is essential to our continued success, and
    these additional positions will allow us to engage in increased
    analytical exchanges with other national security and
    Intelligence Community agencies, and this also includes our
    effort to sustain the effort in Baghdad.

                               PREPARED STATEMENT

        Finally, one more initiative that is important is our
    secure space. As you know, OFAC also is going to be growing in
    terms of its terrorism and WMD designation programs, and
    together we are going to try to make sure that we have the
    secure space available to house these new analysts.
        Thank you very much for your continued support, and for
    your comments this morning.
        [The statement follows:]

                      Prepared Statement of Janice Gardner

        Chairman Bond, Ranking Member Murray, and members of the
    subcommittee, I thank you for the opportunity to testify today on the
    Office of Intelligence and Analysis' 2007 budget request. The
    Department of the Treasury greatly appreciates the committee's support
    to this point for our efforts to establish and build the Office of
    Intelligence and Analysis (OIA).
        I request that a copy of OIA's report on its fiscal year 2006-2008
    strategic direction be entered into the record. We produced this report
    for your committee in response to the conference report accompanying
    the fiscal year 2006 appropriations bill. OIA was required to submit a
    report that detailed ``how OIA will implement the purpose of the Office
    as intended by the Congress.'' OIA's report defines its mission,
    establishes strategic objectives, and outlines OIA's priorities and
    direction for the next several years. In addition, it describes the
    role that OIA will play in the Treasury Department's intelligence
    activities, and expands on OIA's plans to better integrate the office
    into the Intelligence Community (IC). We hope that the committee
    members will find the report to be helpful as they consider OIA's 2007
    budget request.
        I will discuss a number of the themes covered in the OIA report in
    my prepared remarks today. I will provide some background on our
    office, provide an overview of the significant progress we made in
    fiscal year 2005, update you on where we stand with our fiscal year
    2006 efforts, and explain how we would plan to use the funds we have
    requested in fiscal year 2007.

                               BACKGROUND ON OIA

        OIA was established by the Intelligence Authorization Act for
    fiscal year 2004. The Act specifies that OIA shall be responsible for
    the receipt, analysis, collation, and dissemination of foreign
    intelligence and foreign counterintelligence information related to the
    operation and responsibilities of the Department of the Treasury. Prior
    to the creation of OIA, Treasury did not have an in-house intelligence
    analytic element.
        On April 28, 2004, Secretary of the Treasury John Snow established
    the Office of Terrorism and Financial Intelligence (TFI) by Treasury
    Order, which placed OIA within TFI. As the Assistant Secretary, I
    report directly to Under Secretary Levey, who heads TFI.
        OIA's mission is to support the formulation of policy and execution
    of Treasury authorities by:
      --Producing expert analysis of intelligence on financial and other
            support networks for terrorist groups, proliferators, and other
            key national security threats, and
      --Providing timely, accurate, and focused intelligence on the full
            range of economic, political, and security issues.

                    SIGNIFICANT PROGRESS IN FISCAL YEAR 2005

        While OIA is still a fairly new entity, it took a number of
    significant steps in 2005 towards building the robust intelligence and
    analytic program necessary to fulfill its critical mission. Moving the
    OFAC Foreign Terrorist Division (FTD) analysts to OIA was instrumental
    in transforming Treasury from a passive consumer of analytic and
    intelligence products to a full contributing member of the IC. OIA has
    been using the expertise of these analysts--as well as that of the new
    hires--as a foundation for a true center of expertise on material
    support to terrorist organizations. As a result, OIA has considerably
    improved its analytic coverage and capability in priority areas, such
    as Iraqi insurgency funding.
        OIA's top priority, as we mentioned in our report to your
    committee, is to help translate intelligence into policy. OIA analysts
    conduct ``all source'' analysis, regularly reviewing a broad range of
    information from the IC, including human and signals intelligence
    reports, other agencies' analytic assessments, as well as open source
    information. OIA's role in this regard is to then ensure that the
    current intelligence information and analysis are incorporated into all
    aspects of policy deliberations. OIA took several steps in 2005 to
    address this objective.
      --Perhaps most significantly, OIA initiated weekly targeting
            sessions, which are led by Under Secretary Levey and include
            officials from OIA, OFAC, and FinCEN as well. At these
            sessions, potential targets are presented and discussed. The
            participants assess the full range of potential Treasury
            actions, including designation, and then assign follow up
            action.
      --OIA also began producing analytic papers for Under Secretary Levey,
            primarily on nongovernmental organizations (NGOs), which may be
            providing support to terrorists. Under Secretary Levey has
            passed a number of these papers to the foreign governments
            where these NGOs are based, asking them to take appropriate
            action. He has then followed up to ensure that the governments
            are taking the necessary steps to put a halt to this activity.
        In addition to these diplomatic papers, in 2005 Treasury's
    intelligence office prepared a number of other all source intelligence
    analytic products on terrorist financing and other national security
    threats. In fact, OIA has disseminated over 50 cables to the IC over
    the past year. OIA analysts also participated in the drafting and
    coordination on a variety of IC analytic products. These include:
      --National Intelligence Estimates;
      --CIA studies; and
      --Articles for senior administration officials, such as the Senior
            Executive Intelligence Brief.
        There were two key reasons why OIA was able to improve its
    capability to produce all source intelligence analytic products. First,
    Treasury--through OIA--is becoming far better integrated into the IC
    than it has been in the past. In 2005, OIA hired its first full time
    Requirements Officer, who has played a key role in bringing OIA into
    the IC. This officer is sending in specific questions and inquiries on
    behalf of all Treasury entities, including OFAC, to the IC. In these
    ``requirements submissions'' Treasury includes comprehensive background
    information as well as a detailed statement of Treasury's intelligence
    gaps to help focus the IC on Treasury's needs. In response to these
    detailed requirements, Treasury has received a greatly increased level
    of tailored support from the IC.
        Second, OIA has also built its analytic expertise and improved its
    access to intelligence information by establishing detail arrangements
    with various intelligence, law enforcement and military agencies. These
    detail assignments include:
      --Military.--OIA has analysts detailed to 3 of the military
            commands--CENTCOM, PACOM, and EUCOM--and a military officer
            from CENTCOM is assigned to OIA. OIA also has an established
            liaison relationship with SOUTCOM. SOCOM is also preparing to
            assign an officer to OIA.
      --Law Enforcement.--The FBI has detailed an intelligence analyst to
            OIA.
      --Intelligence.--A representative from NSA is assigned to OIA to
            provide support to senior Treasury officials.
        In 2005, OIA also began to build its analytic expertise and
    coverage in another key area--proliferation financing. The Treasury
    Department's ability to target proliferators of weapons of mass
    destruction (WMD) was enhanced in June, 2005 with the issuance of
    Executive Order 13382. This order applies the same tools Treasury has
    used to successfully block the assets of terrorist supporters to those
    who aid in the spread of WMD. OIA analysts were integrally involved in
    supporting OFAC in developing the designation targets listed in the
    annex of the Executive Order, and continue to assist OFAC investigators
    in identifying intelligence reporting that may be useful to support
    future designations.

            BUILDING ANALYTIC COVERAGE AND DEPTH IN FISCAL YEAR 2006

        The funding allocated by the Congress for fiscal year 2006 is
    allowing OIA to make significant additional improvements in a number of
    areas this year. For example, the additional personnel and the
    infrastructure improvements funded in fiscal year 2006 are enabling OIA
    to increase its analytic coverage and to further develop its expertise
    on the financial aspects of key threats to U.S. national security,
    including terrorism and WMD proliferation.
        In fiscal year 2006, OIA analysts will be completing strategic
    research papers on high priority terrorist and proliferation financing
    topics. OIA has completed a research and production plan for fiscal
    year 2006 to help guide OIA's activities during the upcoming year. The
    plan was coordinated with OIA's primary customers, including TFFC,
    OFAC, and FinCEN, and is consistent with IC, NSC, and Treasury
    priorities.
      --Terrorist Financing.--Over the past several years, the terrorist
            threat has become far more decentralized in nature, and many
            terrorist groups affiliated with al Qaida increasingly pose a
            serious threat to U.S. national security. In fiscal year 2006,
            OIA will continue to develop its analytic expertise and expand
            its analytic coverage on the financial and other support
            networks of the various terrorist groups and networks bent on
            attacking the United States and its allies.
      --Insurgency Financing.--OIA will attempt to improve its
            understanding of the insurgency financing in fiscal year 2006,
            primarily through the Baghdad-based Iraq Threat Finance Cell
            (ITFC) for which Treasury serves as the co-lead with Department
            of Defense. ITFC was established to enhance the collection,
            analysis and dissemination of intelligence to combat the Iraqi
            insurgency. Such intelligence is critical to support and
            strengthen U.S., Iraqi and Coalition efforts to disrupt and
            eliminate financial and other material support to the
            insurgency.
        --In fact, the Treasury presence in Iraq on the ITFC is already
                paying dividends. More and better detailed information on
                the insurgency finance issues is becoming available. In
                addition, the financial intelligence analysts have provided
                great support to the military in identifying trends and
                patterns in insurgency financing in the context of a cash-
                based economy.
      --Rogue Regimes/Proliferation Financing.--Over the past year, OIA has
            assumed an increasingly important role in Treasury's effort to
            combat national security threats, including rogues regimes
            involved in WMD proliferation, such as Iran, Syria, and North
            Korea. In fiscal year 2006, OIA is continuing to build on its
            nascent effort in this critical area.
        To accommodate its rapid growth, and to achieve the ambitious goals
    that have been laid out for OIA, we have developed a hiring strategy to
    ensure that we are recruiting a high quality work force with the
    appropriate skill mix. OIA has been taking advantage of a number of
    different recruiting fora and using a variety of Federal recruiting
    programs, such as the Presidential Management Fellows Program. In terms
    of our analytic hires, OIA is hiring all source analysts with a variety
    of experience, ranging from junior analysts directly out of graduate
    school to senior analysts with years of relevant experience. OIA is
    also targeting analysts with prior IC and financial sector experience,
    as well as relevant regional/area expertise.
        OIA is also targeting economists in its fiscal year 2006 hiring
    efforts. The Treasury Department has made significant strides over the
    past several years designating terrorism--and more recently
    proliferation--targets. Developing a better assessment of the economic
    impact of the sanctions is essential in determining whether Treasury is
    focusing on the appropriate types of targets. This kind of analysis is
    extremely valuable not only for Treasury policymakers, but for
    policymakers elsewhere in the government as well. It can help shed
    light on what policy tools the U.S. Government should use--and are
    likely to be effective--against particular countries or targets.
        In sum, we believe that we are on track to succeed with our rapid
    expansion, and that we will make--and are already making--major strides
    in fiscal year 2006 to continue transforming OIA into a center of
    analytic expertise on the issue of financial and other support networks
    for terrorist, proliferators, and other key national security threats.

                        FISCAL YEAR 2007 BUDGET REQUEST

        The funding request for fiscal year 2007 would enable OIA to
    continue its efforts to build Treasury's intelligence capabilities by
    improving its key infrastructure and adding to its analytic breadth and
    expertise.
        Our key initiatives in our fiscal year 2007 request include:
        TFIN.--The modernization of Treasury's Foreign Intelligence Network
    (TFIN), the sole information technology system in the Department
    authorized for Top Secret information. With the creation of Treasury's
    Office of Terrorism and Financial Intelligence (TFI) and OIA, the
    Department's counterterrorism-related responsibilities were expanded
    dramatically. A new information technology architecture was required to
    support this broader, Congressionally-mandated mission. The current
    system is unstable and has not been modified or upgraded to keep pace
    with the changes in intelligence, user, or technological requirements.
    The operating system is no longer supported and the entire system is at
    risk of catastrophic failure. The frequent system crashes have been
    preventing senior Treasury officials from receiving intelligence
    reporting from other agencies in a timely manner. In addition, the
    system's performance issues have been hampering the ability of
    Treasury's intelligence analysts to perform their jobs.
        Ultimately, the upgraded TFIN system will allow Treasury to
    interact seamlessly within the IC and provide Treasury analysts with
    the common software tools used throughout the Community. It will allow
    timely and efficient collaboration with other intelligence analysts in
    the IC, other government departments/agencies, and the Department of
    Defense.
        ITFC.--Our request will allow Treasury to sustain its co-lead role
    in the Baghdad-based ITFC. Two Treasury officers have already been
    assigned temporarily to Iraq, where they conducted the initial
    assessment or ``Phase I''. ``Phase II,'' which calls for the assignment
    of Treasury personnel to Iraq on an ongoing basis to bolster the all-
    source intelligence analysis on the insurgency, is now in progress.
    Improving the U.S. Government's understanding of the insurgency funding
    is a key goal for our office, and I as mentioned earlier, this
    interagency initiative is already paying important dividends.
        All Source Analysis Capability.--The additional analysts OIA is
    requesting in fiscal year 2007 will allow OIA and Treasury to further
    increase the depth and breadth of its analytic coverage and expertise
    in priority areas, such as terrorist financing, and proliferation
    financing. Over the past year, as OIA has grown and policymakers--both
    at Treasury, in the White House and elsewhere--have become more aware
    of its capabilities, OIA has been increasingly tasked with addressing
    the most pressing national security issues. Given its small size and
    increasing importance, bringing new analysts on board as quickly as
    possible is essential for OIA's continued success. These additional
    positions would also allow OIA to engage in increased analyst exchanges
    with other national security and IC agencies, in accordance with the
    Intelligence Reform and Terrorist Prevention Act of 2004.
        Secure Space.--As the committee is aware, in addition to the
    proposed OIA growth, the Office of Foreign Assets Control (OFAC) is
    expanding its terrorism and WMD designations programs. Both OIA and
    OFAC's expansion is necessary, in part, as a result of the June 2005
    Executive Order, giving the Treasury Department additional authority to
    target proliferators of WMD. The highly classified work of these
    expanding units can only be accomplished in specially constructed
    secure areas, known as Sensitive Compartmented Information Facilities
    (SCIFs). Once the fiscal year 2006 hires have been assigned their work
    spaces in existing SCIFs, there will be no available SCIF space
    remaining in the Department. Both OIA and OFAC are requesting
    additional positions in fiscal year 2007; the Secure Space Initiative
    is directly linked to that request. Given the lack of remaining
    available SCIF space in the Treasury Department, we will have to build
    additional SCIF space to accommodate any fiscal year 2007 OIA and OFAC
    hires. Adequate security infrastructure is critical to protecting the
    intelligence and national security functions of the Department.
    Approval of this initiative will ensure Treasury personnel have the
    required secure workspaces to support the mission of disrupting and
    dismantling the financial infrastructure of the terrorists and
    isolating their support networks.

                                   CONCLUSION

        Thanks again for your continued support for OIA and TFI. We
    appreciate the confidence that your committee has shown in our office
    to this point. We believe that the resources that we requested in
    fiscal year 2007 will enable OIA to take the next steps in building the
    type of robust intelligence capability that Congress envisioned when
    you created our office.
        That concludes my prepared remarks. I would be happy to answer any
    questions.

                                TFI AUTHORITIES

        Senator Bond. Thank you very much, Ms. Gardner. Mr. Levey,
    I am delighted to hear that our allies are now saying that we
    ought to hold financiers to account. You may know I am from
    Missouri which is called the ``Show Me'' State. A lot of times
    I keep thinking about that old country music song, ``I Want a
    Lot Less Talk and a Whole Lot More Action.'' Would you please
    tell us when you start seeing the action? Words are nice.
        Let me ask you to explain in a little more detail how TFI
    has had an impact on combatting terrorist financing and what
    new powers you have that Treasury could not do before TFI was
    created, and what additional resources you may need from this
    committee or from the Intelligence Committee.
        Mr. Levey. I think maybe we should do that by discussing
    the initiatives that we have asked for, in addition to the ones
    that Assistant Secretary Gardner laid out for our Intelligence
    Office which are critical in order to answer the increased
    demand. I want to highlight one thing that she said, which is
    that success breeds demand in this. People are seeing that the
    actions that we take in terms of looking at the financial
    system and trying to both make it impervious to illicit
    activity on the one hand, but also to target illicit activity
    within it on the other to identify the bad actors and call them
    out and get financial institutions to say they are going to
    stop doing business with them. People are seeing that that is
    really valuable, and so they are asking us to do more and more
    on different important issues, both with respect to WMD
    proliferation and terrorism.
        In order to do that, one of the most important things we
    need is the intelligence capability to support it. We need to
    be able to come up with the analysis, identify the right
    targets, know the right networks, so that we can exercise our
    authorities wisely. This is, I think, attributable to the fact
    that we have this Intelligence Office that Assistant Secretary
    Gardner leads and that she has been building, but we need to
    continue to build it, both in terms of personnel and in terms
    of the infrastructure to support it which is the TFIN network
    and secure space.
        In addition, we need to be able to continue to build up
    OFAC to follow through on the tactical actions, and so our 2007
    budget request includes additional analysts for WMD
    proliferation and terrorism. On the terrorism issue in
    particular, what those are for, Mr. Chairman, is to follow up
    on entities that are already designated, because one thing we
    know, as you indicated in your opening statement, is that these
    terrorist entities are very capable and flexible, and we have
    to be flexible, too. So once we designate someone or an entity,
    we need to follow up and see how that network is reformulating
    itself so that we continue to follow up. If we do not do that,
    then our designation is not nearly as effective. So one of the
    things we have asked for is support for that.

                          BANCO DELTA ASIA DESIGNATION

        Senator Bond. I think you asked for more time to explain
    how the impact of the Banco Delta Asia expands. Would you tell
    us about the follow up on that as well?
        Mr. Levey. I would love to be able to do that. In fact, we
    have prepared a diagram. I don't know if you can see that. Do
    we need to move it closer to you, Senator Murray or Mr.
    Chairman?
        Senator Bond. You don't happen to have it on a little handy
    cheat sheet, do you?
        Mr. Levey. Yes, we do.
        Senator Bond. That might be a lot easier.
        Mr. Levey. What this chart shows is how our office works
    when it works well, and I think this not only a case study, but
    it is a successful case study.
        What we have on the left side with the overlapping circles
    is TFI, all the different aspects of TFI. You have OFAC, you
    have the Office of Intelligence Analysis, FinCEN, you have our
    Policy Office led by Assistant Secretary O'Brien, and you have
    the IRS which supports us on financial investigations. OIA has
    the responsibility for pulling all that together through an
    integrated intelligence analysis. We were looking at North
    Korean illicit conduct, trying to figure out who were we going
    to put pressure on North Korean illicit conduct, and through
    Janice's leadership we were able to pull all of that together
    and identify what targets we should go after.
        We identified a bank in Macau which is a jurisdiction that
    has money-laundering problems in many ways, but this particular
    bank was facilitating a wide range of illicit activity on
    behalf of the government of North Korea, engaged in
    counterfeiting of U.S. currency, they are engaged in narcotics
    trafficking, they are engaged in other sorts of criminal
    conduct, and they were using this bank in order to facilitate
    that. Not only that, this bank had negotiated a deal with the
    government of North Korea and these entities that in exchange
    for fees paid to the bank, they would apply a lower standard of
    due diligence which is a very tempting thing for someone who is
    engaged in illicit conduct.
        We identified this bank and we designated it under the
    PATRIOT Act as a primary money-laundering concern. That is the
    second column. After we all get together and sit down and look
    at the intelligence analysis. In fact, we have a meeting this
    afternoon to do this with another target, where we all sit down
    together and say: ``What is the best way to get at this
    problem?''
        In this situation, we identified two things to do to get at
    the North Korean illicit conduct. The first is the top item,
    designating the bank under section 311 of the PATRIOT Act. The
    second one is the Executive order designations below, which is
    the Executive order that I mentioned in my opening statement
    that the President issued to give us the power to target and
    freeze the assets of WMD proliferators. We designated a number.
    Actually, at this point the President himself designated in the
    initial Executive order North Korean entities of proliferation
    concern under that Executive order.
        One of those entities that was designated was Tanchon Bank
    which is a North Korean bank that is the primary financial
    facilitator for KOMID which is the North Korean military
    procurement entity, which happened to have a number of accounts
    and to be a big customer of Banco Delta Asia, so it all came
    together quite nicely.
        Senator Bond. Mr. Levey, we need to get on with the
    questions. I would say that Banco Delta Asia was what you would
    call a full-service bank.
        Mr. Levey. A full-service bank.
        Senator Bond. They certainly had it all. I am going to turn
    now to Senator Murray for questions.
        Mr. Levey. Thank you, Mr. Chairman.

                                   BSA DIRECT

        Senator Murray. Thank you very much, Mr. Chairman. I want
    to go back to some previous discussion about the BSA Direct
    program very quickly before I ask you some other questions.
    That program in the past was presented to us as a critical
    program to combat terrorist financing. Now that this program
    appears to be kind of on life-support, can you tell us what
    impact that failure will have on your efforts to monitor
    compliance with the Bank Security Act?
        Mr. Levey. Senator Murray, just to preface this, you are
    right to have all the concerns that you have expressed about
    the BSA Direct Program, and you are right that we have come to
    this committee and asked for money for, and support, and we
    appreciate the support, and what has happened is a
    disappointment to me as I know it is to you. The new Director
    of FinCEN, Bob Werner who certainly deserves no blame for this,
    I want to make sure people understand that. Bob Werner is the
    new Director who came in to a tough situation, identified these
    problems, and after consulting with me, took the appropriate
    action which is to put a temporary work stoppage in place so
    that we could assess exactly where the project is and make sure
    that we do not continue to spend money if the project is not
    going to succeed.
        Senator Murray. Why did it take the appointment of a new
    Director to find out that we were way off track?
        Mr. Levey. The answer to that is that that is an excellent
    question, and I want to know the answer to that, too. I think
    as the chairman put it in his opening statement, he is going to
    ask for people to look at this, and I think that that is
    appropriate. We need to find out, and I also want to find out
    the answer to that question, and figure out if there is
    anything I should have been doing better so that I can make
    sure that I do not make whatever mistakes I may have made
    again.
        Senator Murray. Is this going to move forward now, or are
    we going to pull the plug?
        Mr. Levey. What we need to do is, under this temporary stop
    work order, it gives us 90 days to assess it to determine what
    is the best next step. The reason we did this now, or the
    reason that Director Werner recommended that we do this now,
    and I think it was the right decision, is that by doing this
    temporary stop work order, we are able to make sure that we do
    not have a loss of service to our customers in the interim.
    That is, of course, of the highest priority. We are hopeful
    that we are going to be able to do this assessment and get
    through the project without ever losing our customer service.
    Frankly, we are going to look at the idea I think you mentioned
    in your opening statement about what benefit we can draw upon
    and what leverage we can apply to the IRS systems that might be
    used.
        Senator Murray. Did I hear you say you are in a 90-day
    review?
        Mr. Levey. Yes.
        Senator Murray. I assume that at the end of that, if you
    are moving forward, you are going to be able to guarantee to us
    that you will get all the functionality out of that new system
    that we were originally promised?
        Mr. Levey. I will give you a complete briefing on the
    functionality that will be obtained by the new process and
    exactly how much it will cost. I think that the chairman's
    suggestion that we give an action plan on BSA Direct, in
    whatever time period you think is appropriate, Mr. Chairman, we
    will do it, is exactly what is called for.
        Senator Murray. Given all of that, do you still stand
    behind the request for $12.5 million for this in 2007?
        Mr. Levey. I think the request is $2.4 million. With your
    permission, Senator, I would want to refer that question to
    Director Werner. If it is easier, we can respond in writing and
    do that promptly.
        Senator Murray. Is he in the room?
        Mr. Levey. Yes, he is right here.
        Senator Murray. If you would not mind, Mr. Chairman.
        Senator Bond. I was going to ask Director Werner to come
    forward. The GAO has raised questions about it and you have
    raised a very good question.

                BSA DIRECT AND THE CROSS-BORDER WIRE INITIATIVE

        Senator Murray. And with the cross-border wire request as
    well, it is a $12.5 million request.
        Mr. Levey. With the cross-border wire it is, yes.
        Senator Bond. Mr. Werner, if you will state your full name
    and title for the record, please.
        Mr. Werner. My name is Robert W. Werner, and I am the
    Director of Financial Crimes Enforcement Network.
        Senator Murray. Did you say the new Director?
        Mr. Werner. New Director. Good morning, Mr. Chairman, and
    Madam Ranking Member. You are correct, the cost is $2.4
    million, I think it is $2.473 million, relates to the BSA
    Direct components. That includes the secure outreach, the BSA
    electronic filing, and the BSA Direct retrieval and storage
    component, and then there is $10 million separately requested
    for the cross-border study.
        While the cross-border wire study is related to BSA Direct
    because ultimately the data would be folded into that program,
    it is really very distinct at this point. Right now we are in
    the middle of a feasibility study for the cross-border wire.
    Given the massive amount of data involved in that, if the
    Secretary were to approve the feasibility study and decide to
    go forward with it, that would require tremendous augmentation
    to existing systems. So the fact of the matter is, we are going
    to have a retrieval and storage component for BSA Direct, but
    whether we are able to have the full range of functionality
    that was originally planned in the current retrieval and
    storage project, it is too early to say. But we will not have
    disruption of service to our customers because at this point we
    are also transitioning to the IRS's Web CBRS system, so we will
    have a functioning system. Part of what we are reassessing is
    what exactly the requirement needs are and revalidating those.
        Senator Murray. This committee will need to know whether
    you stand by that number or where you are on that fairly soon,
    so I hope you stay in touch with the committee on that.
        Mr. Werner. We absolutely will, and I can tell you now that
    the electronic filing component is not involved in the stop
    work order and is about $1.3 million of that. In addition, the
    secure outreach which, again, is an operational functioning
    system and not part of the stop work, is close to about
    $500,000. So the remainder does relate to the retrieval and
    storage component, and we will keep you very closely apprised
    of that.
        Senator Murray. I appreciate that. Thank you, Mr. Chairman.
        Senator Bond. Thank you very much, Senator Murray. The GAO
    has raised a lot of questions that I know Director Werner is
    going to have to answer, and we are going to have to answer. So
    I think this is a work in process, and I think 45 days, if you
    can make it, is a good timeline to let us know what you found,
    where you are going to go, and how you can make some chicken
    salad out of what you have been presented.
        Mr. Werner. We will absolutely keep you briefed. I think at
    this point we are projecting having a written report hopefully
    sometime in June, but I think within 45 days we will certainly
    have a much better idea of where we are and what some of the
    options are.

                     TREASURY FOREIGN INTELLIGENCE NETWORK

        Senator Bond. Thank you very much, Mr. Werner. Turning to
    Ms. Gardner, your work I know is extremely important. The DNI
    has emphasized to us how critical your information is, and we
    want to know how we can help you get the work done. I do not
    want to see all of your time taken up as an IT manager because
    you have very important work to do. So we will look forward to
    discussing that with you as the process goes forward.
        Now I would like to ask, Ms. Gardner, if you can elaborate
    on the importance of upgrading the Treasury Foreign
    Intelligence Network, TFIN, especially in terms of how it can
    help you improve the way that OIA performs its job, and when do
    you expect TFIN to be complete?
        Ms. Gardner. Thank you, Mr. Chairman. I appreciate the
    opportunity to talk about TFIN because it is very near and dear
    to my heart. We do need this capability in order to deliver all
    of the things that Under Secretary Levey promised that we would
    be able to do.
        The TFIN system was actually built in the 1990's, and it
    was built in-house, and so it was great at the time, but
    clearly we need something more now. What we have done is try to
    take this in two steps. One is, first, to stabilize the current
    system. That delivery will be on April 18 so that the system
    crashes that we have been experiencing hopefully will stop.
    Then the next phase is actually the upgrade to increase
    capabilities. When the system was built in the mid-1990's, we
    were just a liaison shop. We did not have analysts doing
    analytical work. So now we need to be able to put all the bells
    and whistles of analytical tools, link analysis tools, data
    retrieval, all those things on there.
        I think that we have segmented it in a way so that all the
    deliveries will be rolling out over the next year. If we do get
    the budget request in 2007, we are hoping that we will be able
    to finish all of the phases by the end of the fiscal year with
    the slight possibility that the Disaster Recovery Site will
    probably be at initial operating capability, but not at full
    operating capability until maybe early first quarter 2008.

    INTERNATIONAL TERRORIST FINANCING COOPERATION AND THE BANCO DELTA ASIA
                                  DESIGNATION

        Senator Bond. Thank you. Mr. Levey, I was going to ask you
    about collaboration with international partners, but I had to
    cut you off after you just got through the first two columns in
    your magnificent chart. Let's pick up back on the chart. I
    would like to know in addition to the particular North Korean
    Banco Delta Asia, how you are working with the United Nations,
    the Financial Action Task Force, and other successes, and your
    challenges, in that area.
        Mr. Levey. Interestingly, I think right where I stopped is
    where I was going to get to intelligence cooperation, so I will
    be able to try to answer two questions at once.
        After we took these actions that I described earlier, the
    next step is to go and talk to our partners around the world
    and say this is a threat not only to our financial system, it
    is a threat to the global financial system, and the answer to
    your question on how that international cooperation is working,
    Mr. Chairman, is it is working very well. We are getting a huge
    amount of cooperation internationally when we are able to
    identify illicit conduct and say this is illicit conduct, it is
    a threat to our financial system and to yours. And we are
    getting cooperation not just from governments, but from private
    financial institutions, and that was the reference I made to
    UBS in my opening statement.
        In the BDA case in particular, I made a trip out to Asia,
    and then Mr. O'Brien's Deputy also made a trip out to Asia, and
    we were able to persuade governments in the region that this
    was a threat to them as well. They took action to put a lot of
    pressure on this illicit financial network, and they took
    relevant steps that pushed this North Korean illicit financial
    activity out of their banking system and left it with no place
    to go, or searching for a place to go.
        Then the last thing is monitoring follow-up, and it comes
    back to Janice Gardner's work, which is, now we need to see
    where they are going to try to put their money into the system.
    What is their next target? They are going to try to access the
    financial system in another way, and we have to stay on top of
    it so that we do not just have a temporary victory.
        More broadly, Mr. Chairman, the cooperation internationally
    particularly on terrorist financing has been excellent. We have
    a growing number of states using the U.N. system on terrorist
    financing and designating names which is a real important
    development, and we are continuing to build on that I think
    through Mr. O'Brien's leadership. He has been doing a lot of
    good, hard work and spending a lot of time on the road.

         TFI REDUNDANCY CONCERNS AND DIFFERENCES BETWEEN TFI COMPONENTS

        Senator Bond. One last question. During the early days of
    TFI there were concerns about the possible redundancy and OIA
    acting as an operational vice analytical unit. Can you explain
    how you have addressed these concerns, and explain the
    differences between FinCEN, OFAC, TFFC, OIA, and any other
    agencies you have?
        Mr. Levey. Mr. Chairman, I know that that has been a
    concern. As you know, when I have come to talk to you in your
    capacity on the Intelligence Committee, and I have already
    shown you this in private, this indicates how we work. It is a
    generalized example of what the North Korean Illicit Finance
    process is. On the left you see there are particular threats
    that we feel we need to take action against, and that is where
    our intelligence function comes in. They are to pull together
    all the information that we need in order to determine what
    steps to take. That is not an operational activity, that is
    classic intelligence analysis, presenting the information to
    the policy makers so that we can make a choice.
        The middle, without going through all the acronyms there,
    but what that is is a sampling of the tools available to us as
    an organization, either through OFAC, through FinCEN, through
    international outreach, through TFFC which is Assistant
    Secretary O'Brien's organization. We sit down and we go through
    one of those meetings, we have one this afternoon, as I
    mentioned, and we will say: ``What can we do?'' We choose what
    we think is the right thing to do, and then we go out and do
    it. We have operational components of what we do in the sense
    that we are not just developing this information to learn about
    it, but to act on it, and then we act.
        Then the bottom arrow is, after we act, again, just like we
    are doing with North Korea, the challenge is to see if our
    action had any effect. To be honest with you, sometimes they
    are more effective than others. We have to learn not only when
    we take an action, if it was not as effective as we had hoped,
    why not, what is the next step so we can learn to do better,
    and that is, again, where our Intelligence Office comes in.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Bond. As followers of the Senate know, all those
    bells and whistles means that a vote has started. In closing, I
    appreciate all the hard work and time you and your good
    leadership team have put in to combatting terrorist financing
    and other illicit financing efforts. I support and recognize
    the importance of the 2007 budget request, but I need your help
    to make sure you succeed, especially in making sure that TFIN
    does not experience the same problems that BSA Direct has
    experienced.
        [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 Christopher S. Bond

                                   MANAGEMENT

        Question. As I noted in my opening statement, I remain concerned
    about the Department's management especially since the OIG continues to
    cite management as their No. 1 concern in their annual challenges
    report and due to the recent information technology failure with BSA
    Direct.
        How are you addressing this concern, especially on the need for
    effective corporate leadership in resolving serious deficiencies at the
    bureau level? Please include specific examples in your response.
        Answer. The Department is committed to exercising strong corporate
    leadership over all components of the Treasury Department--through the
    policy offices' supervisory and oversight relationships with our
    bureaus, as well as through the discipline of the traditional
    management functions such as human resources, information technology
    (IT), procurement, budget, strategic planning, and financial
    management. With nearly a full complement of senior officials now in
    office at Treasury, our ability to emphasize corporate management has
    been greatly enhanced.
        In describing Treasury's corporate management challenge, the
    Inspector General emphasized the need to provide IRS and bureau
    oversight and ``ensure consistency, cohesiveness, and economy among all
    bureaus in achieving Treasury's goals and objectives.'' Over the past 9
    months, the Assistant Secretary for Management and Chief Financial
    Officer (ASM/CFO) has instituted a better process for coordinating
    Department-wide management issues. The Bureau Heads' Council has been
    restructured to serve as one of the primary tools of this coordinated
    management effort. The Council has become an arena for discussing best
    practices, cohesive policies and strategic priorities based on the
    President's Management Agenda (PMA), Treasury goals, and bureau goals.
    Participation is now limited to bureau principals, the ASM/CFO, and the
    Deputy Secretary to ensure vigorous discussion and extensive exchanges
    between participants in order to provide thoughtful recommendations to
    the appropriate Department officials. This reinvigorated Council has
    addressed operations, management, Homeland Security Presidential
    Directive-12 (HSPD-12), OMB Circular A-123, the Working Capital Fund,
    annual budget submissions, the Department's strategic plan, and
    Emergency Preparedness. These discussions have led to the creation of
    sub-groups, comprised of a bureau head ``champion'' as chairman and
    other interested bureau heads as members. These sub-groups are
    addressing issues raised during the Council meetings and providing
    monthly updates upon which they make recommendations to the appropriate
    officials.
        Other examples of how Treasury provides effective corporate
    oversight and leadership across management functions include:
      --The majority of Treasury IT projects are succeeding, including most
            of the systems mentioned at the April 6, 2006, Senate
            Appropriations Committee hearing. For example, Treasury's HR
            Connect system was recently named a Federal Human Resources
            Management Line of Business (HR LoB) Shared Service Center
            (SSC) by the Office of Personnel Management and the Office of
            Management and Budget (OMB). The HR LoB is one of the
            Presidential E-Government lines of business, which designates
            agency centers of excellence to provide government-wide
            servicing for core functions. Currently, the Department's HR
            Connect program services Treasury, the Department of Housing
            and Urban Development (HUD) and components of the Departments
            of Justice and Homeland Security.
      --Treasury migrated HUD to HR Connect last year on time and within
            budget, adding an estimated 10,000 employees to the system.
            Both HUD and industry recognized Treasury for the cost-
            effective and smooth transition. Treasury clearly has addressed
            its past problems with the HR Connect program and continues to
            drive towards enhanced performance and operating efficiency.
      --Treasury has made significant improvement across the core IT
            management areas measured under the Expanding E-Government (E-
            Gov) Initiative of the President's Management Agenda. For the
            first time since the establishment of the PMA in 2002, Treasury
            improved its overall E-Gov status from Red to Yellow in the
            first quarter of fiscal year 2006. The improved PMA score was
            based on Treasury's meeting key requirements and performance
            metrics. These key requirements and performance metrics
            included developing Treasury-wide IT capital planning policy,
            maturing the Departmental Enterprise Architecture, and meeting
            quarterly milestones for Presidential E-Gov Initiative
            implementation. This was accomplished in large measure by the
            efforts of all bureaus through the Treasury Chief Information
            Officers' Council and its sub-councils.
      --The Alcohol and Tobacco Tax and Trade Bureau's (TTB) recent
            successful migration from the Bureau of Alcohol, Tobacco and
            Firearms and Explosives (ATF) infrastructure is an example of
            proper oversight and assistance between the Department and a
            Treasury bureau. When ATF was divided into two organizations in
            2003 (ATF became part of the Department of Justice while TTB
            remained a Treasury bureau), all IT resources remained with
            ATF. These IT resources included 100 percent of all capital
            assets, infrastructure, IT support personnel, and resources to
            continue development of core business applications. Treasury's
            senior management team worked closely with TTB bureau
            executives in developing and implementing smart sourcing
            strategies. TTB accomplished the migration of its entire IT
            infrastructure off of ATF in 6 months, which is an extremely
            aggressive schedule for a migration of this scale. In fact, the
            migration was completed well ahead of schedule and within an
            extremely tight budget.
      --With respect to the Treasury Communications Enterprise (TCE)
            procurement, Treasury senior management is engaged in the
            procurement and the issues raised by the Government
            Accountability Office (GAO) were resolved. The Department is
            working closely with Treasury's Inspector General and Treasury
            senior management to improve documentation for the program.
      --To address the new requirements in the Office of Management and
            Budget (OMB) Circular A-123, ``Management's Responsibility for
            Internal Control,'' the Treasury Chief Financial Officers'
            Council formed a cross-bureau and office working group that
            developed a comprehensive methodology to identify, document,
            test, and assess internal controls. The work group, established
            in November 2004, includes permanent participation from 22 of
            Treasury's 24 financial reporting entities involving 8 bureaus
            and 6 offices, including advisory participation from the Office
            of the Inspector General. As a result, Treasury has devised
            collective financial reporting internal controls, established
            uniform documentation methods, developed comprehensive test
            approaches and test plans, and completed over 70 percent of the
            required testing to date.
        Part of the corporate leadership response for improving management
    at the bureau level is to institute a Program Contract Review (Review).
    This Review will be added to the quarterly Capital Planning and
    Investment Control (CPIC) process, and will require Contracting
    Officers to certify that high impact contracts and contracts related to
    high impact programs are on target with respect to performance
    (schedule and quality), budget (cost or price), and the required
    qualifications of the Program Manager, Contracting Officer, and
    Contracting Officer's Technical Representative. The goal of the Review
    will be to ensure improved communication and coordination among the
    bureau-level professionals responsible for different functional aspects
    of contract management and mission delivery, and to provide a mechanism
    for early problem visibility and resolution at the bureau and corporate
    levels, as needed. Initially, the Review will focus on high impact
    information technology programs and related contracts already in the
    CPIC database, and will expand to include a review of all high impact
    acquisitions, including non-IT acquisitions.
        This approach will support the introduction of Earned Value
    Management (EVM) techniques into our contract portfolio, and will help
    ensure that Treasury managers follow the sound business practices
    associated with EVM. It builds on the management platform to strengthen
    cross-disciplinary support and oversight within two already-established
    governance processes, CPIC and the Office of Procurement Executive's
    (OPE) Evaluate & Monitor Program, designed to ensure that Treasury's
    procurement organizations are in compliance with the law, good
    practice, and are promoting continuous improvement.
        The Evaluate and Monitor Program, managed by the Office of the
    Procurement Executive, will provide improved corporate oversight of and
    support to Treasury's operational acquisition organizations, including
    high impact acquisitions. An Acquisition Bulletin, AB 06-04, http://
    www.treas.gov/offices/management/dcfo/procure-
    ment/policy/ab06-04.pdf, was recently issued requiring all bureaus to
    identify ongoing, planned, or anticipated procurement actions, defined
    by the following criteria:
      --Acquisitions with an estimated value of more than $10 million;
      --Acquisitions with an estimated value more than $1 million if the
            proposed acquisitions involve more than one bureau, excluding
            Administrative Resource Center (ARC) support of other Treasury
            bureaus;
      --Acquisitions that require a review by the Treasury Technical
            Investment Review Board (TIRB);
      --Competitive sourcing actions under OMB Circular A-76;
      --Acquisition actions that may be controversial or otherwise
            sensitive such that they warrant the attention of the Senior
            Procurement Executive, for example, relevant protests or
            claims, or acquisitions in which interest or inquiries have
            been expressed by either the White House or Congress, Inspector
            General (OIG or TIGTA) or Government Accountability Office
            (GAO).
        The Evaluate & Monitor Program is increasing its staffing to
    improve oversight. Current staffing is 6 FTE, and oversight and support
    have been improving commensurately.
      --The Program/Contract Review, AB 06-04, and the Evaluate & Monitor
            Program have been reviewed and approved by the Treasury
            Acquisition Council (TAC). The Office of the Procurement
            Executive chartered the TAC in April 2005 to improve governance
            of the acquisition function. The TAC is comprised of the bureau
            Chief Procurement Officers, the Treasury CIO, and the Deputy
            CFO. It is chartered to coordinate cross-cutting policy and
            management issues, develop and implement innovative acquisition
            approaches, share best practices and lessons learned, oversee
            and track progress against improvement goals, and make other
            decisions on issues that have a potential for Treasury-wide
            impact on acquisition and financial management programs.
        The Department also remains focused on enhancing project management
    capability by establishing a Treasury-wide training program. In line
    with OPM and OMB guidance, Treasury's existing IT capital planning
    policy outlines the skills and competencies required for project
    managers based on project scope and complexity. Currently, bureau CIOs
    are required to certify that project managers for major investments are
    qualified according to these guidelines. This initiative, which
    supplements bureau training programs, will include a project management
    course focused on Treasury-specific policy and procedures to ensure
    consistent implementation across the Department.

                                BSA DIRECT/TFIN

        Question. The recent problems exposed with the Financial Crimes
    Enforcement Network's new system called ``BSA Direct'' raises serious
    questions about the Treasury's ability to procure, manage, and oversee
    information technology projects.
        How can I be confident that other high-risk projects such as the
    ``Treasury Foreign Intelligence Network'' system (TFIN) will not
    experience the same problems as BSA Direct? Are you personally
    committed to providing the necessary support and resources for TFIN and
    other IT projects and that you will ensure that the lessons learned
    from BSA Direct will be applied to TFIN and other IT projects?
        Answer. The Treasury Foreign Intelligence Network (TFIN) is the
    sole source of Top Secret/Sensitive Compartmented Information
    intelligence at the Department of the Treasury. Stabilizing and
    modernizing the TFIN system is one of the Department's highest
    priorities.
        From a system development view, BSA Direct involves the design and
    development of a new and complex database application and data
    warehouse, while the TFIN concept and design is based on best practices
    already in use within the Intelligence Community.
        An effective governance structure has been in place for TFIN since
    the inception of the project to ensure mission, business, and technical
    objectives are achieved. This governance structure consists of the: (1)
    TFIN Executive Board comprised of senior officials from the Office of
    Terrorism and Financial Intelligence and the Office of the Chief
    Information Officer (OCIO), and (2) TFIN Steering Committee comprised
    of project management and technical leads from stakeholder offices.
    These governance structures facilitate coordination, track project
    status, and support executive decision-making. OCIO hired a dedicated
    project manager to oversee the TFIN project.
        Treasury has established additional oversight as well. The
    Assistant Secretary for Management and Chief Financial Officer (ASM/
    CFO), the Chief Information Officer (CIO), and the Assistant Secretary
    for Intelligence and Analysis (OIA) are committed to ensuring the
    project's successful completion. The ASM/CFO and CIO are engaged fully
    with the Assistant Secretary for Intelligence and Analysis, the
    system's major stakeholder. These officials and their staffs are
    working closely together to manage the development of TFIN, meeting
    regularly to resolve quickly problems that might affect the cost and
    schedule of the system. Treasury also is working closely with and
    receiving direct support and assistance from the Intelligence
    Community.
        This executive level engagement will continue throughout the
    project and we expect Treasury to complete the system on time and
    within budget. For example, the TFIN platform was stabilized
    successfully according to schedule and budget. Treasury and the
    Intelligence Community have identified TFIN as a critical investment.
    As such, the TFIN investment is subject to additional reporting
    requirements beyond the quarterly ``Control'' review conducted as part
    of the IT capital planning and investment control processes.
        The Department also is implementing specific initiatives to improve
    IT investment and contract management. These actions are focused on
    promoting greater accountability for IT management in the bureaus at
    the project management level, improving the reliability of information
    being reported by the bureaus, and establishing additional processes
    through which to assess and validate project performance. To highlight
    a number of the key initiatives, the Department is: (1) requiring
    bureau CIOs to certify the qualifications of their project managers and
    the accuracy of investment reporting; (2) establishing a more rigorous
    process for justification and reporting is established when bureaus
    request baseline change requests for their major investments; (3)
    implementing a program for reviewing the top 50 investments and
    contracts within the Department; and (4) expanding the independent
    verification and validation program at the corporate level to assess
    the accuracy of bureau project and investment reporting.

                      RESPONSE TO GAO REPORT ON BSA DIRECT

        Question. Two days ago, the GAO issued a review of FinCEN's fiscal
    year 2007 budget request. GAO asserted that ``FinCEN has experienced
    cost, schedule, and performance issues while developing the retrieval
    and sharing component of the BSA Direct project, which raise questions
    about the project's future. Therefore, the assumptions made by FinCEN
    when developing the request for new BSA Direct initiatives may no
    longer be valid, calling into question the need for this funding.'' I
    agree with GAO that the BSA Direct problems raise some serious
    questions about FinCEN's ability to spend effectively the $12.5 million
    in additional funding in the budget request. Providing these new funds
    appears to be ``throwing good money after bad.''
        What is your response? If BSA Direct cannot be salvaged, do you
    intend to recommend to the Congress that the ``Cross-Border Wire
    Transfer System Initiative'' is not feasible and should not be funded
    for fiscal year 2007?
        Answer. The $12.5 million in requested additional funding
    referenced in the GAO report includes $2.5 million for BSA Direct and
    $10 million for a separate, but related, Cross-Border Wire Transfer
    System.
        BSA Direct is an overall umbrella project composed of three
    components: electronic filing (e-filing), secure access, and retrieval
    and sharing. Of the $2.5 million requested for the BSA Direct umbrella
    components, $1.3 million is for enhancements to the e-filing component,
    $0.5 million is to meet the customer base of the secure access system,
    and $0.7 million is for the retrieval and sharing component.
        The electronic filing and the secure access components have been
    operational for a number of years. Electronic filing reduces the cost
    to collect BSA data from a range of $0.76-$7.15 per paper form to an
    average of $0.21 per electronic form submitted. The system is used by
    more than 300 of the largest financial institutions in the United
    States. Planned upgrades to the e-file system in fiscal year 2007 will
    allow: direct input of the BSA filings into the collection system;
    added features such as reference number assignment, error notification
    and other correspondence; improved editing of certain types of filing
    errors; and options for single form filing.
        The secure access component serves as a gateway to FinCEN's
    services, including access to BSA data, analytical products, and online
    training and support for Federal, State and local law enforcement and
    regulatory users through secure electronic communication. In fiscal
    year 2007, FinCEN anticipates a significant increase in the user base
    for this system, regardless of the status the retrieval and sharing
    component.
        The retrieval and sharing component is being developed by EDS and
    it alone is the subject of the recent stop work order. This component
    was designed to provide a data warehouse with 10 years of enhanced BSA
    data and additional analytical tools.
        The fiscal year 2007 budget request of $10 million for a Cross-
    Border Wire Transfer reporting system allows upfront discussions with
    Congress in the event the Treasury Secretary approves the collection of
    cross-border wire transfer data. The authorizing language (Section 6302
    of the Intelligence Reform Act of 2004 (S. 2845 Public Law 108-458))
    charges FinCEN with two tasks: (1) a feasibility study to be completed
    as soon as practicable; and (2) the implementation of enabling
    regulations and a technological system for receiving, storing,
    analyzing, and disseminating the reports, to be completed by December
    2007. This request does not represent an assumption that the Treasury
    Secretary or Congress will authorize the development of the system, but
    was submitted out of an abundance of caution and the concern that, if
    approved, resources would be needed for an implementation that would
    begin during fiscal year 2007.
        The technical alternatives analysis that FinCEN will present in the
    feasibility study rests on the premise that any conceptual system must
    be flexible enough to incorporate existing, planned, and future data
    sources--this includes BSA Direct. FinCEN's study will consider whether
    and how to create a new system to accommodate the cross-border funds
    transfer data and other BSA data. The criteria applied by FinCEN in its
    study of the collection and storage of electronic funds transfer
    reporting are that the system must:
      --integrate multiple data sources, including existing BSA data
            systems;
      --require minimum or no alteration to existing BSA data sources;
      --enable the concurrent query of the multiple data systems by the
            users in a transparent fashion; and
      --accommodate the addition of future data sources with minimum or no
            alteration to the existing or planned BSA data sources.
        FinCEN currently is working to complete its feasibility study and
    anticipates submitting a report to the Secretary of the Treasury in the
    coming weeks. The feasibility study will outline alternative approaches
    to developing the system and will provide order of magnitude estimates
    of the costs involved. These alternatives will address the risks and
    our concerns if we attempt to implement this system by December 2007,
    as required in the legislation.
        While the study still is underway, a preliminary conclusion is that
    it is not feasible to complete the development and implementation of
    the system by December 2007. Due to the complexities of implementing a
    cross-border wire transfer reporting requirement, which would involve
    developing and issuing new regulations as well as developing the
    necessary information technology infrastructure to receive, warehouse
    and analyze the data received, FinCEN will need the time and resources
    to develop its project management capabilities before it can undertake
    this effort. The study will outline the organizational resources that
    FinCEN will need to manage successfully the development of this
    project.

                             CIO AND CFO OVERSIGHT

        Question. The Department of the Treasury spends over $2 billion
    annually on information technology. What percentage of this investment
    portfolio does the Treasury CIO directly oversee?
        Answer. The ASM/CFO and CIO oversee Treasury's entire investment
    portfolio through formal and informal channels.
        Formally, the ASM/CFO meets monthly with the bureau heads to review
    corporate management issues, including IT management concerns, and
    agree upon enterprise directions and implementation approaches. As an
    example, the Department's HSPD-12 initiative, which will meet the
    requirements of the whole Treasury Department, is being led at this
    level.
        From an IT perspective, the Treasury CIO oversees the entire
    Treasury Information Technology (IT) investment portfolio. As Chair of
    Treasury's Technical Investment Review Board (TIRB), which is comprised
    of bureau CIOs, oversight is provided through a formal Capital Planning
    and Investment Control (CPIC) process, which we have developed over the
    last 2 years. The process is multi-layered with both quarterly and
    annual reporting.
        The CPIC process for each fiscal year includes a review of proposed
    new investments (Pre-Select), decisions regarding the composition of
    the IT portfolio to be submitted to OMB (Select), quarterly reviews of
    the portfolio's health (Control), and assessments of steady state
    investments (Evaluate).
        As part of the Control phase of the CPIC process at Treasury, all
    IT investments are reviewed quarterly to ensure compliance with cost,
    schedule, security, risk management, and project manager requirements
    and guidelines. For non-performing investments, where cost, schedule,
    or performance fails planned targets by 10 percent, the project
    managers must submit corrective action plans to the CIO. In addition,
    Treasury has established a formal baseline change request process to
    oversee all changes to established IT investment baselines. Finally, we
    now are asking bureau CIOs to certify cost and schedule performance
    information provided to the TIRB on quarterly basis.
        Informally, both the ASM/CFO and the CIO work directly with their
    bureau counterparts on a day-to-day basis to ensure that the
    Department's high priority projects succeed. For example, the ASM/CFO,
    CIO, and the rest of the Treasury management team work directly with
    bureau stakeholders to implement the President's Management Agenda.
    Within the E-Government area, this has included the implementation of
    government-wide payroll, grants, and recruitment systems across
    Treasury.
        Question. How specifically does this oversight occur?
        Answer. The Treasury CIO reports directly to the Assistant
    Secretary for Management and Chief Financial Officer (ASM/CFO).
        Question. How does the CFO ensure adequate performance and
    accountability by the CIO? What specific criteria does the CFO use to
    measure the performance of the CIO?
        Answer. The ASM/CFO ensures performance and accountability by the
    CIO through a rigorous performance planning process for the CIO's
    individual performance plan. The CIO's specific performance commitments
    include: strengthening corporate management for the Department,
    including addressing control weaknesses and management challenges
    identified by the OIG and TIGTA, progress in meeting President's
    Management Agenda requirements for the Expanding E-Gov initiative, and
    improving enterprise IT operations. The CIO must meet specific
    performance metrics agreed upon in each of these areas.

                         IT BUSINESS CASE DOCUMENTATION

        Question. The Government Accountability Office (GAO) recently
    reported that the business case documentation required for major IT
    investments is unreliable based on a review of five agencies, including
    the Department of the Treasury. GAO subsequently recommended that
    agencies improve the reliability of these business cases.
        What specific actions is the Treasury CIO taking to improve the
    accuracy and reliability of the Department's IT business cases?
        Answer. Treasury is taking actions to promote greater
    accountability across the Department's IT management, including steps
    to improve the reliability of information being reported, and
    establishing additional processes to assess and validate program
    performance and reporting.
        We are developing, updating, and institutionalizing Treasury-wide
    policies and guides to improve documentation for major IT investments.
    For example, over the past year Treasury has issued formal guidance on
    Treasury Capital Planning and Investment Control Policy, Earned Value
    Management, Alternatives Analysis, and Baseline Change Request Policy.
    We are revising overall Treasury IT policy to incorporate minimum life
    cycle documentation requirements for all major IT projects. This
    documentation will ensure project managers are developing and
    maintaining the detailed background records required for effective
    program management.
        In addition, we now are integrating the efforts of the Office of
    the CIO and the Senior Procurement Executive in overseeing IT projects
    and establishing an on-going capability for independent validation and
    verification of IT investments, as discussed in more detail in response
    to Senator Bond's first question.

          CIO'S OVERSIGHT OF BUREAU PROJECT MANAGEMENT TEAMS AND CIOS

        Question. The Treasury CIO told committee staff that his
    responsibilities include reviewing and certifying the qualifications of
    every Treasury bureau CIO and their project management teams and that
    he has the authority to remove a CIO or project management team if they
    do meet his qualifications.
        How often does the CIO review and certify the qualifications of
    each bureau CIO and project management team? What criteria does he use
    to determine their qualifications? Has the CIO ever removed a bureau
    CIO or project management team? If so, please provide specific
    information on when this occurred and the reasons for the removal.
        Answer. To clarify, the Treasury CIO does not have the independent
    authority to remove a bureau CIO or project team, nor does he certify
    the qualifications of each bureau CIO.
        In January 2006, the Treasury CIO established a policy pursuant to
    which each bureau CIO must certify to corporate management the
    qualifications of its project managers for major investments. The
    policy was based on guidance issued by the Office of Personnel
    Management and Office of Management and Budget (OMB M-04-19) that
    requires requesting agency CIOs to ensure that major investments are
    managed by qualified project managers. This certification is required
    each time there is a new investment added to the IT portfolio or when
    there is a change in the project manager for a major project. Treasury
    Capital Planning and Investment Control guidelines require major IT
    investment project managers to be qualified in accordance with the
    Federal CIO Council Workforce and Human Capital for IT Committee's
    Federal IT Project Manager Guidance Matrix. Project managers must
    document the knowledge, skills, abilities, and experience that qualify
    them to manage a major IT investment.
        The Treasury CIO is continuing to strengthen project management
    within the Department. A formal Treasury-wide training program is being
    established to provide project managers with critical skills and
    competencies in terms of best practices and earned value management
    concepts. This program will enhance bureau training initiatives. For
    example, the program will include a course focused on Treasury-specific
    policy and procedures to ensure consistent implementation across the
    Department.
        The Treasury CIO also is working with FinCEN and the IRS to address
    specifically a number of critical investments within those bureaus.
    Treasury CIO management is participating in the selection of new bureau
    CIOs, including advising the FinCEN Director on the selection of a new
    FinCEN CIO, as well as participating in the selection of a new CIO for
    the Bureau of Engraving and Printing (BEP). Where issues or concerns
    arise with bureau IT performance, the ASM/CFO and the Treasury CIO
    directly engage bureau heads.

                     ROLES AND RESPONSIBILITIES OF THE CIO

        Question. Please describe for the record, the roles and
    responsibilities of the Treasury CIO and specifically how these roles
    and responsibilities aligned with each requirement specified in the
    Clinger Cohen Act, E-Gov Act, and Paperwork Reduction Act.
        Answer. As outlined by the Government Accountability Office, the
    Chief Information Officer has 13 major areas of responsibility. The
    Treasury CIO is responsible for:
      --Information Technology/Information Resources Management (IT/IRM)
            strategic planning [44 U.S.C. 3506(b)(2)]
      --IT capital planning and investment management [44 U.S.C. 3506(h)
            and 40 U.S.C. 11312 & 11313]
      --Information security [44 U.S.C. 3506(g) and 3544(a)(3)]
      --IT/IRM human capital [44 U.S.C. 3506(b) and 40 U.S.C. 11315(c)]
      --Information collection/paperwork reduction [44 U.S.C. 3506(c)]
      --Information dissemination [44 U.S.C. 3506(d)]
      --Records management [44 U.S.C. 3506(f)]
      --Privacy [44 U.S.C. 3506(g)]
      --Statistical policy and coordination [44 U.S.C. 3506(e)]
      --Information disclosure [44 U.S.C. 3506(g)]
      --Enterprise architecture [40 U.S.C. 1401(3)]
      --Systems acquisition, development, and integration [44 U.S.C.
            3506(h)(5) and 40 U.S.C. 11312]
      --E-Government initiatives [44 U.S.C. 3506(h)(3) and the E-Government
            Act of 2002]
        The following table lists a selection of the major requirements
    within the Clinger-Cohen Act, the E-Gov Act, the Paperwork Reduction
    Act, and the corresponding role and responsibility of the Treasury CIO.

    ------------------------------------------------------------------------
                    Requirement                         Treasury CIO
    ------------------------------------------------------------------------
    Clinger-Cohen Act:
        Provide IT related advice and other     Reports to ASM/CFO. Advises
         assistance to the agency head and       and consults with ASM/CFO
         other senior management personnel.      and other Treasury
                                                 leadership regarding IT
                                                 management.
                                                Oversees Treasury-wide IT
                                                 capital planning process.
        Develop, maintain, and facilitate       Leads the development and
         implementation of a sound and           implementation of the
         integrated IT architecture.             Treasury Enterprise
                                                 Architecture.
        Promote effective and efficient design  Chairs the Treasury CIO
         and operation of all major              Council and Treasury
         information resources management        Technical Investment Review
         processes.                              Board.
                                                Promotes policy and process
                                                 improvements to enhance
                                                 Departmental IT oversight
                                                 and management.
    ------------------------------------------------------------------------
    E-Gov Act:
        Participate in the functions of the     Participates in the Federal
         Federal CIO Council.                    CIO Council and is co-chair
                                                 of the IT Workforce
                                                 Committee.
        Monitor the implementation of IT        Leads E-Government program
         standards . . . including common        which incorporates
         standards for interconnectivity and     Enterprise Architecture,
         interoperability, categorization of     Enterprise Solutions, and
         Government electronic information,      Presidential E-Government
         and computer system efficiency and      functions.
         security.
         . . . Develop citizen and              Manages and oversees
         productivity-related performance        Treasury performance of E-
         measures for use of E-Government and    Government requirements as
         IT in meeting agency objectives,        outlined in the President's
         strategic goals, and statutory          Management Agenda and the
         mandates.                               Department's IT strategic
                                                 planning process.
         . . . Comply with OMB E-Guidance,      Oversees compliance and
         particular emphasis on agency head      dissemination of OMB
         communicating guidance to key agency    guidance and policy
         executives.                             regarding IT.
         . . . Establish and operate IT         Assesses and determines the
         training programs.                      strategy for ensuring
                                                 adequate IT workforce
                                                 capabilities; develops and
                                                 promotes IT training
                                                 programs for the
                                                 Department.
        Agencies must conduct Privacy Impact    Serves as the Department's
         Assessments for new IT investments      Chief Privacy Official;
         and on-line information collections.    manages the Department's
                                                 Privacy Impact Assessments
                                                 and information collection
                                                 functions.
        Requires each agency to develop,        Leads Treasury computer
         document, and implement an agency-      security program, including
         wide information security program to    overall FISMA compliance.
         provide information security for the    In this role, develops,
         information and information systems     maintains, and facilitates
         that support operations and assets      implementation of
         (FISMA).                                Departmental IT guidance,
                                                 including policies,
                                                 procedures, manuals, and/or
                                                 guidelines relative to the
                                                 Department of the
                                                 Treasury's unclassified
                                                 computer security programs
                                                 of all Departmental
                                                 elements and classified and
                                                 sensitive but unclassified
                                                 telecommunications
                                                 security.
    ------------------------------------------------------------------------
    Paperwork Reduction Act:
        Overall responsibility for information  Leads comprehensive IT
         resources management.                   management organization
                                                 comprised of IT capital
                                                 planning, IT strategic
                                                 planning, enterprise
                                                 architecture, E-Government,
                                                 Cyber Security, Information
                                                 Management,
                                                 Telecommunications, and
                                                 Enterprise Solutions.
        Establish an effective information      Serves as the senior
         collection and records management       official managing the
         program.                                Department's comprehensive
                                                 information collection and
                                                 records management
                                                 functions. Certifies all
                                                 Treasury information
                                                 collection requests and
                                                 prepares the Department's
                                                 annual Information
                                                 Collection budget.
    ------------------------------------------------------------------------

                                     CFIUS

        Question. The Committee on Foreign Investment in the United States
    or CFIUS has become a controversial issue over the past year with the
    Unocal and DPW deals. Even though both deals ended up collapsing due to
    political pressure, I believe that there are some lessons learned from
    these two experiences that need to be addressed.
        Senator Shelby has taken the lead in reforming the legislation
    governing CFIUS. However, I believe the Treasury and the administration
    could take some steps outside of legislation that could improve the
    process. For example, I think that the Office of Intelligence and
    Analysis is uniquely positioned to provide intelligence support for the
    CFIUS process.
        What steps is Treasury taking to avoid some of the mistakes from
    the past year? In particular, how are you improving communication with
    the Congress so that we learn about these potentially controversial
    deals prior to the media learning about them?
        Answer. The administration supports reform of the CFIUS process and
    has already begun to take steps to address the concerns expressed by
    members of Congress. First, the administration is committed to
    improving communication with Congress concerning CFIUS matters and
    shares the view that Congress should receive timely information to help
    meet its oversight responsibilities. Treasury is now promptly notifying
    Congress of every review upon its completion, and the administration is
    working hard to be responsive to Congressional inquiries. The
    administration also has offered to conduct quarterly briefings for
    Congress on CFIUS matters. These quarterly briefings were scheduled to
    begin before the issues with respect to the DP World transaction became
    the subject of Congressional and media attention. I look forward to
    your suggestions on how to foster better communication.
        Second, the administration supports a high level of political
    accountability for CFIUS decisions and is committed to ensuring that
    senior, Senate-confirmed officials play an integral role in examining
    every transaction notified to the committee. Improvements to the CFIUS
    process should also ensure that senior U.S. officials are focused on
    national security issues. CFIUS agencies are briefing at the highest
    levels in their respective agencies. On-going, high-level engagement
    occurs regularly on CFIUS issues at Treasury and other CFIUS agencies.
        Third, the administration and the Treasury Department also agree
    that the committee can carry out its role more effectively by
    strengthening the role of the intelligence community in the CFIUS
    process, which is essential in a complex and changing national security
    environment. The Director of National Intelligence (DNI) has begun to
    do so by assigning an all-threat assessment responsibility to the
    National Intelligence Council and ensuring that all relevant
    intelligence community agencies and activities participate in the
    development of final intelligence assessments provided to the
    committee, including Treasury's Office of Intelligence Analysis. The
    committee recently formalized the role of the Office of the DNI, which
    plays a key role in all CFIUS reviews and investigations by
    participating in CFIUS meetings, examining every transaction notified
    to the committee, and providing broad and comprehensive threat
    assessments. The DNI already contributed greatly to the CFIUS process
    through reports by the Intelligence Community Acquisition Risk Center
    concerning transactions notified to the committee, but formalizing its
    place in the process--and strengthening the threat assessments provided
    to the committee--represent an enhancement of the intelligence
    community's role. The DNI does not vote on CFIUS matters and should
    not, because the role of the DNI is to provide intelligence support and
    not to make policy judgments based upon that intelligence.

                                    IRS BSM

        Question. The budget request proposes a major increase in funding
    for BSA Direct of some $12.5 million but proposes a major cut to the
    IRS's Business Systems Modernization program of some $30 million. The
    GAO just issued a report noting the problems with BSA Direct and the
    Treasury OIG just issued a report praising the IRS's management of its
    IT contractors.
        Given what we now know about the problems at FinCEN and BSA Direct
    and the improvement at the IRS, do you agree that the budget request
    for FinCEN is a case of rewarding bad behavior while the request for
    IRS is a case of punishing good behavior? How do you reconcile these
    contradictions? Are you still committed to BSM?
        Answer. The $12.5 million in requested additional funding for BSA
    Direct referenced in the GAO report includes $2.5 million for BSA
    Direct and $10 million for a separate, but related, Cross-Border Wire
    Transfer System.
        Of the $2.5 million requested for BSA Direct, $1.8 million is for
    enhancements to meet the needs of the expanding user base for the e-
    filing and secure access components, both of which have been
    operational and successful for a number of years, with the remaining
    $0.7 million for continued development of the retrieval and sharing
    component.
        The problems noted in GAO's report have come to light and are being
    addressed. FinCEN Director Werner proactively has initiated an
    assessment of the BSA Direct retrieval and sharing component, presently
    scheduled to be completed in July, to determine the extent of the
    problems with the project and the next steps that need to be taken with
    regard to BSA Direct. The Office of the CIO is working closely with
    FinCEN on this effort.
        The $10 million requested in fiscal year 2007 for the Cross-Border
    Wire Transfer System is submitted in accordance with Section 6302 of
    the Intelligence Reform Act of 2004 (S. 2845, Public Law 108-458),
    which charges FinCEN with two tasks: (1) a feasibility study to be
    completed as soon as practicable; and (2) the implementation of
    enabling regulations and a technological system for receiving, storing,
    analyzing, and disseminating the reports, to be completed by December
    2007. FinCEN will submit a report on the results of the feasibility
    study to the Secretary in the coming weeks, and has included this
    funding request to allow development of the system to begin in 2007,
    should the Secretary recommend and Congress authorize doing so.
        The administration continues to be committed to the IRS Business
    Systems Modernization program. We are pleased with the Treasury
    Inspector General for Tax Administration's recognition of the progress
    that the IRS BSM program has made over the past 2 years to improve its
    performance on delivering projects and releases on time and on budget,
    while meeting or exceeding scope expectations. In fiscal year 2006 and
    continuing into fiscal year 2007, BSM is revising its modernization
    strategy to emphasize the incremental release of projects to deliver
    business value sooner and at a lower risk. The President's budget
    request for BSM for fiscal year 2007 aligns with this revised strategy
    and provides the level of resources the administration believes
    necessary to deliver the fiscal year 2007 BSM program requirements.

                     DYNAMIC ANALYSIS OFFICE OF TAX POLICY

        Question. The budget request proposes some $500,000 to create a new
    ``dynamic analysis office'' within the Treasury.
        What types of analysis would this office conduct that is not being
    conducted at Treasury or other Federal agencies? What is the long-term
    plan for this office in terms of funding and staffing?
        Answer. The administration has very limited capabilities to conduct
    dynamic analyses of tax policy changes. The budget request would create
    a new Dynamic Analysis Division within the Treasury Department's Office
    of Tax Policy to conduct dynamic analyses of major tax policy changes.
    The dynamic analyses would focus on the macroeconomic effects of tax
    policy changes. The new Division would not, at least initially, conduct
    dynamic scoring of tax policy changes, which would take dynamic
    analysis one step further and estimate how the macroeconomic changes
    affect government revenues.
        While the fiscal year 2007 budget request for $513,000 is for the
    upcoming fiscal year, Assistant Secretary Pack sent a letter on June 8,
    2006 to Chairman Bond and Ranking Member Murray proposing that this
    initiative be accelerated into this fiscal year. The acceleration of
    this new Division into fiscal year 2006 would be funded within the
    existing appropriation for this fiscal year. The request for fiscal
    year 2007 would remain unchanged, funding three full-time positions for
    1 full year rather than the estimated six positions for 6 months.

                    TREASURY COMMUNICATIONS ENTERPRISE (TCE)

        Question. Have the deficient items identified in the TCE bid
    protest been addressed and corrected? In particular, what measures are
    being taken to ensure the reasonableness of the price evaluation?
        Is the Treasury's office of the Chief Information Officer properly
    structured and staffed to provide adequate oversight to major systems
    acquisitions such as TCE?
        Answer. The issues raised on the TCE bid protest have been
    addressed fully. In October 2005, Treasury released an amended Request
    for Proposal, which clarified what is required of vendor price
    proposals. Furthermore, in evaluating vendor proposals, the evaluation
    team is working in close concert with both Internal Revenue Service
    (IRS) legal counsel as well as Treasury's Office of the General Counsel
    (OGC) to ensure that they are following all appropriate rules and
    regulations.
        The Office of the Chief Information Officer (OCIO) is qualified
    fully to provide effective oversight to major acquisitions such as TCE.
    The TCE procurement is being executed through the IRS Office of
    Procurement, which has extensive experience in conducting acquisitions
    the size and scope of TCE. The OCIO senior management works in close
    concert with IRS Procurement, IRS legal counsel, Treasury OGC, and
    Treasury senior management to provide adequate oversight and management
    of the acquisition. This collective leadership team meets weekly to
    monitor the status of the TCE procurement.
        The ASM/CFO also established a focused leadership group to provide
    advice and recommendations on the business case documentation and on
    the strategy for TCE. This group includes the Treasury CIO, Senior
    Procurement Executive, Deputy Chief Financial Officer, Assistant
    General Counsel, and ASM/CFO senior advisors.

                        IRS OVERSIGHT BOARD NOMINATIONS

        Question. There are currently three vacancies on the IRS Oversight
    Board. I fully support Chairman Wagner and believe that these vacancies
    must be filled quickly to ensure that the Board has a quorum to meet
    and conduct its legislatively-mandated oversight responsibilities.
        Has the administration identified individuals to fill these
    vacancies? When can we expect these nominations to be formally
    submitted to the Senate?
        Answer. On May 1, 2006, the President nominated 4 outstanding
    individuals to fill the vacant or expired seats on the IRS Oversight
    Board. They are:
      --Paul Cherecwich, Jr., of Utah, to be a Member of the Internal
            Revenue Service Oversight Board for a term expiring September
            14, 2009, vice Charles L. Kolbe, term expired;
      --Donald V. Hammond, of Virginia, to be a Member of the Internal
            Revenue Service Oversight Board for a term expiring September
            21, 2010, vice Robert M. Tobias, term expired;
      --Catherine G. West, of the District of Columbia, to be a Member of
            the Internal Revenue Service Oversight Board for a term
            expiring September 14, 2008, vice Karen Hastie Williams, term
            expired; and
      --Deborah L. Wince-Smith, of Virginia, to be a Member of the Internal
            Revenue Service Oversight Board for a term expiring September
            14, 2010, vice Larry L. Levitan, term expired.

                                STANDING UP TFI

        Question. During the early days of TFI, there were concerns about
    possible redundancy and OIA acting as an operational vice analytical
    unit.
        Please explain how you have addressed these concerns and explain
    the differences today between FinCEN, OFAC, TFFC, OIA, etc.
        Answer. The four components of TFI--the Financial Crimes
    Enforcement Network (FinCEN), the Office of Foreign Assets Control
    (OFAC), the Office of Intelligence and Analysis (OIA), and the Office
    of Terrorist Financing and Financial Crime (TFFC)--play distinct but
    complementary roles in fulfilling the overall mission of safeguarding
    the financial system from criminal abuse and applying measures to
    combat key national security threats, including terrorism, the
    proliferation of weapons of mass destruction, and money laundering.
    FinCEN is the U.S. Financial Intelligence Unit (FIU). Its mission is to
    administer and enforce the Bank Secrecy Act (BSA) and to receive,
    analyze, and disseminate, both domestically and internationally,
    financial intelligence, including suspicious activity reports, to
    detect criminal activity so that it can be prevented and prosecuted
    criminal activity. OFAC administers and enforces economic and trade
    sanctions, which are based on U.S. foreign policy and national security
    goals against targeted foreign countries, terrorists, international
    narcotics traffickers, and those engaged in activities related to the
    proliferation of weapons of mass destruction. In putting together
    packages for designation under Treasury's various sanctions
    authorities, OFAC engages in investigations, analysis, and research
    involving intelligence, law enforcement, and open source information
    and, as appropriate, extensive field work. As the policy development
    and outreach office for TFI, TFFC works with the Treasury Department,
    the U.S. Government interagency community, and its counterparts in
    Finance Ministries around the world, as well as directly with the
    private sector to develop and advance policy and specific actions to
    combat terrorist financing, WMD proliferation, money laundering, and
    other criminal activities. TFFC leads and coordinates 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. TFFC also promotes the development of effective targeted
    financial sanction regimes and the use of other targeted financial
    authorities through the G7, G20, FATF, United Nations, European Union,
    and bilaterally with countries of strategic importance.
        OIA is Treasury's in-house intelligence analytic unit, focusing on
    counterterrorism, counterproliferation, and other national security
    threats. OIA's mission is to support the formulation of policy and
    execution of Treasury authorities by providing: (1) expert analysis and
    intelligence production on networks that provide financial and other
    support to terrorist groups, proliferators, and other key national
    security threats; and (2) timely, accurate and focused intelligence
    support on the full range of economic, political, and security issues.
    We envision that as OIA evolves, it will be widely viewed as a center
    of analytic expertise on such networks. The TFI components'
    counterterrorism efforts are closely coordinated, both at daily senior
    staff meetings, and perhaps even more importantly, at weekly targeting
    meetings. The targeting meetings, which are led by TFI's Under
    Secretary, include senior officials from all of the TFI components. At
    these sessions, based on a review of the relevant intelligence,
    potential targets are presented and discussed. The participants assess
    the full range of potential Treasury actions, including designation,
    and decide on follow up direction and assignments. OIA will continue to
    host and participate in these sessions in the future, which have proved
    to be an effective mechanism for translating intelligence information
    into policy action.

                        COORDINATION WITH OTHER AGENCIES

        Question. With the establishment of TFI, I am curious to know how
    this new office is coordinating its intelligence activities with other
    Federal agencies and the Office of the Director of National
    Intelligence.
        How are you working and communicating with the intelligence
    community, especially with the Office of the Director of National
    Intelligence and other key intelligence agencies such as the Department
    of Homeland Security, the Department of Justice and the Federal Bureau
    of Investigation to make sure that efforts are not being duplicated?
        Answer. OIA is the primary Treasury office responsible for ensuring
    that the Department is fully integrated with the Intelligence Community
    (IC). Our recently completed report on OIA's fiscal year 2006-2008
    strategic direction makes clear that enhancing Treasury's integration
    into the IC has been--and will remain--one of OIA's top priorities. OIA
    has been working closely with the Office of the Director of National
    Intelligence since it was created. The DNI has been very supportive of
    OIA, and has been of great assistance to OIA at a number of key
    junctures. OIA has aligned its priorities with those set forth by the
    Director of National Intelligence in the National Intelligence
    Strategy. OIA's goals and direction align with key DNI objectives in a
    number of areas, including: strengthening analysis, WMD proliferation,
    keeping policymakers informed, and building an integrated intelligence
    capability. During its short tenure, OIA has already made great strides
    in integrating TFI specifically, and Treasury more generally, into the
    IC, and it will continue to build on these efforts. As a result of its
    improved integration into the IC, OIA analysts are now participating in
    the drafting and coordination of a variety of IC analytic products.
    These include: National Intelligence Estimates, CIA studies, Senior
    Executive Intelligence Briefs and Presidential Daily Briefs. OIA has
    also initiated both formal and informal analytic exchanges with its
    intelligence and law enforcement partners. The FBI and OIA, for
    example, are now working on a joint analytic project, which they intend
    to complete this year. The additional personnel OIA is now hiring--and
    those it is requesting in fiscal year 2007--will allow OIA to further
    increase its contributions to IC products, and to produce additional
    finished intelligence pieces for dissemination to the IC.

                               OFAC DESIGNATIONS

        Question. Pursuant to the Treasury's new designation authority to
    sanction proliferators of weapons of mass destruction, please provide
    the committee an explanation of the Office of Foreign Assets Control's
    designation process.
        Answer. OFAC follows a three-step process in pursuing designations,
    which consists of: identifying the target; constructing and de-
    conflicting an evidentiary package; and publicly announcing the
    designation. Like its colleagues in law enforcement and the
    intelligence community, OFAC follows leads. If the initial
    investigation of a lead shows promise, then OFAC investigators move
    into the second stage of the designation process--the evidentiary
    process.
        In the WMD proliferation context, as well as in OFAC's other
    programs, such as the successful counter-narcotics programs, OFAC
    engages in investigation and research using intelligence, law
    enforcement and open source information and, as appropriate, field
    work. Once this evidence is collected, OFAC's investigators draft an
    evidentiary document analyzing and summarizing the information acquired
    through their research. This ``summary'' document describes how the
    information provides OFAC reason to believe that the target meets the
    specific criteria for designation. After an evidentiary package has
    been thoroughly reviewed within OFAC, it is reviewed by Treasury's
    attorneys to ensure that OFAC has met its evidentiary threshold, and by
    the Department of Justice's Civil Division, which represents OFAC in
    court if its designations are challenged.
        The next formal stage of OFAC's process involves interagency
    coordination. In most cases, OFAC engages informally with colleagues in
    a variety of agencies throughout the investigation process. In fact,
    initial targets are suggested through an interagency working group, and
    closely coordinated and vetted within appropriate agencies in the early
    stages of development. OFAC also works closely with colleagues in OIA
    and from elsewhere in the Intelligence Community. Nonetheless, OFAC
    goes through a more formal coordination phase designed to de-conflict
    its proposed designations with the operational and policy interests of
    other agencies and to ensure that the targets are consistent with and
    further the strategic national security and foreign policy goals of the
    United States. Executive Order 13382 specifically directs that
    designations by Treasury or State be undertaken in consultation with
    one another, as well as in consultation with Justice and other relevant
    agencies.
        Once this thorough interagency review process has been completed,
    the final evidentiary package is presented for signature by the
    Director of OFAC. At the same time that the package is provided to the
    Director of OFAC for consideration, two other important processes are
    in motion. First, OFAC's team of compliance officers and information
    technology professionals work closely with OFAC investigators to
    prepare the information about a target for possible public
    dissemination through OFAC's List of Specially Designated Nationals and
    Blocked Persons (SDN list). The SDN list is used by thousands of
    companies around the country and around the world to screen real-time
    transactions and accounts for the possible involvement of an OFAC
    target. The second process occurs if and when OFAC investigators become
    aware that a designation target has a presence in the United States. At
    that point, OFAC investigators from both the Designation Investigations
    Division and the Enforcement Division prepare an operation to block any
    property that can be identified.

                               BIGGEST CHALLENGES

        Question. What are the three most immediate challenges for TFI?
        Answer. The three most immediate challenges for TFI are: (1) the
    need for additional resources to more aggressively pursue core
    objectives, including combating the financial underpinnings of weapons
    of mass destruction (WMD) proliferation; (2) leveraging our authorities
    most effectively to deal with terrorist-sponsoring regimes Iran and
    Syria, and working in partnership with governments and the private
    sector to do so; and (3) building the information technology systems
    necessary to effectively and efficiently carry out our mission.
        First, with respect to resources, Treasury has continued--with the
    support of your subcommittee--to build the new Office of Terrorism and
    Financial Intelligence. As TFI has grown in size, the demand for our
    expertise and capabilities has expanded as well. The President's budget
    for fiscal year 2007 includes funding for the component offices of TFI
    to meet this demand. For example, it provides OFAC with additional
    positions to implement and administer the WMD sanctions program, as
    well as to monitor and update existing terrorism designations. It
    provides funding for OIA to continue its efforts to build Treasury's
    intelligence capabilities by improving its key infrastructure and
    adding to its analytic breadth and expertise. And it provides FinCEN
    with additional resources to streamline data processing and enhance its
    e-filing capabilities to increase the ease of compliance with
    regulations and improve its abilities to track users' needs.
        Second, TFI continues to be challenged to leverage its capabilities
    to deal with terrorist-sponsoring regimes Iran and Syria. TFI has at
    its disposal a broad range of tools to pressure obstructionist regimes
    and freeze the assets of terrorists, proliferators, and other
    wrongdoers. We have regulatory authorities to help banks and other
    institutions implement systems to detect and halt corrupt money flows.
    And, we continue to work with other governments and international
    institutions to achieve collective action against threats and to take
    critical steps to stem the flow of illicit finances. The combination of
    these various measures contributes to the U.S. Government's overall
    ability to deter and defend against key threats. The dynamic situation
    in the Middle East requires close and sustained attention and careful
    coordination across the interagency and the international community to
    ensure that these capabilities, or, in some cases, the threat to take
    certain measures, are exercised most efficiently and effectively.
        Finally, TFI continues to be challenged to meet its internal
    information technology requirements, and the fiscal year 2007 budget
    request, if approved, will move us toward being able to do so. For
    example, Treasury's Foreign Intelligence Network (TFIN), the sole
    information technology system in the Department authorized for top
    secret information has not been modified or upgraded to keep pace with
    the changes in intelligence, user, or technological requirements. TFIN
    lacks appropriate analytical tools and a robust disaster recovery
    capability. The fiscal year 2007 budget provides funding to upgrade
    this critical system. Additionally, OFAC has a demonstrated need for an
    Enterprise Content Management (ECM) system to provide electronic
    document, records and case management functions. The fiscal year 2007
    budget request of $627,000 will assist OFAC and Treasury's Office of
    the Chief Information Officer (OCIO) in continuing their joint efforts
    to develop a pilot approach to an ECM system within the context of a
    government-wide/department-wide enterprise solution.
                                     ______

                  Questions Submitted by Senator Thad Cochran

        Question. The New Markets Tax Credit (NMTC) Program relies upon the
    decennial census to qualify areas as eligible for NMTC financing.
    Employing 2000 Census Bureau data, only a few census tracts along
    Mississippi's devastated coast line qualify as ``Low-Income
    Communities''. A re-measurement, not contemplated in the current
    statute would likely qualify them under the program's guidelines. In
    addition, I understand that Secretary Snow has the discretion under the
    Job Creation Act of 2004 to designate ``targeted populations'' as a
    group to be treated as a ``Low-Income Community''.
        Will the Community Development Financial Institutions Fund, with
    the Secretary of the Treasury, designate the census tracts or targeted
    population of the most heavily damaged areas as ``Low-Income
    Communities'' by conducting either a re-measurement of census tracts in
    the Katrina-affected areas or employing the targeted population
    discretionary tool which currently exists?
        Answer. The CDFI Fund, the Internal Revenue Service (IRS) and NMTC
    Program participants rely upon Census Bureau data to determine whether
    projects are located in NMTC-qualifying Low-Income Communities (LICs).
    To our knowledge, the Census Bureau has not announced plans to re-
    assess the areas damaged by Hurricane Katrina and provide updated
    census information. Absent new data from the Census Bureau, the CDFI
    Fund does not have any means available to provide a re-measurement of
    these areas.
        Although new census data won't be available, the Secretary may
    designate ``Targeted Populations'' as LICs. Pursuant to The American
    Jobs Creation Act of 2004, Targeted Populations may include low-income
    persons as well as other persons that ``otherwise lack adequate access
    to loans or equity investments'' (i.e., persons who have historically
    been denied access to loans, equity investments or financial services
    due to factors that are unrelated to their investment or credit
    worthiness such as gender, race, ethnicity, national origin and creed).
        The CDFI Fund, in conjunction with the IRS, is developing guidance
    to implement this new Targeted Populations provision. As part of this
    process, we are considering whether and under what circumstances
    residents of the Hurricane Katrina Gulf Opportunity (GO) Zone could
    potentially be included as a Targeted Population. We hope to publish
    guidance on this matter before the end of June 2006.
        Question. Of the $8 billion of NMTC Allocations made to date, a
    very small amount of NMTC allocation ($15 million of the total $8
    billion) has been made to Community Development Entities (``CDEs'')
    based in Mississippi, and little other NMTC allocation has made its way
    into the State from allocatees based outside Mississippi. The residents
    of Mississippi suffered much devastation from the Katrina Hurricane.
        Instead of allocating $1 billion of NMTCs to the entire GO Zone,
    will the Community Development Financial Institution Fund (CDFI) and
    Secretary of the Treasury consider designating a pro-rata (based on pro
    rata storm population in the Katrina affected areas) amount to be spent
    in each State?
        Answer. The NMTC, unlike other credits such as the Low-Income
    Housing Tax Credit, is a non-apportioned Federal tax credit. That is to
    say, NMTCs are not apportioned to States on a pro-rata basis. Rather,
    they are awarded to intermediary entities known as Community
    Development Entities (CDEs) throughout the country that apply to the
    CDFI Fund under annual competitive allocation rounds. While the GO Zone
    Act of 2005 provided an additional allocation of $1 billion for use in
    the recovery and redevelopment of the Hurricane Katrina GO Zone, it did
    not specifically authorize or otherwise instruct the CDFI Fund to
    convert the allocation authority into an apportioned Federal tax credit
    to be issued by the affected States.
        Question. Six hundred million dollars of the supplemental $1
    billion allocation created for the benefit of the GO Zone is being
    allocated under rules which do not open the opportunity for interested
    groups in Mississippi to participate in its redevelopment through this
    incentive. In March 2006, some of my constituents learned that to be
    considered for the $600 million, an entity would have had to have
    submitted an application for NMTCs in September 2005, 3 months before
    the $1 billion supplemental was signed into law. To submit an
    application for NMTCs, an entity would have had to file to become a CDE
    1 week before Hurricane Katrina landed onshore. This implementation of
    the program disadvantaged participants inside the State of Mississippi
    who would like to be involved in its rebuilding.
        For Mississippi CDEs that did apply for NMTCs in this round, will
    the CDFI Fund and Secretary of the Treasury work with applicants to
    make revisions necessary to their applications to ensure that they
    receive minimum threshold scores, qualifying them for allocations?
        How will the CDFI Fund and Secretary of the Treasury open this
    process to those in Mississippi who would like to compete for the $600
    million of NMTCs? Will it hold a special competition (either completely
    open or with limitations) for the $600 million? Will the $600 million
    be allocated pro rata among the governors of the three States for
    State-created CDEs, allocations of which could then be allocated to
    other CDEs in the State?
        Answer. The process for allocating the $600 million of GO Zone
    allocation authority through the 2006 allocation round was described in
    a revised Notice of Allocation Availability (NOAA) published on March
    10, 2006. The Treasury Department has no plans to amend these
    procedures.
        The GO Zone Act of 2005 made available $1 billion of additional
    allocation authority to be allocated as follows: $300 million through
    the 2005 NMTC allocation authority; $300 million through the 2006
    allocation authority; and $400 million through the 2007 allocation
    authority. As you are aware, this legislation was enacted in late
    December 2005--approximately 6 months after the 2005 NMTC award
    decisions had been finalized. The $300 million of additional 2005 GO
    Zone allocation authority was therefore added to the $300 million of
    2006 GO Zone allocation authority, thus enabling the CDFI Fund to
    allocate up to $600 million of allocation authority through the 2006
    allocation round. This is an addition to the $3.5 billion of allocation
    authority that was already available through that round.
        When the GO Zone Act was passed in December 2005, the application
    deadline for the 2006 round of NMTC allocation authority had expired.
    The Treasury Department decided not to re-open the round to accept
    additional applications, as this would likely lead to delays of 6
    months or more in making available the allocation authority to the GO
    Zone applicants. The Treasury Department felt that it was critical that
    these resources be made available as soon as possible in the affected
    areas.
        In determining not to accept additional applications, the Treasury
    Department took into account the make-up of the 2006 round applicant
    pool. The CDFI Fund received a total of 254 applications, including 65
    that were submitted by organizations that indicated their intent to
    serve the GO Zone as part of their principal markets. This included 16
    applicants (requesting a total of $2.59 billion in allocation
    authority) that were headquartered in the GO Zone, 13 of which had
    received deadline extensions (some as long as 12 weeks) in the wake of
    Hurricane Katrina. Based on this data, the Treasury Department was
    confident that there would be a high number of qualified CDEs
    headquartered both inside and outside of the GO Zone that would be able
    to make effective use of the credits.
        Finally, we believe the GO Zone legislation addresses your concern
    that local entities be involved in the redevelopment process. The
    legislation requires that, in making the GO Zone allocation
    determinations, CDEs must demonstrate that they have a significant
    mission of recovery and redevelopment in the GO Zone. The CDFI Fund
    will consider each applicant's track record of redevelopment in the GO
    Zone, as well as the extent to which it has resources (physical
    resources as well as personnel) deployed in the GO Zone and/or is
    partnering with local entities in the GO Zone.
        Question. There is some evidence that a preponderance of NMTC
    financing, both loans and investments, have been directed to real
    estate businesses. There also seems to be less NMTC financing being
    directed to small business lending and venture capital investing. Both
    venture capital and small business lending would be helped if
    regulations governing the reinvestments of capital could be made more
    flexible--both in terms of the substantially all threshold for
    reinvestment and in terms of the eligible uses of reinvested funds in
    terms of geographic area and investments activity.
        What regulatory changes are you contemplating to ensure more use of
    the NMTC for small business and venture capital projects?
        Answer. The CDFI Fund has collected NMTC transaction level data on
    transactions completed in 2004 through its Community Investment Impact
    System. Data on 2005 transactions is due June 30, 2006. The 2004 data
    indicates that of the 280 transactions reported in 2004, 28 percent
    were business investments and 72 percent were real estate transactions.
        The Treasury Department is aware of the desire to see more use of
    the NMTC Program to support small business lending and venture fund
    investing. The NMTC statute does not prioritize allocations among the
    various types of potential uses such as real estate development,
    business loans or venture investing. However, the NMTC statute does
    require that substantially all of a qualified equity investment be used
    to make qualified low-income community investments throughout a 7-year
    period. We are told that investors prefer the certainty of real estate
    transactions both as a matter of mitigating economic risk and as a
    matter of compliance with the 7-year investment period rule.
        The CDFI Fund will award a contract to evaluate the use of the NMTC
    Program, including evaluating its use in financing small business and
    venture fund investments. One element of the evaluation will include an
    assessment of investor behavior and preferences in the NMTC Program.
    The Fund expects to have information late this fall or early in 2007.
    The CDFI Fund anticipates that subsequent to the issuance of this
    assessment and the statutorily-mandated GAO study due in 2007, the CDFI
    Fund will work collaboratively with the Office of Tax Policy and the
    Internal Revenue Service to study appropriate statutory and/or
    regulatory improvements to the program, if the program is extended.
        Question. It is my understanding that urban areas claim
    approximately two-thirds focus of the NMTC program's resources, in
    terms of percentage of allocations and actual funds. The one-quarter
    share of funds first devoted to rural geographies has shifted to
    suburban areas. Only one-sixth of resources were targeted to rural
    communities in the last round.
        What can you do to ensure that more of the credit reaches rural
    communities?
        Answer. At the time of application submission, applicants are asked
    to estimate the percentage of activities that will be undertaken in
    rural areas. Through three allocation rounds, awardees have estimated
    that approximately 17 percent of their transactions would be undertaken
    in rural areas, which is consistent with the percentage of the U.S.
    population that resides in rural areas (17.4 percent, according to 2000
    census data).
        In addition, the CDFI Fund has completed an analysis of
    transactions undertaken by awardees as of fiscal year end 2004, and has
    determined that approximately 19 percent of the $1.3 billion of
    investments closed that year were undertaken in rural communities. The
    CDFI Fund has also analyzed the application trends in the 2005
    application round, and determined that there is no selection bias
    against applications submitted by organizations serving rural areas. In
    other words, CDEs focusing activities primarily in rural markets
    received awards in a rate consistent with their application rate.
        That being said, the CDFI Fund will continue its efforts to provide
    more outreach in markets that do not appear to be benefiting from NMTC
    investments.
        Question. I have constituents who are concerned about the use of
    credit to subsidize transactions that would otherwise move forward
    without the credit. NMTC should drive capital into new deals not
    feasible in conventional markets.
        What is being done to make sure that the NMTC is being used to
    subsidize transactions that would not occur without the credit?
        Answer. Historically we know that low-income communities have not
    been able to access capital on the terms needed to finance businesses
    and real estate developments. Based upon preliminary transaction data
    provided by allocatees through the CDFI Fund's Community Investment
    Impact System (CIIS), which is required as a matter of compliance with
    the Fund's allocation agreement, as well as anecdotal accounts of the
    use of the credits, the CDFI Fund believes that the NMTCs have been
    very effective at bringing capital into transactions that would not
    otherwise be financed.
        To obtain an allocation through what has been a very competitive
    application process in each of the four rounds conducted to-date, the
    CDFI Fund gives each applicant the opportunity to commit that it will
    go above and beyond minimal program requirements. For instance, while
    all allocatees are required to invest substantially all (generally 85
    percent) of the qualified equity investments they receive in low-income
    communities, most applicants have committed to invest NMTC proceeds in
    areas characterized by severe economic distress (i.e., areas that have
    significantly higher poverty rates and lower median family incomes than
    those minimally required under the NMTC Program; areas that have
    unemployment rates at least 1.5 times the national average; and/or
    areas that have been designated for economic development through other
    governmental programs such as Brownfields, Empowerment Zones and
    Renewal Communities). Of the 41 allocatees that received awards under
    the 2005 round, 37 indicated that at least 75 percent of their
    activities will be provided in these areas of severe economic distress,
    and 21 indicated that 100 percent of their activities will be provided
    in such areas. The CDFI Fund will require these allocatees, through
    their allocation agreements, to meet the benchmarks identified in their
    applications.
        Similarly, the CDFI Fund requires its allocatees to provide
    products with non-conventional features, even though this would not
    otherwise be required under the program regulations. Such features
    include, among other things: equity and equity-equivalent terms and
    conditions; subordinated debt; below market interest rates; and reduced
    origination fees. In the 2005 allocation round, all 41 allocatees
    indicated that at least 75 percent of their loans and investments will
    have particularly flexible or non-traditional features, and 36 of the
    41 allocatees indicated that 100 percent of their loans and investments
    will have particularly flexible or non-traditional features. Thus, the
    CDFI Fund ensures that the commitments made in the applications will be
    kept through the allocation agreements.
        We believe these requirements help ensure that the investments
    being made through the NMTC Program are not in the locations or not on
    the terms and conditions that the marketplace would normally finance.
    Additionally, the CDFI Fund is about to engage an independent
    contractor in a long-term, longitudinal evaluation of the NMTC Program.
    This evaluation will enable the CDFI Fund and Congress to more fully
    understand and measure the benefits of the tax credit in low-income
    communities throughout the country.
        Question. The Internal Revenue Service (IRS) regulations
    implementing the New Markets Tax Credit Program place an onerous
    regulatory burden on allocatees seeking to use their credits to make
    investments in CDEs or intermediary activities. Specifically, the
    regulations require the ``direct tracing'' of tax credit investor
    proceeds to specific activities or projects; thus, making it difficult
    to use as loan or equity capital. Most CDEs that are CDFIs are small
    and already have significant reporting burdens required to maintain
    their CDE/CDFI certification status. The reporting burden has a
    disproportionate impact on rural or other communities that are
    typically served only by small- or medium-sized CDE/CDFIs and has
    effectively locked them out of accessing these important Federal
    resources.
        What can the Treasury Department or IRS do to eliminate the direct
    tracing requirements for allocatees seeking to use their credits to
    make investments in Community Development Entities (CDEs) that are also
    CDFIs?
        Answer. The NMTC statute requires that for an equity investment to
    be qualified, substantially all of the cash must be used to make
    qualified low-income community investments throughout a 7-year period.
    The tracing requirements are necessary to ensure that the statutory
    requirements are met. Recognizing the difficulty in such tracing, a
    safe harbor is provided for determining the use of the cash.
                                     ______

                  Questions Submitted by Senator Patty Murray

                    TREASURY COMMUNICATIONS ENTERPRISE (TCE)

        Question. In 2004, the Treasury Department launched the procurement
    of a new Treasury Communications Enterprise--or ``TCE''. TCE was
    envisioned to allow data, voice, and video technologies in a single
    network. Your budget told us that it would be worth $10 billion over a
    10-year period.
        Every aspect of this procurement appears to have been botched by
    your Department. You awarded the contract to AT&T but shortly
    thereafter, several unsuccessful bidders won a bid protest before the
    GAO because your Department altered the basis upon which the bidders
    prepared their proposals. Your Department was also found to have
    understated the cost of the winning bid and failed to fairly evaluate
    the prices of the competing bids.
        In response to GAO's decision, you decided to terminate the
    contract with AT&T and acquire the services through the GSA. Then, late
    last year, you reversed course again and announced that you would
    proceed with your own independent procurement. For some reason, having
    failed once with an independent procurement, you are now going forward
    with one even though the GSA is in the midst of its own similar
    procurement for much of the rest of the government. The GSA maintains
    that all the services you will need will be provided by their system.
        When the Treasury Inspector General looked into this program, he
    found that poor planning and execution of TCE resulted in numerous
    delays and increased costs. They also found little evidence of adequate
    senior management oversight of the project.
        Mr. Secretary, what explains all the problems that have plagued
    this program? Why did you reverse course and decide not to proceed with
    the GSA procurement? What critical capabilities will your system have
    that the GSA's system will not?
        Answer. The contract award for TCE in December 2004 was protested
    by the losing bidders. Due to the considerable interest in Treasury's
    ability to use GSA's Networx program, Treasury and GSA entered into a
    Memorandum of Understanding (MOU) on December 2, 2004. The MOU stated
    that Treasury would evaluate the GSA's Networx services 3 years after
    the award of TCE. The losing bidders argued that this MOU materially
    altered the basis under which option years would be awarded. The
    protest was upheld by GAO in March 2005. Treasury did not intend nor
    did it believe the MOU impacted the procurement, as the Department
    already intended to seek the best value for the government by
    evaluating other service for the option years. Consistent with
    effective IT management and procurement principles, the goal was to
    evaluate the TCE contract and determine the most cost-effective long
    term strategy.
        Subsequent to the sustained protest, Treasury conducted a second
    Acquisition Alternatives Analysis in consultation and cooperation with
    GSA. Treasury once again considered government-wide contract
    alternatives and scrutinized carefully these options in light of the
    protest decision. Treasury and GSA worked to refine the alternatives
    analysis and reach consensus on the best approach to move forward with
    the replacement for the expiring contract, Treasury Communications
    System (TCS). The Treasury and GSA post-protest analysis confirmed
    Treasury's conclusions of the initial analysis. Based on the estimated
    schedule for the award of Networx and a review of other GSA options to
    serve as a bridge between TCS and Networx, the finding was that a
    Treasury-led full and open competition was the most reasonable decision
    based on contract structure, cost, and most importantly, transition
    risk.
        Existing GSA contracting vehicles could not accommodate easily the
    managed service requirements for TCE. To support the managed services
    model, the GSA contracts would have required modifications, which would
    have increased time, cost, and complexity to support a managed services
    solution. The near-term expiration of GSA contracting vehicles would
    have required an additional competition and a second transition once
    the new contracting vehicle--GSA's planned Networx program--was
    awarded. Two transitions within a 2-year timeframe represented
    unacceptable risks of potential service interruptions and threat to
    Treasury's ability to fulfill its mission responsibilities. Using a GSA
    contract vehicle also was a significantly more expensive option due to
    GSA overhead and the costs associated with waiting for Networx.
        Concurrently, the Office of the Inspector General completed an
    audit of the TCE procurement, which found that planning documentation
    was not cohesive or comprehensive. While the project had the full
    support of Treasury senior officials, who were briefed regularly on
    TCE, we recognize that the supporting documentation did not reflect
    consistently and clearly senior management decisions to the extent
    necessary for management review and audit. Treasury subsequently has
    undertaken specific actions to address the audit findings.
        Question. Why hasn't your CIO done a better job of managing this
    project and all the other troubled IT projects in your agency?
        Answer. Treasury is taking the necessary steps to address the
    Inspector General's (IG's) findings and recommendations. Upon receipt
    of the report, the ASM/CFO directed a team of IT, procurement, and
    legal executives to develop corrective actions that address all of the
    IG's findings and recommendations. Specifically, the Department has
    greatly improved the TCE documentation, and also is strengthening
    documentation requirements for all major Treasury IT projects.
        Department-wide efforts are underway to strengthen IT investment
    oversight for the Treasury IT portfolio as a whole. Over the past 2
    years, the Treasury CIO has been leading efforts to mature the IT
    capital planning process within the Department. Treasury has made
    demonstrated progress in: (1) formalizing and standardizing the
    quarterly review process of the health of the IT portfolio, (2)
    establishing Department-wide Capital Planning and Investment Control
    (CPIC) process and Contract Earned Value Management policy guidance,
    and (3) instituting the use of a common investment portfolio management
    tool.
        Other examples of how Treasury is providing effective corporate
    oversight and leadership of IT management include:
      --The majority of Treasury IT projects are succeeding, including most
            of the systems mentioned at the April 6, 2006, Senate
            Appropriations Committee hearing. For example, Treasury's HR
            Connect system was recently named a Federal Human Resources
            Management Line of Business (HR LoB) Shared Service Center
            (SSC) by the Office of Personnel Management and the Office of
            Management and Budget (OMB). The HR LoB is one of the
            Presidential E-Government lines of business, which designates
            agency centers of excellence to provide government-wide
            servicing for core functions. Currently, the Department's HR
            Connect program services Treasury, the Department of Housing
            and Urban Development (HUD) and components of the Departments
            of Justice and Homeland Security.
      --Treasury migrated HUD to HR Connect last year on time and within
            budget, adding an estimated 10,000 employees to the system.
            Both HUD and industry recognized Treasury for the cost-
            effective and smooth transition. Treasury clearly has addressed
            its past problems with the HR Connect program and continues to
            drive towards enhanced performance and operating efficiency.
      --Treasury has made significant improvement across the core IT
            management areas measured under the Expanding E-Government (E-
            Gov) Initiative of the President's Management Agenda (PMA). For
            the first time since the establishment of the PMA in 2002,
            Treasury improved its overall E-Gov status from Red to Yellow
            in the first quarter of fiscal year 2006. The improved PMA
            score was based on Treasury's meeting key requirements and
            performance metrics. These key requirements and performance
            metrics included developing Treasury-wide IT capital planning
            policy, maturing the Departmental Enterprise Architecture, and
            meeting quarterly milestones for Presidential E-Gov Initiative
            implementation. This was accomplished in large measure by the
            efforts of all bureaus through the Treasury Chief Information
            Officers' Council and its sub-councils.
      --The Alcohol and Tobacco Tax and Trade Bureau's (TTB) recent
            successful migration from the Bureau of Alcohol, Tobacco and
            Firearms and Explosives (ATF) infrastructure is an example of
            proper oversight and assistance between the Department and a
            Treasury bureau. When ATF was divided into two organizations in
            2003 (ATF became part of the Department of Justice while TTB
            remained a Treasury bureau), all IT resources remained with
            ATF. These IT resources included 100 percent of all capital
            assets, infrastructure, IT support personnel, and resources to
            continue development of core business applications. Treasury's
            senior management team worked closely with TTB bureau
            executives in developing and implementing smart sourcing
            strategies. TTB accomplished the migration of its entire IT
            infrastructure off of ATF in 6 months, which is an extremely
            aggressive schedule for a migration of this scale. In fact, the
            migration was completed well ahead of schedule and within an
            extremely tight budget.
        The Department also remains focused on enhancing project management
    capability by establishing a Treasury-wide training program. In line
    with OPM and OMB guidance, Treasury's existing IT capital planning
    policy outlines the skills and competencies required for project
    managers based on project scope and complexity. Currently, bureau CIOs
    are required to certify that project managers for major investments are
    qualified according to these guidelines. This initiative, which
    supplements bureau training programs, will include a project management
    course focused on Treasury-specific policy and procedures to ensure
    consistent implementation across the Department.
        However, it is clear that there still remains work to be done.
    Treasury is implementing specific actions to promote greater
    accountability across the Department's IT management, improve the
    reliability of information being reported, and establish additional
    processes through which to assess and validate program performance and
    reporting. These efforts are being undertaken Treasury-wide, with
    engagement of the leadership across the senior management, IT, and
    procurement communities.
        Question. Mr. Secretary, last year in a question for the record, I
    asked whom you held responsible for this botched procurement. The
    answer never identified anyone. So, now I want to ask you in person.
        Who in your department is to be held responsible for this waste of
    taxpayer dollars?
        Answer. Ultimately, as Secretary, I am responsible for the use of
    all Treasury resources. I rely on the ASM/CFO and the CIO to execute
    this responsibility related to major IT investments. I am confident
    that they are taking the necessary steps to provide a solution that is
    cost effective and meets Treasury's business needs.
        The Treasury Department's telecommunications infrastructure is
    critical to many functions such as: online tax filing and processing,
    the auction and purchase of Treasury securities, toll-free telephone
    taxpayer assistance, the disbursement of social security and veterans'
    benefits, and the collection of payments and delinquent debt owed to
    the U.S. Government.
        A Treasury-led full and open competition represents the most cost-
    effective use of taxpayer dollars, as well as the most responsible
    approach in mitigating the risk of service interruption that would
    impair Treasury's ability to carry out its mission.
        Given that no GSA alternative was available at the time it was
    needed, Treasury had to use a sole-source justification to continue to
    receive telecommunications services. In addition, GSA delayed the
    Networx contract awards multiple times, which now are scheduled for
    March and May of 2007. After those awards, there will be an additional
    delay before any agency can receive services under Networx in order for
    the agency, including Treasury, to conduct a competition among vendors
    in the Networx program.
        If TCE were shut down, Treasury would face a potential gap in
    service from the time the current contract expires, i.e., September
    2007, to the time the final Treasury site is transitioned to Networx.
    To avoid this gap, Treasury would need to use a second sole-source
    justification to extend the current contract long enough to bridge to
    services under Networx, possibly until the first or second quarter of
    fiscal year 2009. This is a best-case estimate assuming: (1) no Networx
    protests and (2) that Treasury is the first agency in line for
    competition and transition needed to obtain services from a winning
    Networx vendor.
        Treasury's extension of its current telecommunications contract
    also would pose the risks: (1) a protest of a second sole-source
    justification and a significant cost increase by the current provider;
    (2) termination of service, should the current provider decide to
    shutdown the existing telecommunications infrastructure for its own
    business reasons; or (3) considerable time and cost to move sites that
    already have been transitioned to the TCE vendor back to the current
    telecommunications provider.
        If TCE were shut down, Treasury would be required to end the TCE
    contract under the contract's ``Termination for Convenience'' clause.
    That would make Treasury liable to the contractor for termination
    costs, such as equipment investment, minimum order costs, work in
    progress costs, and other costs allowed under a termination for
    convenience. Treasury also might be liable for the significant sunk
    investment to build the infrastructure necessary to provide TCE
    services.
        In addition, Treasury currently is spending an estimated $3.3
    million per month for telecommunications services above the estimated
    TCE monthly costs. The Department will continue to incur this
    additional cost until it completes the transition to TCE or Networx.

                 BSA DIRECT--WHY DID NO ONE SPOT THE PROBLEMS?

        Question. Mr. Secretary, you heard me discuss the recent problems
    discovered with the BSA Direct program. That program was supposed to be
    the key tool for your agency to combat terrorist financing by ensuring
    compliance with the Bank Secrecy Act.
        In our appropriations bill last year, our committee directed you to
    report to us if there were to be any significant delays with this
    program. On February 17 of this year, your agency listed the continued
    development of BSA Direct as a major accomplishment of the agency. Your
    staff told us that the project was on track and would start functioning
    at the end of April.
        Less than 1 month later, the new director of the Financial Crimes
    Enforcement Network issued a ``stop work'' order for BSA Direct and
    required a top-to-bottom review because the project had failed to meet
    major performance milestones.
        How did this happen and who are you holding responsible for this
    failure?
        Answer. In February 2006, as the various commercial software
    products were integrated and tested, a number of system performance
    issues surfaced. Due to these performance issues, the system still was
    not fully tested by mid-March, and so a contingency plan had to be
    implemented to ensure continued access by our customers to the BSA
    data.
        FinCEN Director Robert Werner issued a 90-day ``stop work'' order
    directing FinCEN to perform an assessment of the BSA Direct Retrieval
    and Sharing component in order to ensure that the best product is
    developed at the best price, while also taking advantage of already
    developed technology. An assessment team chaired by the FinCEN BSA
    Direct project manager and including representatives from the Treasury
    CIO's office, FinCEN's Acting CIO, subject matter and information
    technology experts from FinCEN, as well as three support contractors on
    the BSA Direct project was created in March 2006. This assessment team
    will assess and refine core requirements for BSA information retrieval,
    dissemination, sharing, and analysis; determine if this component of
    BSA Direct can be salvaged and/or leveraged by other alternatives; and
    define the path to ensure business continuity. The team expects to
    deliver a report to the FinCEN Director by July 2006, following a
    recent 30-day extension of the ``stop work'' order. This time frame
    will allow the assessment team to offer specific recommendations based
    on detailed conclusions that are supported by clear, concise and
    credible evidence.
        Throughout this assessment period, FinCEN will be working with the
    IRS to ensure that there is no disruption of service to its customers
    in the law enforcement community. BSA Direct users will continue to
    have access to BSA data via the current FinCEN Secure Outreach web
    site, and will use the IRS WebCBRS (Currency and Banking Retrieval
    System) for retrieval and online analysis of information.

                    OVERALL MANAGEMENT OF TREASURY PROJECTS

        Question. Mr. Secretary, at last year's hearing, when we discussed
    the mismanagement of major procurements in your Department, I thought
    that part of the problem might have been the many vacancies that you
    had in senior positions at the Department. Now, it's a year later and
    many of those vacancies have been filled.
        Looking forward, can we expect to see these costly, wasteful
    mistakes come to a stop?
        Answer. The Department has experienced a number of organizational
    changes and vacancies over the past few years. This turnover, indeed,
    has precipitated questions regarding the management of major
    procurements by the Department. With the new team recently put in
    place, we are working diligently to implement Treasury-wide IT capital
    planning and contract management policies consistently throughout the
    Department. These efforts are focused on promoting greater
    accountability across the Department's IT management, instituting
    standards for documentation for major projects, and establishing
    additional processes through which to assess and validate program
    performance and reporting. The Treasury CIO is working closely with the
    Office of the Inspector General to address the Management Challenges
    identified in the fiscal year 2005 Performance and Accountability
    Report. Actions include strengthening Treasury-wide IT capital planning
    policy and guidance, establishing minimum documentation requirements
    for major projects, and improving the reliability of investment
    reporting through an expanded independent verification and validation
    program. We believe these efforts will address key areas for
    improvement across the full life cycle of IT investments from
    acquisition, to steady state, to project closure.
        Question. In particular, your agency is telling us that its new
    Treasury Foreign Intelligence Network will have a total cost of $30
    million.
        Can you guarantee us that the cost will not grow dramatically for
    this program like it has for so many others?
        Answer. The President's fiscal year 2007 budget requests $21.2
    million to implement an accelerated deployment schedule to strengthen
    quickly Treasury's ability to fulfill its expanded intelligence role
    and to operate as a full partner in Intelligence Community activities.
    The $21.2 million will fully fund the needed upgrades to TFIN, which is
    scheduled to be completed by the end of fiscal year 2007. This brings
    the total cost of developing the TFIN core network and disaster
    recovery capabilities to $37 million.
        An effective governance structure has been in place for TFIN since
    the inception of the project to ensure mission, business, and technical
    objectives are achieved. This governance structure includes the: (1)
    TFIN Executive Board comprised of senior officials from the Office of
    Terrorism and Financial Intelligence and the Office of the Chief
    Information Officer (OCIO), and (2) TFIN Steering Committee comprised
    of project management and technical leads from stakeholder offices.
    These governance structures facilitate coordination, track project
    status, and support executive decision-making. OCIO hired a dedicated
    project manager to oversee the TFIN project.
        Treasury has established additional oversight as well. The
    Assistant Secretary for Management and Chief Financial Officer (ASM/
    CFO), the Chief Information Officer (CIO), and the Assistant Secretary
    for Intelligence and Analysis (OIA) are committed to ensuring the
    project's successful completion. The ASM/CFO and CIO are engaged fully
    with the Assistant Secretary for Intelligence and Analysis, the
    system's major stakeholder. These officials and their staffs are
    working closely together in managing the development of TFIN, meeting
    regularly to resolve quickly problems that might affect the cost and
    schedule of the system. For example, on April 24, we implemented
    successfully the new stabilized TFIN platform. This executive level
    engagement will continue throughout the project. We expect Treasury to
    complete the system on time and within budget. Treasury also is working
    closely with and receiving direct support and assistance from the
    Intelligence Community.
        From a Departmental IT investment management perspective, Treasury
    has identified TFIN as a critical investment internally, as has the
    Intelligence Community. As such, the TFIN investment is subject to
    additional reporting requirements beyond the quarterly ``Control''
    review conducted as part of the IT capital planning and investment
    control.
        The Department also is implementing specific initiatives to improve
    IT investment management, including the expansion of independent
    verification and validation resources to assess accuracy of project and
    investment reporting. We do not anticipate requesting additional funds
    from the Congress for the development of the TFIN system.

                              STOP THE WINE TAX!!

        Question. Last year, your Department proposed almost $30 million in
    new and increased user fees on the wine and alcohol industry. We, in
    our wisdom, did not adopt your recommendation. Yet, again, this year,
    you are proposing those same user fees.
        These don't appear to be new fees to provide new services to the
    industry. Rather, they are just new taxes proposed so you can eliminate
    some appropriated funding in your Department.
        Why are you proposing these fees again when you know they are not
    likely to be approved?
        Answer. The user fees proposed for TTB are intended to recover the
    costs in providing regulatory services to the alcohol industry. TTB
    issues permits to industry members engaged in the business of
    producing, importing, or wholesaling alcohol. Additionally, TTB must
    pre-approve all labels for alcohol products bottled, sold, or imported
    in interstate commerce. TTB must also approve certain formulas and
    statements of process for alcohol products, and may perform certain
    laboratory tests. These services ultimately protect both the general
    public and industry against misleading labels, adulterated alcohol, and
    dishonest persons entering the alcohol business, and promote fair
    competition among industry members. Since these regulatory efforts
    provide value to the industry, the industry should pay for the benefits
    it receives.
        Charging fees for services to industry can also provide incentives
    that lead to increased efficiency. For example, in calendar year 2005,
    71 percent of applications for approval of alcoholic beverage labels
    were filed on paper instead of electronically. Fees will encourage
    industry to file electronically and reduce unnecessary Certificate of
    Label Approval submissions.
        Question. Washington State is home to more than 400 wineries and
    350 wine grape growers--which is more than California's Napa Valley.
    They play an ever-increasing role in the Washington State economy--
    especially in rural communities throughout the State. I believe these
    increased fees will severely hinder growth of the wine industry here in
    the United States.
        Can you outline for this committee what new benefits these user
    fees will provide the industry? Isn't it true that, once these new fees
    are assessed, the wineries will not be getting any new services above
    the ones they are getting today?
        Answer. Industry members will not receive any new services under
    this proposal. However, industry is currently receiving benefits from
    the services TTB provides and should pay for those benefits.

               ESTABLISHMENT OF A DYNAMIC TAX OFFICE AT TREASURY

        Question. Your fiscal year 2007 budget request includes an
    additional $513,000 and 3 FTE for a Dynamic Analysis Division within
    the Office of Tax Policy at Treasury.
        What resources are you dedicating towards this effort this year--do
    you plan to reprogram any resources to stand it up sooner?
        Answer. We would like to accelerate this initiative into fiscal
    year 2006 and Assistant Secretary Pack sent a letter to this effect to
    Chairman Bond and Ranking Member Murray on June 8, 2006. Establishing
    this new Division now will enhance and facilitate our capabilities to
    perform dynamic analyses of the macroeconomic effects of major tax
    policy changes, which, as you know, are particularly important to the
    work currently underway at the Treasury Department on tax reform. The
    acceleration of the new Division into fiscal year 2006 would be
    accomplished with no impact on our fiscal year 2006 funding; that is,
    it will be funded within the Office of Tax Policy's existing
    appropriation. The funding that we requested in the fiscal year 2007
    budget also would be unaffected.
        Question. Is it your intention should you receive this funding in
    fiscal year 2007 that dynamic scoring would be instituted into the
    government's budgeting?
        Answer. This dynamic analysis initiative will allow us to examine
    the effect that tax policy changes have on the size of the economy and
    major macroeconomic variables, such as GDP, the size of the capital
    stock, and total compensation. Dynamic scoring would take this one step
    further and estimate how the change in the size of the economy
    translates into higher or lower tax revenues. We envision that the
    initiative will, at least initially, focus on dynamic analysis, not
    dynamic scoring. Conventional revenue estimates, which do not take into
    account changes in the size of the economy, will continue to be
    produced. The Department needs to develop the capability for and
    experience with dynamic analysis before it can consider dynamic scoring
    of tax policy changes.

                       HYPOCRISY OF CHINA VS. CUBA POLICY

        Question. Mr. Secretary, do you believe that our Nation's policy of
    constructive engagement with China, and particularly our trade
    relationship with them, has helped us press our case for democracy,
    open markets and human rights?
        If you believe that our Nation's policy of constructive engagement
    with China has been a positive force change in that country, why is
    this administration doing exactly the opposite with Cuba?
        Answer. When formulating U.S. foreign policy, different
    considerations come into play; and sanctions regimes are designed to
    respond to country-specific concerns.
        While the United States remains concerned about the democracy and
    human rights record in China, we must also recognize that China is in
    the midst of an historic transformation from a centrally-planned
    economy to a market economy. Increasing openness to trade and foreign
    investment is central to this process, as is the integration of China
    into the institutions (and the responsibilities) that govern the global
    trading system. Chinese leaders at the highest level have stressed
    their commitment to financial sector reform and openness, a major focus
    in Treasury's engagement with China. On his visit to Washington last
    month, President Hu stated that his country will not only ``continue to
    advance the reform of the RMB exchange rate regime,'' but also ``take
    positive steps in expanding market access, increasing imports, and
    strengthening the protection of intellectual property rights.'' We will
    continue to leverage our trade relationship to work towards open
    markets in China, which is in both our interests. There is still a long
    way to go.
        Cuba has a brutal dictatorship that is increasing pressure on
    opposition groups. In addition to engaging in political repression, the
    Cuban government is actually reducing the limited economic openings for
    small-scale entrepreneurs in Cuba. U.S. policy towards Cuba remains to
    hasten the rapid transition to democracy and a free-market economy. As
    set forth in the Libertad Act, U.S. policy is to take steps to remove
    the economic embargo of Cuba when the President determines that a
    transition to a democratically elected government in Cuba has begun.
    The State Department is best placed to respond specifically to
    questions about the administration's policy toward Cuba.

         ARE THE RUSSIANS ALLIES WHEN IT COMES TO COMBATING TERRORISM?

        Question. A senior official in Russia's Foreign Ministry said last
    week that, as chair of the G-8, Russia will put forward a number of new
    initiatives to combat international terrorist financing.
        Have you been in contact with the Russian government to help shape
    this agenda, and if so, what new initiatives should we expect out of
    the Russians in this area?
        Answer. Yes, Treasury has been in contact with Russian counterparts
    regarding the G-8 Anti-Money Laundering/Combating the Financing of
    Terrorism (AML/CFT) agenda. For example, AML/CFT issues were discussed
    in the most recent G-8 Finance Sous Sherpas on May 11. Russia will be
    hosting an experts meeting from May 31 through June 1, 2006, which will
    focus on working with the Financial Action Task Force (FATF) style
    Regional Bodies (FSRBs) to implement AML/CFT standards. Russian
    proposals in this area are consistent with ongoing bilateral and
    multilateral AML/CFT initiatives. In particular, Russia has stressed
    the importance of enhancing the effectiveness of the FSRBs by
    increasing IMF and World Bank coordination with the regional bodies and
    by increasing support for their mutual efforts.
        The United States and Russia agree that it is crucial for countries
    to continue to develop strong AML/CFT programs. We agree that the work
    of the FSRBs to promote implementation of the FATF AML/CFT standards is
    instrumental to these efforts, as is the support of the International
    Financial Institutions. We see merit in Russia's proposals to enhance
    cooperation between these groups.
        Question. On a related matter, Russia, as you know, does not
    officially consider Hamas a terrorist organization. In fact, Russia was
    one of the first countries to invite Hamas on an official visit
    following the terrorist group's victory in the Palestinian legislative
    elections.
        How do disagreements between nations in the definition of who is a
    ``terrorist'' affect our efforts to stop the flow of terrorist-related
    finances?
        Do you worry that the Russians' efforts in this area might
    undermine our own efforts and those of other allies?
        Answer. United Nations Security Council Resolution (UNSCR) 1267
    requires all countries to freeze the assets of individuals and entities
    related to Usama Bin Laden, Al Qaeda and the Taliban. UNSCR 1373
    requires all countries to freeze the assets of individuals and entities
    that support global terrorism, but leaves it to member states to
    determine which groups fall within its scope. Many countries, including
    the United States and members of the European Union, have designated
    Hamas as a terrorist organization. Unfortunately, not all countries
    have followed this lead.
        As with any sanctions program, the extent to which a terrorist
    designation is multilateralized renders it more or less effective. This
    certainly applies to Hamas. We will continue to work, both bilaterally
    and multilaterally, to ensure that terrorist organizations find no
    financial safe haven and that these organizations are to the greatest
    extent possible deprived of access to the international financial
    system.

                    DISRUPTING TERRORIST FINANCING NETWORKS

        Question. Treasury now has at its disposal, increased resources to
    disrupt terrorists' financial support networks and you continue to seek
    more such resources. In fact, the majority of the fiscal year 2007
    requested increases go for these purposes.
        What kind of progress have you been able to make on cross-border
    currency transactions, wire transfers, and effective oversight of
    alternative payment systems such as ``hawalas'' with other countries?
        Answer. In the area of traditional wire transfers, we believe that
    every major bank in the United States has access to the tools necessary
    to implement a robust compliance program to interdict transactions
    potentially violative of OFAC regulations. OFAC has also made
    considerable progress in the area of cross-border Automated Clearing
    House (ACH), actively working with industry and with the Federal
    Reserve's Gateway to develop new standards to increase the transparency
    of the parties involved in such transactions. OFAC, along with FinCEN,
    is coordinating with both Federal and State regulators to address money
    laundering issues within informal value transfer systems. It has, for
    example, pursued a number of cases, both criminally and civilly, with
    regard to hawalas acting illegally in sending funds to sanctioned
    countries, particularly Iran.
        FinCEN continues to oversee and better ensure compliance with the
    Bank Secrecy Act with respect to cross-border currency transactions,
    wire transfers and transactions conducted in the United States by, for,
    or on behalf of alternative payment systems such as hawalas. All of
    these types of transactions are subject to certain reporting, and
    record-keeping requirements under the Bank Secrecy Act. FinCEN also
    will continue to evaluate the need for further rule making under the
    Bank Secrecy Act to better safe guard our financial system from
    criminal abuse.
        Additionally, we have been addressing actively these issues with
    other countries through our membership in the Financial Action Task
    Force (FATF) and its network of FATF-Style Regional Bodies (FSRBs).
    FATF and its FSRBs include approximately 150 countries that have agreed
    to implement the FATF Forty Recommendations on Money Laundering and
    Nine Special Recommendations on Terrorist Financing.
        Last year, TFI led the effort within the FATF to adopt Special
    Recommendation (SR) IX. SR IX requires FATF/FSRB members to take steps
    to detect the physical cross-border transportation of currency and
    negotiable instruments and to stop or restrain funds that are suspected
    to be related to terrorist financing or money laundering. FATF/FSRB
    member countries also are required under Special Recommendation (SR) VI
    to implement measures to ensure that money remitters are licensed or
    registered, apply appropriate AML/CFT controls (including customer
    identification, recordkeeping, and Suspicious Activity Report (SAR)
    reporting), and to take administrative, civil or criminal action
    against violators. In the United States, money transmitters (including
    alternate payment systems such as hawaladars) are required to register
    with the Financial Crimes Enforcement Network (FinCEN); adopt AML
    programmatic policies, procedures and controls; identify customers; and
    report suspicious activity.
        With respect to wire transfers, SR VII requires countries to
    transmit full originator information with cross-border wires, providing
    law enforcement authorities with ready access to information needed to
    track illicit funds. These requirements complement those contained in
    the Travel and Recordkeeping Rules that govern wire transfers in the
    United States.
        As co-chair of the FATF's Working Group on Terrorist Financing, the
    U.S. Government plays a key role in the implementation of these Special
    Recommendations. TFI also works within the interagency to provide
    assistance to other jurisdictions in implementing the FATF 40+9.

                  HOW MUCH CAN REALISTICALLY BE ACCOMPLISHED?

        Question. Terrorist cells are increasingly self-financing through
    criminal activity such as drug trafficking, counterfeiting intellectual
    property, insurance claim fraud to name a few, as opposed to wire
    transfers. There are strong indications that terrorist operations do
    not require exorbitant sums of money. The bombings of the U.S.S. Cole
    and those in Bali, Madrid and London, are all estimated to have cost
    $50,000 or less, and the 9/11 bombings were estimated to cost $500,000.
    Experts in terrorist financing have said that the cost of terrorist
    attacks is decreasing exponentially.
        Are we reaching a point of diminishing returns because terrorists
    are avoiding the transfer mechanisms that we are good at tracking?
        Answer. Treasury's approach to combating terrorist financing is
    two-fold: first, we seek to identify and close vulnerabilities in the
    international financial system; second, we seek to identify, disrupt
    and dismantle the financial networks that support terrorist
    organizations.
        We are meeting this responsibility through a number of initiatives
    involving various sectors. For example, we are working through
    organizations such as the FATF and the IMF and World Bank to ensure
    that all countries are taking effective measures to prevent terrorist
    abuse of such mechanisms as charities, cash couriers, wire remitters,
    and informal funds transfer providers.
        The imposition of sanctions by the United States and its
    international partners against terrorists, terrorist organizations and
    their support structures is a powerful tool with far-reaching effects
    that goes beyond the blocking of terrorist assets. Designating
    individuals or organizations as SDGTs (Specially Designated Global
    Terrorists), SDTs (Specially Designated Terrorists), or FTOs (Foreign
    Terrorist Organizations) notifies the U.S. public and the world that
    these parties are either actively engaged in or supporting terrorism or
    that they are being used by terrorists and their organizations to
    support the terrorist agenda. Notification also serves to expose and
    isolate these individuals and organizations and denies them access to
    the U.S. financial system, and in the case of a United Nations (U.N.)
    designation, the global financial system. In addition, the imposition
    of economic sanctions can assist or complement the law enforcement
    actions of other U.S. agencies and/or other governments.
        As long as terrorists, terrorist organizations and their support
    structures continue to target the United States and its allies, we must
    make every effort to combat them; targeted sanctions are one of the
    tools employed by the United States. Terrorists are becoming more
    sophisticated at attempting to evade sanctions. Such activity
    necessitates our continuing efforts to identify, expose and target
    morphed or reformed terrorist organizations, front companies, and
    agency relationships that may be developed to evade sanctions and allow
    them access to the United States and international financial systems.
    Unless the United States and its allies apply constant and unrelenting
    pressure, terrorists will immediately exploit any opportunities that
    become available. Denying terrorists, especially their financial
    supporters, the convenience and benefits of using traditional
    legitimate economic and financial systems has created another barrier
    to their activities and has impeded their support networks. Removing
    those hurdles to the funding of their infrastructures will not produce
    a benefit because they will be able to revert to using unprotected
    traditional systems. Keeping those barriers in place requires
    undiminished commitment by Treasury at the same time that the
    alternative systems that terrorists and their supporters may choose to
    use become another target set for action by the U.S. Government. It
    gains us nothing in the war on terrorism to remove security from the
    front gate because the terrorists have started trying to tunnel beneath
    the fence. Consequently, in the War on Terror, there are arguably no
    diminishing returns, because stopping or impeding even one terrorist
    act saves lives and adds to the national and economic security of the
    United States and its allies.

                     PROGRESS WITH CHARITABLE ORGANIZATIONS

        Question. Charitable organizations can be exploited by terrorists
    because there is little government oversight, donations are largely
    anonymous, and these funds are collected by both charitable groups and
    the government in lieu of taxes for religious, social, and humanitarian
    purposes. The financial and operating structures of charitable
    organizations are not easily understood.
        How have you been able to deal with this and are you considering
    measures that will produce transparency in charities?
        Answer. Treasury has taken an active role in preventing widespread
    abuse of the charitable sector by terrorists to raise and move funds
    and provide logistical support. Curtailing such abuse is a critical
    element in the U.S. Government's national and international strategy to
    combat terrorist financing generally, as underscored in the 2002 and
    2003 National Money Laundering Strategies, numerous U.S. Government
    counter-terrorist financing strategies, and various international
    resolutions and standards.
        The U.S. Government has developed a comprehensive strategic
    approach to combat the risk of terrorist financing in the charitable
    sector. Collectively, these measures include: a coordinated oversight
    system comprised of Federal, State, and private elements; targeted
    investigations, prosecutions, and designations; international
    engagement; and extensive outreach engagements with the private sector.
        Under the coordinated oversight prong, Treasury has promulgated
    effective measures for monitoring charitable organizations' compliance
    with U.S. law through its terrorist-related designations pursuant to
    Executive Orders (EO) 13224 and 12947. As of May 2006, the United
    States has designated 41 charities under EO 13224 and EO 12947 because
    of their support for terrorist activity. This includes five U.S.-based
    charities and 36 additional international charities (two of which have
    branch offices located in the United States). On February 19, 2006, the
    United States blocked the assets of a sixth U.S.-based charity pending
    further investigation, which has the effect of freezing all assets
    located within U.S. jurisdiction and prohibiting U.S. nationals from
    transacting with the charity. These designations serve a multitude of
    purposes aside from blocking the flow of funds to terrorist
    organizations or purposes, including putting other charities and donors
    on notice of the designation, deterring donors or charities that may
    otherwise have funded terrorist organizations, and forcing terrorist
    organizations to use alternative, riskier financing mechanisms.
        To increase awareness of the risk of terrorist financing in the
    U.S. charitable sector and to provide charities with measures they can
    take to protect themselves, Treasury's Office of Terrorist Financing
    and Financial Crime (TFFC) has undertaken an extensive outreach
    program. In response to numerous dialogues with the sector on how they
    might better adopt practices to protect themselves from such abuse, and
    protect the integrity of charitable giving and the confidence of
    donors, in November 2002, the Treasury Department released the Anti-
    Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based
    Charities (Guidelines), which were revised and released in draft form
    to solicit public comment in December 2005. The Guidelines provide
    measures for charities to take in order to protect themselves against
    the risks of terrorist financing.
        The Guidelines follow a risk-based approach that balances the
    demands of applying these protective measures with the particular
    operational risks of each charity and with an understanding that
    terrorist financing risks vary between charities. They encourage
    charities to enact and practice sound governance and fiscal policies,
    which includes detailed record-keeping, as well as to collect
    information on and vet key employees, members of the governing body,
    and potential grantees. There is also guidance on the adoption of
    specific practices that help better facilitate compliance with OFAC
    sanctions programs, including those that address terrorist financing,
    and provide information on directing inquiries and/or suspicions and
    referrals to the appropriate State and Federal law enforcement
    authorities. Moreover, the issuance of the Guidelines initiated a
    strong, ongoing dialogue with the sector, which reinforced the sector's
    awareness of the risks of terrorist abuse it faced, and led to a
    greater understanding of the available resources and measures that
    could help to protect against such risk.
        The Guidelines also led to a strong engagement with the American
    Muslim charitable community, which often faces heightened risks due to
    the high-risk regions in which many American Muslim charities operate.
    TFFC has facilitated meetings with other watchdog and intermediary
    organizations (such as ECFA and BBB-WGA, etc.) in an effort to
    facilitate the creation of the National Council for American Muslim
    Non-profits (NCAMN). Launched in March of 2004, NCAMN is a proactive
    initiative of the American Muslim charitable community and is working
    to create standards of transparency and accountability similar to other
    intermediaries that it can apply to organizations under its purview,
    including relief organizations, mosques, Islamic schools, etc. TFFC's
    parallel engagement with the American Muslim charitable sub-sector and
    the larger charitable sector have resulted in charities adopting more
    proactive approaches to protect their assets and the integrity of their
    operations.
        TFFC has also acted as an integral component of overall U.S.
    engagement with the international community. Specifically, TFFC has
    helped to shape international policy on charities through its work with
    the FATF. It recently took part in negotiations for the FATF's
    Interpretive Note to Special Recommendation VIII on non-profits, which
    is the practical application of the international standard to curb
    terrorist abuse of non-profit organizations. This Interpretive Note was
    adopted by the FATF member countries at the February 2006 Plenary. TFFC
    will continue to engage with the FATF, its regional-style bodies, and
    individual member countries to encourage implementation of national
    standards that encourage transparency and accountability in the
    charitable sectors of those jurisdictions.
        Finally, OFAC has a section of its website dedicated to charitable
    organizations and will shortly be publishing suggestions for analyzing
    sanctions risk with regard to both donations and grant-making.

            IS TREASURY TARGETING NON-CONVENTIONAL FUNDING SOURCES?

        Question. GAO has recommended that the administration pay closer
    attention to non-financial mechanisms used by terrorist financiers to
    generate and distribute funds.
        To what extent is the Treasury Department, and its Office of
    Terrorism and Financial Intelligence (TFI) in particular, interested in
    and able to concentrate on non-conventional money-generating and money-
    moving networks such as the trade in commodities--gold, diamonds,
    cigarettes, and gemstones?
        Answer. TFI examines all forms of financial networks that support
    terrorist, WMD and other illicit activity, including trade-based money
    laundering and potentially illicit trade in commodities.
        FinCEN recently issued an interim final rule that requires dealers
    in precious metals, stones or jewels to establish and maintain anti-
    money laundering programs to prevent and detect money laundering and
    terrorist financing. In addition, the Bank Secrecy Act requires all
    trades and businesses in the United States to report the receipt of
    cash, or cash equivalents, in excess of $10,000 to FinCEN. This
    information is captured on the FinCEN/IRS 8300 form which also provides
    a ``suspicious transaction'' box to alert law enforcement and
    regulatory agencies to the possibility of criminal activity. Perhaps
    most importantly, the Bank Secrecy Act has many reporting and
    recordkeeping requirements on banks, money service businesses, broker
    dealers and other financial institutions in the United States
    including, but not limited to, the reporting of cash and suspicious
    transactions by customers. Since all types of non-conventional money-
    generating or money-moving networks use banks or other types of
    financial institutions to place and move funds, financial activities by
    these entities are reported, or otherwise available to, law
    enforcement, intelligence and regulatory authorities. Attempts to evade
    the Bank Secrecy Act by way of ``structuring'' or bulk-cash
    transportation also make criminals vulnerable to detection by law
    enforcement.
        Additionally, TFFC is working with the relevant FATF-style Regional
    Bodies (FSRBs) to examine trade-based money laundering and to craft
    innovative solutions. TFFC has worked extensively with the interagency
    community, particularly Immigration and Customs Enforcement (ICE) at
    the Department of Homeland Security, to understand and counteract the
    trade-based money laundering employed by Colombian narcotics groups
    through the Black Market Peso Exchange. TFFC and ICE have worked
    through international organizations such as the FATF to develop
    typologies of trade-based money laundering and continue to collaborate
    with international partners and exchange trade-based data as a means of
    identifying trade-based money laundering networks and taking
    appropriate responsive action.
        Finally, OFAC focuses on any entities that meet the criteria for
    designation under Executive Orders and statutes it implements. Insofar
    as such entities include non-conventional money generating/moving
    entities, OFAC investigates the ways in which such entities are moving
    money in connection with individuals and entities on OFAC's List of
    Specially Designated Nationals and Blocked Persons (SDN list). Thus,
    OFAC's focus is not on any one kind of entity, but rather on any entity
    moving value for the benefit of a narcotics trafficker's or terrorist's
    or WMD proliferator's organization.

                  WHAT ABOUT ADDRESSING OFFSHORE BANKS, ETC.?

        Question. It has been suggested that the U.S. Government is
    neglecting the role played by offshore banks, shell companies, and
    business fronts in funding terrorism. Do you agree?
        Answer. No. FinCEN requires financial institutions to establish and
    maintain adequate anti-money laundering programs with systems and
    controls, training, testing and designated personnel to detect and
    report suspicious activity, including terrorist financing. Offshore
    banks, shell companies and business fronts have long been acknowledged
    as high risk entities. As such, these entities are subject to elevated
    due diligence standards by financial institutions to ensure compliance
    with the suspicious activity reporting requirement of the Bank Secrecy
    Act. Failure to develop an adequate anti-money laundering program and
    failure to report suspicious activity involving offshore banks, shell
    companies and business fronts has resulted in very significant civil
    money penalties by FinCEN. See http://www.fincen.gov/
    reg_enforcement.html.
        Title III of the USA PATRIOT Act provides the U.S. Government with
    powerful tools to prevent these entities from being utilized by
    terrorists to raise and move funds. Section 312 requires financial
    institutions to apply enhanced due diligence policies and procedures to
    correspondent accounts maintained for certain foreign banks operating
    under offshore banking licenses. Section 313(a) prohibits U.S.
    financial institutions from providing correspondent accounts in the
    United States to foreign banks that do not have a physical presence in
    any country. It also requires these financial institutions to take
    reasonable steps to ensure that correspondent accounts provided to
    foreign banks are not being used to provide banking services indirectly
    to foreign shell banks and financial institutions are required to
    obtain certification to this effect.
        The U.S. Government has also taken action against jurisdictions
    with respect to their offshore sectors. Under the provisions of Section
    311, the U.S. Government determined Nauru to be a jurisdiction of
    primary money laundering concern and proposed instituting special
    measures against it in 2002 for its failure, among other things, to
    adequately supervise its offshore banking sector. The U.S. Government
    has also been pursuing cases where offshore banks have attempted to
    manipulate U.S. branches, affiliates, and correspondents by using the
    U.S. financial system to route transactions in violation of our
    sanctions. We are working diligently with the banking community and
    with international regulators to ensure transparency in transfers such
    as cover payments where there is little information about underlying
    transactions. We also have extensive outreach and educational programs
    in place to address manipulation of check-clearing and trade finance
    mechanisms.
        The U.S. Government participates actively in international bodies
    such as the Financial Action Task Force (FATF) and the Offshore Group
    of Banking Supervisors (OGBS) that promote effective implementation of
    international anti-money laundering and counter-terrorist financing
    standards in offshore financial centers.
        OFAC has been pursuing cases where offshore banks have attempted to
    manipulate U.S. branches, affiliates, and correspondents by using the
    U.S. financial system to route transactions in violation of our
    sanctions. We are working diligently with the banking community and
    with international regulators to assure transparency in transfers such
    as cover payments where there is little information about underlying
    transactions. We also have extensive outreach and educational programs
    in place to address manipulation of check clearing and trade finance
    mechanisms.
        Question. Can Treasury play an expanded role in this area?
        Answer. Treasury continues to monitor jurisdictions and
    institutions overseas to identify offshore sectors and activities that
    could pose potential threats to the U.S. financial system. We will
    utilize the authorities made available to us by Congress under the Bank
    Secrecy Act (BSA) as amended by the USA PATRIOT Act including section
    311, the International Emergency Economic Powers Act (IEEPA) and other
    statutes to address these specific threats through targeted economic
    and financial sanctions, rulemaking and the issuance of advisories,
    alerts and reports to industry.

                   TREASURY'S OFFICE OF INTELLIGENCE ANALYSIS

        Question. Ms. Gardner, the 9/11 Commission stated that terrorist
    financing had not been a priority for either domestic or international
    intelligence collection and, as a result, intelligence reporting on the
    issue was not up to par.
        How has Treasury's relatively new Office of Intelligence Analysis
    contributed to overall intelligence collection?
        Answer. While Treasury's Office of Intelligence and Analysis (OIA)
    is primarily an analytical unit, it has already begun to play a role in
    improving the Intelligence Community's (IC) collection efforts on
    terrorist financing. In 2005, OIA hired a full-time Requirements
    Officer, who submits requirements and evaluations on behalf of all
    Treasury entities, including OFAC and FinCEN, to the IC. In these
    requirements submissions, Treasury includes comprehensive background
    information as well as a detailed statement of Treasury's intelligence
    gaps to help focus the IC on Treasury's needs. In response to these
    detailed requirements, Treasury has received a greatly increased level
    of tailored support from the IC. OIA is in the process of hiring
    another Requirements Officer to help with its growing responsibilities
    in this area. OIA has played a particularly significant role in
    improving IC collection on the Iraqi insurgency. OIA is serving as the
    co-lead with the Department of Defense on the Baghdad-based Iraq Threat
    Finance Cell (ITFC). The Treasury presence in Iraq on the ITFC is
    already paying dividends. More and better detailed information on
    insurgency finance issues is becoming available, due in part to the
    increased analytic focus on this issue. In addition, the financial
    intelligence analysts have provided great support to the military in
    identifying trends and patterns in insurgency financing in the context
    of a cash-based economy.

                           WHERE DO WE GO FROM HERE?

        Question. Mr. Levey and Mrs. Gardner, the 9/11 Commission report
    suggests that the strategy for terrorist financing should shift from
    seizing assets to gathering intelligence since it may not be achievable
    or cost effective to attempt to deny terrorists funding. Terrorists are
    increasing seeking more informal ways of moving money and terrorist
    networks themselves are becoming more decentralized and self-
    supporting.
        What, do you believe, is the appropriate combination of goals to
    address terrorist financing?
        Answer. The imposition of sanctions by the United States and its
    international partners against terrorists, terrorist organizations and
    their support structures is a powerful tool with far-reaching effects
    that goes beyond the blocking of terrorist assets. Designating
    individuals or organizations as SDGTs (Specially Designated Global
    Terrorists), SDTs (Specially Designated Terrorists), or FTOs (Foreign
    Terrorist Organizations) notifies the U.S. public and the world that
    these parties are either actively engaged in or supporting terrorism or
    that they are being used by terrorists and their organizations to
    support the terrorist agenda. Notification also serves to expose and
    isolate these individuals and organizations and denies them access to
    the U.S. financial system, and in the case of a U.N. designation, the
    global financial system. In addition, the imposition of economic
    sanctions can assist or complement the law enforcement actions of other
    U.S. agencies and/or other governments.
        As long as terrorists, terrorist organizations and their support
    structures continue to target the United States and its allies, we must
    make every effort to combat them and targeted sanctions is one of the
    tools employed by the United States. Terrorists are becoming more
    sophisticated at attempting to evade sanctions. Such activity
    necessitates our continuing efforts to identify, expose and target
    morphed or reformed terrorist organizations, front companies, and
    agency relationships that may be developed to evade sanctions and allow
    them access to the United States and international financial systems.
    Unless the United States and its allies apply constant and unrelenting
    pressure, terrorists will immediately exploit any opportunities that
    become available.
        Denying terrorists, especially their financial supporters, the
    convenience and benefits of using traditional legitimate economic and
    financial systems has created another barrier to their activities and
    has impeded their support networks. Removing those hurdles to the
    funding of their infrastructures will not produce a benefit because
    they will be able to revert to using unprotected traditional systems.
    Keeping those barriers in place requires undiminished commitment by
    Treasury at the same time that the alternative systems that terrorists
    and their supporters may choose to use become another target set for
    action by the U.S. Government. It gains us nothing in the war on
    terrorism to remove security from the front gate because the terrorists
    have started trying to tunnel beneath the fence. Subsequently, in the
    War on Terror, there are arguably no diminishing returns because even
    stopping or impeding only one terrorist act saves lives and adds to the
    national and economic security of the United States and its allies.
        Question. Given these trends and given the fact that we don't have
    unlimited dollars, how can we get the most for the money spent?
        Answer. Treasury focuses on two goals regarding terrorist
    financing: to identify and close vulnerabilities in the international
    financial system and to identify, disrupt and dismantle the financial
    networks that support terrorist organizations. The overall impact of
    these effects is to make it costlier, riskier, and less efficient for
    terrorists to move their funds through the international financial
    system. Treasury gets the most for the money spent by focusing on these
    two strategic priorities. Therefore, the extent to which terrorists are
    forced to rely on more cumbersome and less reliable methods of funds
    movement is a measure of success. The response to this development,
    however, is to redouble our efforts to target all financial channels,
    both formal and informal.
        Treasury will continue to apply its authority, in coordination with
    the inter-agency national security infrastructure, to disrupt the
    financing of terrorism and deter terrorist operations.

      DO BANKING AGENCIES COMPLY WITH FINCEN'S BANK SECRECY REQUIREMENTS?

        Question. Last year, I asked how regulatory agencies can seriously
    comply with the required exchange of bank secrecy data when there is no
    penalty if they don't comply. The Department's answer was to say that
    an unprecedented level of cooperation has been reached with the banking
    agencies and that including a penalty provision would have undermined
    this cooperation.
        So, can you say that up through today, since the enforcement action
    against Riggs National Bank, all the banking agencies have been fully
    cooperative?
        Answer. Yes. The Riggs National Bank matter served notice of the
    problems that can arise with respect to an absence of cooperation,
    unintentional or otherwise, among Federal agencies with parallel or
    overlapping jurisdiction. Based partly on the Riggs matter, FinCEN
    entered into Memoranda of Understanding (MOU) with the Federal banking
    agencies in October 2004. FinCEN has and will continue to enter into
    MOU with other Federal and State agencies, as appropriate. The MOU
    ensure that FinCEN receives timely notice of all significant Bank
    Secrecy Act (BSA) related findings, and ensure cooperation among the
    stakeholder agencies with respect to compliance with, and enforcement
    of, the anti-money laws of the United States.
        In accordance with Memoranda of Understanding with FinCEN, all
    Federal and State law enforcement and regulatory agencies are required
    to safeguard BSA data acquired from FinCEN from unauthorized
    disclosures. In order to ensure the effectiveness of the safeguards,
    FinCEN conducts inspections of agencies that receive BSA data.
        In regard to information flowing to FinCEN from the Federal banking
    agencies, we have instituted systems and controls to ensure the data is
    not disseminated to unauthorized personnel. In fact, the Memoranda of
    Understanding with the Federal banking agencies of October 2004 contain
    an explicit provision prohibiting the unauthorized disclosure of BSA
    and other ``confidential supervisory information'' by FinCEN to
    unauthorized parties.
        In addition, 31 U.S.C. 5318(g)(2) prohibits any director, officer,
    employee or agent of a financial institution to notify any person
    reported on a suspicious activity report that such a report has been
    filed with FinCEN. This same section prohibits any officer or employee
    of any Federal, State or local government from doing the same, other
    than as necessary to fulfill official duties. Furthermore, government
    employees are subject to a host of legal and administrative sanctions
    for unauthorized disclosures of protected information, including BSA
    information.
        Question. FinCEN recently stood-up its Office of Compliance, among
    other things, to analyze Bank Secrecy Act examination data provided by
    regulators.
        What is your assessment of how successful FinCEN has been with its
    analysis of bank secrecy data and have results been demonstrated?
        Answer. FinCEN provides a broad range of analyses of Bank Secrecy
    Act (BSA) data to Federal, State, local and foreign law enforcement and
    regulatory customers. These analyses play an important role in
    safeguarding the financial system from the abuse of financial crime,
    including money laundering, terrorist financing, and other illicit
    activity. Specifically, FinCEN analysis of BSA data identifies
    relationships among targets of law enforcement investigations,
    identifies patterns of funds movement, and identifies the locations of
    suspects and their assets. FinCEN analysts also enhance BSA data with
    all-source information in providing findings and options to customers.
    FinCEN has developed a suite of analytical tools that enable analysts
    to conduct complex mining of BSA data, and to depict results with
    graphic displays of data relationships and financial flows.
        In fiscal year 2005, FinCEN provided BSA data analysis in response
    to 1,436 requests from domestic and foreign law enforcement, regulatory
    and intelligence customers. For the first half of fiscal year 2006,
    FinCEN provided analysis in response to 742 customer requests. FinCEN's
    customers for this work also include foreign financial intelligence
    units (FIUs) that are members of the Egmont Group of FIUs, comprising
    101 participating countries. The Egmont Group is committed to a global
    effort to combating money laundering and terrorist financing through
    FIU cooperation and information exchange. During the past 5 years,
    Egmont FIU case requests to FinCEN have grown 32 percent annually on
    average. FinCEN also works with financial regulators, including
    FinCEN's own regulatory component (FinCEN's Regulatory Policy and
    Programs Division), the Federal banking supervisory authorities, the
    Internal Revenue Service, and 41 State banking supervisory agencies.
    FinCEN's BSA data analysis in response to these requests supports
    pending enforcement actions against particular non-compliant
    institutions, and also supports possible Bank Secrecy Act policy
    enhancements. This type of analysis has identified compliance issues
    previously undetected in certain depository institutions and money
    services businesses and, since August 2005, has supported at least six
    significant enforcement actions against three banks, one broker-dealer
    firm, a casino and a money services business.
        FinCEN's BSA data analysis for regulatory customers also provided
    filing trends and patterns and identified vulnerabilities in certain
    financial industry segments. For example, information gleaned from the
    study of Suspicious Activity Reports (SARs) relating to the insurance
    industry was used in developing new insurance regulations. FinCEN's BSA
    data analysis also supports guidance to the private sector, including
    ``The SAR Activity Review--Trends, Tips & Issues'', as well as the bi-
    annual publication of ``The SAR Activity Review--By the Numbers'', a
    compilation of numerical data gathered from Suspicious Activity Reports
    filed by all institutions with mandatory suspicious activity reporting
    requirements. Financial industries members widely use both analytical
    publications.
        The large volume of customer requests to FinCEN for analysis is one
    important measure of the effectiveness of FinCEN's BSA data analysis.
    Another important measure is customer satisfaction. FinCEN's most
    recent survey of customer satisfaction, which was conducted by an
    independent evaluator from August to October 2005, included a
    statistically valid sample of the FinCEN customers of four types of
    analysis products (investigative target reports, investigative case
    reports, SAR activity review, and strategic analysis products). The
    survey results indicated 73 percent of FinCEN's customers found
    FinCEN's analytic support valuable.
        The effectiveness of FinCEN's analysis of BSA data also is
    highlighted in the outcomes of specific cases. Recent examples of
    effective outcomes include the following:
      --FinCEN completed a proactive targeting case initiated based on a
            Suspicious Activity Report that alleged possible terrorist
            financing based on suspicious wire transfers. The bank referred
            to numerous instances of the company being identified as a
            front or shell company for Hezbollah. The report explored
            potential connections between Islamic terrorism fund-raising
            and narcotics money laundering through an examination and
            analysis of Bank Secrecy Act information on a company located
            in South America, and a company believed to be affiliated in
            Central America.
      --A geographic threat assessment was completed on the Southwest
            Border based on analysis of all BSA data forms for counties
            bordering Mexico. The threat assessment was requested by the
            Texas Department of Public Safety's (DPS) Directed Intelligence
            Group in an effort to identify money laundering hot spots. The
            DPS is working toward intelligence-driven operations and
            investigations, and with this threat assessment of money
            laundering hotspots will be able to direct and train their
            intelligence collection efforts much more effectively.
            Recently, criminal investigators in Texas noted that
            debriefings of suspects in the southwest border region
            indicated suspects were under pressure to find crossing points
            other than Laredo, Texas, and El Paso, Texas, because of the
            increased observation that those locations have been receiving
            as a result of the FinCEN assessment.
      --FinCEN examined SARs through one of its BSA search and analysis
            tools to identify activity associated with the suspicious
            remittance of U.S. dollars to Colombia via Automated Teller
            Machines (ATMs). Research identified a cluster of 11
            interrelated SARs associated with a man and a woman located in
            the United States who were depositing and transferring funds
            into or through 36 accounts at 8 U.S. banks. SARs indicated
            that a large percentage of the funds were subsequently remitted
            back to Colombia through ATMs at the rate of 57 to 157
            withdrawals per day. Currency Transaction Reports (CTR) and
            Currency and Monetary Instrument Reports (CMIR) verified
            statements made by the man that the funds were derived from
            cash imported from Colombia. This activity, initially provided
            to law enforcement as an investigative referral, provided only
            a snapshot of what could be a much larger pattern of activity.
      --FinCEN supported an Immigration and Customs Enforcement (ICE) field
            office effort to identify unlicensed/unregistered remittance
            businesses in a specific geographic area of Virginia. FinCEN
            found no viable targets through the SAR targeting method of
            querying key words in the SAR narratives, e.g., ``wire
            transfer,'' ``remittance,'' ``hawala,'' etc. As a result,
            FinCEN downloaded CTRs filed by banks in the specified area,
            and after conducting analysis of the CTRs through an ad hoc
            database, was able to identify seven targets.
      --FinCEN utilized CTR targeting in support of an ICE investigation
            into alleged willful negligence by a large bank. The
            investigation was initiated after it was discovered that the
            bank had not filed SARs on large, suspicious cash deposits by a
            convicted heroin money launderer. FinCEN focused its efforts on
            finding other individuals or businesses that had conducted
            similar activity through the same and other banks in the
            geographic area. Through the use of CTRs, FinCEN profiled the
            activity of the heroin money launderer then identified similar
            activity by downloading all CTRs where the number and amount of
            CTR activity was similar to that of the money launderer. The
            effort resulted in an extensive list of targets that resulted
            in a number of ``spin-off'' investigations by ICE and IRS-CI.
            fincen's registration of money service businesses (msbs)
        Question. The Treasury IG has found that a little over 1 year ago,
    only a small number of the Money Service Businesses (MSBs) such as
    Western Union and post offices that do money orders, had registered
    with FinCEN as required by the Money Laundering Suppression Act of
    1994. As of a few months ago, FinCEN's published list of MSBs had only
    increased a little bit, not much of an improvement.
        What is being done to improve this registration effort?
        Answer. Since the implementation date of the registration
    requirement for money services businesses on December 31, 2001, it is
    clear that identifying the universe of businesses subject to our money
    services businesses-anti-money laundering regulatory regime is one of
    the greatest challenges we face as an agency. Finding ways to enhance
    compliance with the registration requirement has been one of our
    focuses since the inception of the registration concept.
        FinCEN developed and is implementing a comprehensive strategy in
    fiscal year 2006 for addressing the challenges posed by the
    identification and registration of money services businesses. The
    success of our efforts to increase registration, and therefore
    establish transparency in this segment of the financial services
    industry, will depend in large part upon our approach to
    communications, education, and industry outreach. We are in the process
    of upgrading our money services business internet website, translating
    the current instructional brochures into various foreign languages,
    fully implementing the Bank Secrecy Act resource center, and developing
    and implementing a comprehensive education program for the Internal
    Revenue Service examiners, our State regulatory partners and the
    industry.
        Over the past several years, we have devoted considerable resources
    to conduct aggressive outreach and education campaigns concerning Bank
    Secrecy Act (BSA) requirements. Despite those efforts, some in the
    industry, particularly those that offer these services only as an
    ancillary component of their primary business, appear to be unfamiliar
    with or unaware of their obligations under the BSA. At the same time,
    as indicated by the volume of requests for administrative rulings and
    numerous questions received at industry conferences, it is apparent
    that the current regulatory framework would benefit by more clarity
    that can be provided through the development and issuance of guidance,
    such as advisories, frequently asked questions, and the like.
        Therefore, we have stepped up our efforts to clarify the
    expectations that accompany these requirements. For example, on April
    26, 2005, FinCEN published guidance to the money services business
    industry which clearly established the expectations for compliance with
    the registration, anti-money laundering program, recordkeeping and
    reporting requirements of the Bank Secrecy Act. On the same date,
    FinCEN and the Federal banking agencies published joint guidance to
    banking organizations that explained these expectations to entities
    providing banking services to money services businesses. On February 3,
    2006, we published guidance to reinforce and clarify the registration
    requirements for money services businesses.
        Question. Now that more than 4 years have passed since the
    registration requirement became effective, how many MSBs have been
    penalized for non-registration or failure to register?
        Answer. To date, we have not penalized a money services business
    for failure to register under the Bank Secrecy Act. However, we have
    supported efforts by the Internal Revenue Service (IRS) to upgrade its
    Bank Secrecy Act (BSA) examination capabilities by providing revisions
    to the IRS examination manual for non-bank financial institutions, and
    by providing instruction on risk-based examination procedures at IRS
    examiner training programs. We believe that these efforts are beginning
    to show positive results. During fiscal year 2005, the IRS conducted
    examinations of 3,700 entities for compliance with the BSA, including
    registration. Furthermore, since July 28, 2005, the Office of
    Compliance at FinCEN referred 27 suspected unregistered money services
    businesses to the IRS's Small Business/Self-Employed Division for
    possible examination.
        FinCEN has, however, recently penalized a money services business
    for violating various provisions of the Bank Secrecy Act. On May 9,
    2006, FinCEN issued a civil money penalty in the amount of $10,000
    against a money services business located in Tampa, Florida. FinCEN
    determined that this money services business failed to develop and
    implement a written anti-money laundering program reasonably designed
    to ensure compliance with the Bank Secrecy Act which led, in turn, to a
    failure to file 80 currency transaction reports. In fact, the money
    services business had a zero currency transaction reporting compliance
    rate during the period of the BSA deficiencies.
        Question. How has the registration program for MSBs enhanced
    FinCEN's ability to identify potential terrorist financing, money
    laundering, and other financial crimes?
        Answer. The registration requirement is one of many Bank Secrecy
    Act (BSA) requirements that enables FinCEN to further its mission of
    safeguarding the financial system from abuses of financial crime,
    including terrorist financing, money laundering and other illicit
    activity. The registration requirement facilitates transparency and
    critical identifying information about the thousands of money services
    businesses operating in the United States, including readily available
    information on agent outlets of the major money service business
    companies. In cases involving non-compliant money services businesses,
    we can compel immediate corrective action with registration. In cases
    involving egregious or willful failure to register under the BSA, we
    can seek and impose appropriate remedies.
        As a natural by-product, the registration requirement also enables
    banks, which money services businesses must eventually use, to gauge
    the level of knowledge and compliance with the anti-money laundering
    and terrorist financing provisions of the BSA. Upon discovery of
    suspected criminal activity or non-compliance with the BSA by money
    services business customers, banks can file suspicious activity reports
    to enable law enforcement and regulatory agencies to respond
    appropriately.

    CAN THE PRESIDENT'S NEW COMMUNITY DEVELOPMENT PROGRAM FILL THE ROLE OF
                                   CDFI FUND?

        Question. Secretary Snow, you mention in your opening statement
    that the President is only requesting $7.8 million for the Community
    Development Financial Institutions (CDFI) Fund, which was funded at $55
    million last year. The funding that the President is requesting will
    only support the New Markets Tax Credit program. The other CDFI Fund
    activities he proposes to consolidate with other community development
    programs as part of the Strengthening America's Communities Initiative
    (SACI). As you know, the President made a similar proposal last year,
    which the Congress rejected.
        The other programs within the CDFI Fund are critical in bringing
    financial services and private investment into underserved communities.
    For every dollar that the Federal Government spends, these CDFIs are
    able to attract $20 in private sector investment. These funds are used
    to support programs that help support the creation of small businesses,
    assist with homeownership, even bring ATMs to communities. In my home
    State of Washington, one CDFI, the Cascadia Revolving Loan Fund has
    used grant money to increase its capacity and support innovative
    programs like their Child Care Fund which offers financing and
    technical assistance to child care providers so that they can open
    their own child care centers and bring quality child care to these
    communities.
        Since the CDFI Fund helps to bring capital and financial services
    to communities and individuals that traditional banks view as too
    risky, how will the President's proposed community development program
    specifically address this need for access to financial institutions in
    underserved communities?
        Answer. The proposed Strengthening America's Communities Initiative
    (SACI) for fiscal year 2007 differs substantially from the fiscal year
    2006 SACI envisioned model. Last year, 18 community and economic
    development programs, which included three of the CDFI Fund's monetary
    award programs and the Department of Housing and Urban Development's
    Community Development Block Grant (CDBG) Program, among others, were to
    be consolidated under the aegis of the Department of Commerce. This
    proposal was rejected by Congress.
        The fiscal year 2007 SACI proposal has the CDBG Program remaining
    at HUD with revised eligibility criteria; with the exception of the
    Economic Development Administration, all of the other community and
    economic development programs have been zeroed out with no new program
    funding (or substantially reduced funding) and no planned program
    transfers to HUD or the Department of Commerce.
        Thus, the President's proposed fiscal year 2007 budget eliminates
    the Fund's three monetary award programs and provides $7.8 million to
    administer only the NMTC Program and the portfolio of existing awards.
        Question. Instead of developing a new program to serve this
    purpose, wouldn't it make more sense to continue one that is successful
    in meeting these needs?
        Answer. While there are numerous community development programs, we
    believe a more focused SACI program would provide better results to
    individuals and communities.
                                     ______

                Questions Submitted by Senator Richard J. Durbin

                               THE NATIONAL DEBT

        Question. In my opening statement, I talked briefly about the
    ramifications of the massive amount of our national debt that is
    currently held by foreign governments. I alluded to the fact that I
    wanted to talk a bit more about China in particular. Here's why:
    according the Associated Press, earlier this week a vice chairman of
    China's parliament suggested that China should stop buying U.S.
    Treasuries and should take steps to reduce its holdings in those bonds.
        Mr. Secretary, if foreign governments start dumping our debt, won't
    that destabilize our economy? Won't that destabilize the whole
    international financial system, which for years now has relied upon
    American demand to fuel economic growth? What do you think will happen
    if China starts selling?
        Answer. The market for Treasury securities is large, liquid, and
    deep. China could reduce its rate of accumulating Treasury securities,
    even substantially, without significantly affecting U.S. financial
    markets. Despite recent large purchases, China's holdings of Treasury
    securities are still modest relative to the size of the market. China's
    holdings of Treasury securities are estimated to be 7.8 percent of the
    $4.1 trillion in Treasury securities not held by U.S. Government and
    Federal Reserve accounts at the end of March.
        Chinese investors bought around $98 billion in Treasury securities
    to their portfolios in the 12 months through March 2006. This is around
    $400 million per trading day. The daily turnover in the Treasury market
    is over $500 billion. The Chinese authorities have subsequently stated
    that they do not plan to change the proportion of U.S. Treasury
    securities purchased for or held in their foreign reserves.
        In this regard, it is notable that net purchases of U.S. securities
    by all foreign official institutions have declined substantially from
    the peak year 2004 without exerting a significant influence on U.S.
    financial markets. Foreign official purchases of long-term reached $236
    billion in 2004, before falling to $111 billion in 2005.

                                  THE TAX GAP

        Question. Mr. Secretary, it's tax time. As my constituents in
    Illinois are racing to get their taxes filed before the deadline in a
    couple of weeks, good people assume that they should pay their taxes
    because it is the right thing to do, because everyone needs to do their
    part. But in 2001, an estimated $353 billion in Federal revenues has
    been lost because some people decided not to pay or to underpay their
    taxes. That works out to $16 out of every $100 owed. This so-called
    ``tax gap'' has likely gotten even worse since 2001.
        I don't think that Treasury should make it their mission to track
    down every last dollar owed to the government, because that is too
    expensive for the government to do that and would lead to unnecessary
    hassling of good, honest families that are trying their best to pay
    their taxes correctly. But $353 billion is a big, big number. We simply
    have too much debt outstanding to ignore this problem.
        What is Treasury going to do to close this gap?
        Answer. Our tax gap estimates are derived from a National Research
    Program (NRP) study of Tax Year 2001 individual income tax returns. The
    final estimates from that study showed that the gross tax gap was $345
    billion while the net tax gap, what's left after enforcement and late
    payment collection, is $290 billion. This is a voluntary compliance
    rate of 83.7 percent.
        The IRS is committed to increasing the voluntary compliance rate to
    85 percent by 2009 and is taking several steps to achieve this goal.
    First, and perhaps most importantly, the IRS must continue the balanced
    approach of emphasizing both service and enforcement as the best means
    to achieve compliance. From a service perspective, the IRS is
    increasing its focus on electronic tax administration. Large businesses
    and large tax exempt organizations are already required to e-file. In
    the most recent filing season, over 70 million individual taxpayers
    filed their returns electronically. This number rises every year. E-
    filing is a win-win for both the taxpayer and the IRS. For the
    taxpayer, there is less chance of error on a return prepared and filed
    electronically. Plus, the taxpayer receives a quicker refund and a
    notice that the return has been received. For the IRS, the marginal
    cost for an e-file return is $0.28 as compared to $2.65 for paper
    returns. This cost savings allows the IRS to re-direct resources to
    other areas.
        IRS is also putting in place a Taxpayer Assistance Blueprint, an
    ambitious program designed to improve the overall level of service
    provided to taxpayers.
        From an enforcement perspective, IRS is making good use of the
    additional $442 million included in the fiscal year 2006 IRS budget for
    enforcement. It is focusing those resources to maximize the use of each
    dollar dedicated to enforcement. Specifically, the IRS is:
      --Increasing the coverage of high-risk compliance issues to address
            the largest portion of the tax gap--the underreporting of tax--
            across all major compliance programs;
      --Looking at complex high-risk issues in abusive tax avoidance
            transactions, promoter activities, corporate fraud and
            aggressive transactions, all resulting in increased corporate
            and high income audit coverage;
      --Improving our ability to identify compliance risks within the tax
            exempt communities; and
      --Leveraging our resources with those of the States to address common
            tax gap issues such as more timely data matching, increased use
            of State data for IRS enforcement actions and the development
            of complementary Federal/State enforcement strategies based on
            the NRP data.
        Second, the IRS is trying to find ways to increase third party
    information reporting. This will allow the IRS to match what a third
    party reports with what the taxpayer reports on his or her income tax
    return. The NRP study showed that there is a high correlation between
    items subject to information reporting systems and taxpayers' reporting
    of such items on their tax return. Where there is no third party
    reporting, the compliance rate drops dramatically. As a result, it is
    incumbent on us to find ways to increase information reporting that
    will not overly burden either the taxpayer or the entity that is
    required to report. A good example of this is the proposal in the
    President's fiscal year 2007 budget to require reporting of aggregate
    payment card reimbursements made to retail merchants each year. This
    will allow the IRS to match payments made to retail merchants by a
    payment card issuer to what the merchant reports as income on his or
    her income taxes.
        Third, we must become more efficient in resource utilization. One
    of the benefits of the NRP study is that it will allow us to refine our
    audit selection formulas for several examination classes. In addition,
    these formulas will help us better calibrate the resources in our
    various business units so they can operate more efficiently and impose
    less of a burden on compliant taxpayers. We do not have the resources
    to return to the high audit rates of the past, but we are using the NRP
    results to manage our compliance programs more effectively and to
    design pre-filing activities that help taxpayers comply with the law.
        Fourth, we need to change the law in several critical areas. I have
    already mentioned the legislative proposal in the President's fiscal
    year 2007 proposed budget to require payment card issuers to report
    aggregate payments made to retail merchants. There are four other
    specific legislative proposals included in the President's fiscal year
    2007 proposed budget designed to reduce the tax gap also included. They
    are:
      --Clarify the circumstances in which employee leasing companies and
            their clients can be held jointly liable for Federal employment
            taxes;
      --Expand information reporting to certain payments made by Federal,
            State and local governments to procure property and services;
      --Amend Collection Due Process procedures for employment tax
            liabilities; and
      --Expand to non-income tax returns the requirement that paid return
            preparers identify themselves on such returns and expand the
            related penalty provision.
        In conclusion, it is safe to say that substantial reductions in the
    tax gap will only be achieved through fundamental reform and
    simplification of the tax laws. Achieving significant reductions,
    absent such reform, would necessitate draconian measures that would
    involve the IRS in the lives of taxpayers in ways that they would never
    accept. But we can and will make improvements in the mean time as
    embodied in our goal of 85 percent compliance by 2009.

                            WORKER MISCLASSIFICATION

        Question. Mr. Secretary, I am concerned with how many contractors
    currently misclassify their workers as independent contractors rather
    than employees. Contractors do this so they have no responsibility for
    the withholding of State, Federal, and social security taxes from
    employee's paychecks, as that responsibility rests on the worker. These
    contractors gain an additional competitive advantage in that they avoid
    all the insurance costs of having employees.
        Workers are then paid in cash by the contractor, and all too often,
    the worker does not declare any income, and does not pay any of the
    required taxes. The loss of tax revenues has been estimated at over
    $400 billion per year.
        Not only is this misclassification issue shortchanging various
    State and Federal agencies, and therefore the general public who relies
    on programs such as social security and Medicare, but it is putting
    honest contractors and honest workers out of business. The cheating
    contractors can do business at 24 percent less cost than honest
    contractors, and honest contractors and workers have a hard time
    competing for jobs.
        In my home State of Illinois, this is a growing problem that has to
    be addressed immediately. From the years 2001-2004, State of Illinois
    Audits found that 17.3 percent of Illinois employers audited had
    misclassified workers as independent contractors. In 2004 alone, the
    rate of misclassification was 21 percent--67,745 employers statewide
    and 7,478 in construction. This results in $158 million in lost income
    tax in Illinois alone in 2004, $18 million of which is lost from the
    construction sector.
        Are you aware of this misclassification issue? If so, are you
    planning on stepping up enforcement efforts to catch the cheats who
    game the system at the cost of the general public and honest
    contractors?
        Answer. Misclassification of workers has been a long-standing issue
    for the Internal Revenue Service (IRS).
        There is currently no estimate for the portion of the tax gap
    attributable to misclassification of workers, however, we believe it is
    significant. The portion of the tax gap attributable to employment
    taxes is estimated to be $54 billion. Of the Federal tax gap, $109
    billion is attributable to underreporting of business income. Schedule
    C income, which is subject to little or no third-party reporting or
    withholding, has a net misreporting percentage of 57.1 percent. This
    includes the misclassification of workers. As you can surmise,
    noncompliance with Federal employment tax laws also affects State
    budgets, State unemployment compensations funds, and Workman's
    Compensation pools.
        It is important to note that the misclassification of workers can
    run the gamut from employers who are just not aware of their employment
    tax requirements to intentional noncompliance.
        We are planning on stepping up enforcement in this area. The IRS
    has increased its efforts over the past few years to address the
    employment tax gap. In fiscal year 2005, 33,748 employment tax returns
    were examined, an increase of 85 percent compared to fiscal year 2004.
    Worker classification issues were raised in approximately 2,400 of
    these examinations. Our work plans for fiscal year 2006 called for
    increasing employment tax examinations of which approximately 5,800
    will address worker classification issues. We are currently increasing
    our Employment Tax staff which will allow us to perform additional work
    in the future.
        The most egregious worker classification issues are identified
    through the Employment Tax Worker Classification Examination Program
    which identifies employers who may be misclassifying workers based on
    filing of Forms 1099.
        Additionally, several other initiatives are in process to address
    the misclassification issue including:
      --The Social Security Administration (SSA) processes corrections to
            individual earnings records (including situations where
            earnings are missing from the record). Each week, SSA refers a
            listing of workers whose earnings have been corrected to the
            IRS. Some of the employers identified did not file income tax
            or employment tax returns, and further investigation often
            reveals the employers paid the workers in cash and also did not
            file Forms 1099-MISC.
      --As the Administrator of the Bank Secrecy Act (BSA), the Financial
            Crimes Enforcement Network (FinCEN) requires depository
            institutions and other industries vulnerable to money
            laundering to file Currency Transaction Reports (CTRs) which
            report cash transactions of $10,000 or more. Acting as FinCEN's
            agent under the BSA, these reports are transferred to the IRS
            Detroit Computer Center and entered into a database called the
            Currency and Banking Retrieval System (CBRS) which is accessed
            by FinCEN's law enforcement customers. The IRS also uses
            FinCEN's BSA data to identify employers who cash large checks
            in a pattern consistent with using the money to fund employee
            cash payrolls or pay incorrectly classified workers in cash
            with little or no accounting thereof. We are increasing the
            number of audits we conduct based on this information in fiscal
            year 2007.
        We have also used IRS databases to compare wage and labor
    deductions on business returns with corresponding employment tax return
    filings. Where the appropriate employment tax returns are not filed, an
    employment tax examination is considered with a potential worker
    classification issue. We are planning an increase in these audits in
    fiscal year 2007 as well.
        Workers who feel they should be classified as employees can file
    Form SS-8, Determination of Worker Status, with the IRS. After an
    exchange of information with the employer, the IRS makes a
    determination of worker status and refers the more egregious employers
    to the field for possible examination. In the past 3 years, workers
    filed more than 17,000 Forms SS-8. This is a source of worker
    misclassification cases that we use to identify employers for
    examination.
        We also have misclassification cases under investigation as part of
    our emphasis on abusive transactions and abusive schemes. As an
    example, we have identified a corporation that targets other client
    companies and assists them, for a fee, in converting all their
    employees to independent contractors.

                             ENFORCEMENT PRIORITIES

        Question. Mr. Secretary, let's discuss the law enforcement that
    Treasury conducts for a moment. I'm told that a professor and a
    graduate student from Southern Illinois University were recently
    targeted for scrutiny by your Office of Foreign Assets Control because
    they were going to travel to Cuba. I presume that these two individuals
    were singled out for scrutiny because they also happen to be public
    officeholders in Illinois, but they were traveling under the Cuba
    license that SIU has held since 2000.
        I don't expect you to have intimate knowledge of every case that
    Treasury investigates, but I do want to ask you about your enforcement
    priorities.
        Shouldn't Treasury and all of its offices be focusing more on
    chasing terrorists, and focusing less on harassing pre-approved
    university travelers to Cuba? Do you believe that Treasury's
    enforcement resources are being allocated properly right now?
        Answer. Please be assured that Treasury allocates its investigatory
    and enforcement resources according to national security priorities
    established by the administration. Terrorism is, by everyone's measure,
    the No. 1 priority. Although OFAC does not comment on open
    investigations, it is important to keep in mind that each license
    carries with it specific requirements including who may and may not be
    included on delegations traveling to Cuba. When OFAC becomes aware of
    potential violations, it investigates and, if warranted, takes
    appropriate action to address the situation.
        FinCEN's administration of the Bank Secrecy Act also ensures the
    proactive filing of suspicious activity reports involving potential
    terrorist financing. As evidenced by FinCEN's $24 million civil money
    penalty against Arab Bank in August 2005, financial institutions that
    fail to report suspicious transactions involving potential terrorist
    financing, which can be so critical to assisting authorities in their
    efforts to identify and prevent terrorist acts and disrupt terrorist
    networks, are subject to severe sanctions.

                              PERFORMANCE MEASURES

        Question. I've been interested for quite some time in making sure
    that we are doing everything we can to stop the flow of financial
    support that terrorists rely upon in order to wreak their havoc. As you
    know, last year the GAO completed a report which Senate Finance
    Committee Chairman Grassley and I requested, along with Senate Homeland
    Security and Governmental Affairs Chairman Susan Collins, to analyze
    the effectiveness of U.S. Government efforts to combat these terrorism
    financial networks. The GAO report made several strong recommendations
    for where the government should try to improve. I'd like to discuss two
    of those recommendations today.
        First, I think that if we can measure success appropriately then we
    will target our efforts more efficiently. The GAO report recommended
    that strong performance measures be put in place so that we can better
    assess how well we are doing in disrupting terror financing. I
    recognize that this is not an easy thing to measure, but nonetheless we
    need some benchmarks by which we can judge our progress in rooting out
    these money networks.
        After I wrote to the Treasury to ask about this last fall, I
    received a response from an Assistant Secretary a couple of weeks ago
    that stated that the Office of Foreign Assets Control had finished
    developing performance measures . . . but then he gave no indication of
    what those measures were.
        How do you plan to measure your success in disrupting the financing
    of terrorism?
        Answer. OFAC will measure the impact of Terrorism, Proliferators of
    Weapons of Mass Destruction, and Narco-Trafficking sanctions programs
    as high, medium or low impact. For this outcome performance measure,
    developed in conjunction with Treasury's Office of Strategic Planning
    and submitted in connection with the Performance and Accountability
    Report, impact is measured by their effectiveness in identifying,
    exposing, isolating, impeding, and/or incapacitating the targets (micro
    and macro) of the sanctions program as demonstrated by, but not limited
    to, the presence or absence of the following, types of actions:
      --Facilitation of law enforcement activity (domestic or foreign);
      --Facilitation of intelligence collection by intelligence community;
      --Response by the international financial community--voluntary
            compliance;
      --Response by the international business community--voluntary
            compliance;
      --Response by the targets (e.g. attempts to evade sanctions, attempts
            to restructure organization, etc.);
      --Response by foreign governments;
      --Response by other government agencies;
      --Effectiveness of public exposure;
      --Deterrent effect of threat of further action; and
      --Impact on targeted network.

                               AGENCY COOPERATION

        Question. The GAO report also criticized Treasury, State, Justice,
    and other governmental departments for not working in a more
    coordinated fashion to fight terrorism funding. The report suggested
    that Treasury does not accept the idea that the State Department should
    lead this fight, nor does Treasury accept the procedures recommended by
    the State-led Terrorist Finance Working Group in delivering training
    and technical assistance abroad.
        In the departmental responses to the GAO, Treasury, State, and the
    other agencies seemed to reject the idea that there was a problem in
    coordinating our efforts to monitor, track, and eliminate sources of
    terrorist financing. Please explain to me how Treasury and the other
    agencies have improved their coordination in these areas and in
    implementing the procedures recommended by the State-led Terrorist
    Finance Working Group in delivering training and technical assistance
    abroad.
        Answer. The fight against terrorist financing is among Treasury's
    highest priorities. Treasury works closely with our partners in the
    interagency community and our counterparts abroad to ensure that
    vulnerabilities in the international financial system are closed to
    terrorists and terrorist financing networks are disrupted and
    dismantled. Though there is always more that can and must be
    accomplished, we believe that the U.S. Government's achievements in the
    fight against terrorist financing have been considerable, as reflected
    by the ``A-'' issued to the U.S. Government in the area of terrorist
    financing in the 9/11 Commission's ``Final Report Card on 9/11
    Commission Recommendations.'' The positive assessment is the result of
    all agencies within the U.S. Government working together and
    cooperating closely.
        The referenced GAO report does not focus on the fight against
    terrorism funding broadly, but rather is limited to an examination of
    interagency coordination on the provision of technical assistance
    related to terrorist financing to certain priority countries. This is a
    small, though vitally important, component of the U.S. Government's
    broad counter-terrorist financing efforts. The GAO correctly notes that
    there can be improvement in the way that the State Department--which
    has the lead in the provision of technical assistance--and agencies
    such as the Treasury Department--which has technical expertise in this
    area--interact and coordinate with each other. Since the publication of
    the GAO report, considerable effort is underway, both within Treasury
    and throughout the interagency community, to improve this process. For
    example, under State Department leadership, the Training and Assistance
    Sub Group (TASG)--a senior-level interagency group dedicated to
    overseeing the provision of counterterrorism technical assistance--has
    been reinvigorated in order to provide enhanced oversight and guidance
    to the State-led Terrorist Finance Working Group (TFWG). Moreover, more
    senior representatives have been assigned to the TFWG itself to ensure
    that it is functioning efficiently. We will continue to work both
    within Treasury and through the interagency community to improve the
    coordination and delivery of technical assistance in this vital area.

                              SUBCOMMITTEE RECESS

        Senator Bond. I thank you for coming here today, and you
    can be sure that we will be continuing to work with you,
    following your activities, helping where we can, and commenting
    where needed.
        With that, my sincere thanks to the witnesses. The hearing
    is recessed.
        Mr. Levey. Thank you, Mr. Chairman.
        [Whereupon, at 11:03 a.m., Thursday, April 6, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      DEPARTMENTS OF TRANSPORTATION, TREASURY, THE JUDICIARY, HOUSING AND
    URBAN DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR
                                      2007

                                  ----------

                            THURSDAY, APRIL 27, 2006

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:35 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Christopher S. Bond (chairman)
    presiding.
        Present: Senators Bond, Murray, Durbin, and Dorgan.

                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

    STATEMENTS OF:
            MARK W. EVERSON, COMMISSIONER
            RAYMOND T. WAGNER JR., CHAIRMAN, IRS OVERSIGHT BOARD
            J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX
                ADMINISTRATION
    ACCOMPANIED BY:
            DAVID A. POWNER, INFORMATION DIRECTOR, GOVERNMENT
                ACCOUNTABILITY OFFICE
            JAMES WHITE, DIRECTOR, STRATEGIC ISSUES, GOVERNMENT
                ACCOUNTABILITY OFFICE

                OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Good morning. The Subcommittee of the Senate
    Transportation, Treasury, the Judiciary, HUD, and Related
    Agencies, Appropriations will come to order.
        This is the budget hearing on the fiscal year 2007 budget
    for the Internal Revenue Service. We have a very distinguished
    panel of witnesses today. I welcome back IRS Commissioner Mark
    Everson. I also welcome Ray Wagner, Chairman of the IRS
    Oversight Board; Nina Olson, the National Taxpayer Advocate,
    and I believe that Russell George, Treasury Inspector General
    for Tax Administration will be joining us shortly.
        I also note that the Government Accountability Office has
    submitted a statement for the record at my request and has sent
    two senior officials to answer any questions during the
    hearing, and we appreciate that. GAO has served us extremely
    well, especially with their detailed reviews and oversight of
    the IRS Business Systems Modernization program.
        Before I begin my formal comments, personally I thank all
    of the witnesses today for their service and commitment to the
    IRS. The IRS is probably one of the least appreciated Federal
    Agencies, but it is definitely one of the most important to the
    functioning of our Government and the payment of our salaries.
    I would add as a personal note, as for those who would wish to
    take my questions and comments out of context and suggest that
    I am opposed to the IRS or question its leadership, let me be
    clear. We had our hearing 3 weeks ago on the Treasury, and I
    commended Secretary Snow for doing an excellent job, but in the
    course of our questions, as we do in all agencies, we asked
    them about problem areas, and we are here, my distinguished
    ranking member and I, not only to commend what is going on, but
    to find out how we can help in areas where additional resources
    are needed.
        So we will be asking tough questions because there are many
    challenges in this area, and we want to be as supportive of
    Commissioner Everson and the people who assist him in their
    roles today, and I want that known for the record.
        The tax filing deadline ended 10 days ago. So we will be
    able to review some of the preliminary results of the IRS
    performance for this tax filing system. We will also focus on
    the agency's efforts and plans in addressing the so-called tax
    gap. I look forward to all the witnesses' views on these issues
    and their suggestions on how we can improve taxpayer
    compliance.
        To the IRS credit, the Service continues to improve its tax
    administration performance. Based on preliminary results from
    the current filing season, returns processing has been smooth
    and taxpayers are receiving refunds without too many problems.
    Electronic filing is growing. More taxpayers are turning to the
    IRS website for information. Telephone service has improved.
    The accuracy of IRS responses to tax law and accounting
    questions has improved. Compared to the 1990's, the IRS has
    come a long way in its service delivered to taxpayers and to
    the people of the United States.
        On the enforcement front, IRS has made major strides.
    Enforcement revenue over the past 5 years has increased by
    $13.5 billion from $33.8 billion to $47.3 billion, or almost 40
    percent. The IRS has accomplished these results by stepping up
    audits, combating illegal and abusive tax shelters, and
    increasing criminal convictions. These actions are very
    positive not only deterring taxpayers from cheating, but in
    increasing honest taxpayers' confidence in the Government.
        There are, however, some troubling signs. Electronic filing
    is growing at a slower pace compared to previous years, and the
    IRS will not meet the congressionally mandated goal of 80
    percent of taxpayers E-filing by 2007. The IRS continues to be
    overly dependent upon an antiquated system which will limit
    both service and enforcement capabilities, and most troubling
    is the tax gap does not appear to be shrinking. Some believe
    that the tax gap may be actually higher than projected.
        The gap, which is the difference between what taxpayers
    timely and accurately pay in taxes and what they should pay
    under the law, not only creates an unfair burden on taxpayers
    who voluntarily and honestly pay their taxes, but also hurts
    our Nation's fiscal stability for our future generations. I
    would urge everyone to read the Comptroller General's February
    15 testimony before the Senate Budget Committee. I think the CG
    did a commendable job of putting the tax gap in context of our
    Nation's fiscal health. While most of the attention on our
    fiscal health is on discretionary spending or tax cuts in the
    economy, the CG adds that we cannot ignore the tax gap. He
    concludes that while our long-term fiscal imbalance cannot be
    eliminated with a single strategy, reducing the tax gap is one
    approach that could help address the looming fiscal challenge
    facing the Nation, closed quote, and I agree with that
    assessment.
        The views of the CG should be more than sobering. They
    should energize us to attack the tax gap because it is about
    good Government. The Government has a moral obligation in
    punishing those who unfairly burden honest citizens who
    voluntarily pay their taxes as their civic duty. It is also
    about our future. The consequence of a persistent tax gap hurts
    our long-term fiscal and economic health. It harms our
    children's future and the future of the children's children,
    and ultimately their future will be directly impacted by the
    actions we take today in addressing the tax gap.
        Closing the entire tax gap is not realistic, but there is
    not any reason, there is no excuse, not to dedicate ourselves
    to attacking this problem and lessening the tax gap. Even small
    or moderate reductions will yield significant results. Even a 1
    percent reduction in the tax gap could yield some $3 billion
    annually. The administration has set a very laudable goal in
    addressing the tax gap to increase voluntary compliance to 85
    percent by 2009. I support this goal, but 85 percent should be
    a floor. We need a detailed plan. So today, I will direct the
    IRS to work with the IRS Oversight Board, the National Taxpayer
    Advocate, and other important stakeholders to develop a plan to
    achieve this goal by 2009 and to quantify the amount by which
    this will reduce the gap.
        To achieve any reduction in the tax gap, multiple
    strategies will be required, such as simplifying the tax code,
    which I happen to believe is a compelling overwhelming need,
    conducting more sustained research, obtaining better data on
    noncompliance, improving taxpayer service, enhancing
    enforcement, and leveraging technology. I support all of these
    strategies, but I recognize that some of these strategies
    require additional resources. Therefore, it is through the lens
    of the tax gap that we scrutinize the budget request before us
    today. To say that I am disappointed in what came out of OMB
    would be an understatement.
        In terms of the 2007 budget request, the administration
    proposes some $10.6 billion for the IRS. This budget request is
    an increase of $18.1 million or 0.2 percent above the 2006
    enacted level. The request, however, contains a number of
    budget assumptions that pose significant risks to the IRS. Some
    might even call them a slight of hand. Specifically, it assumes
    $135 million in new user fees, some $121 million in savings
    through program efficiencies, and $137 million in budget cap
    adjustment. There is some merit to these ideas, but if these
    assumptions are not attained, the IRS would face a cut of some
    $240 million from the fiscal year 2006 enacted level, and to be
    blunt, I question whether these assumptions are realistic and
    that the bases can be achieved.
        Moreover, even if the IRS attains savings in new fees, the
    GAO calculates that the budget request is still a small
    decrease compared to the 2006 enacted level after adjusting for
    expected inflation. In fact, the GAO notes that the budget
    request would result in staffing cuts to both service and
    enforcement.
        The budget request cuts the IRS Business Systems
    Modernization program by $30 million or 15 percent. I will be
    the first to admit that the BSM has had challenges and risks;
    however, cutting this program by 15 percent when the IRS
    continues to be highly dependent upon systems from the dark
    ages makes no sense to me. From my young sports car
    enthusiasts, I have heard that it is equivalent to running a
    Formula One race with a Ford Pinto. I strongly believe that the
    BSM should be the IRS's top priority due to its impact on
    service and enforcement and ultimately in reducing the tax gap.
    GAO noted the reduction to the BSM ``could delay delivery of
    improved services for taxpayers.'' Further, the IRS team, led
    by a very competent Associate CIO, has begun to make real
    progress on BSM. For example, the new Customer Account Data
    Engine System processed over 6 million returns and dispersed
    5.3 refunds this year without disruptions and faster than under
    the old system. Cutting BSM greatly damages the momentum built
    up over 2 years. To me, cutting the BSM is equivalent to
    punishing good behavior.
        Frankly, I question cutting any part of the IRS budget. The
    IRS needs more resources. It needs more resources for taxpayer
    services. It need more resources for enforcement. It needs more
    resources for system modernization.
        In terms of taxpayer services, this budget request cuts
    these activities by some $85 million from the 2006 enacted
    level without assuming new user fees. While I do not object to
    the IRS retaining user fees for their activities, using them to
    offset direct appropriations is not appropriate in my view. The
    IRS has made significant improvements in taxpayer services over
    the past several years, but some services may be in peril.
    Since 2004, IRS taxpayer services have been cut by $180
    million, or 4.8 percent. While these cuts have not appeared to
    impact performance, IRS officials have cautioned that, ``the
    agency cannot continue to absorb reductions in taxpayer service
    without beginning to compromise some services''.
        Now, all the witnesses here today have acknowledged that
    improving taxpayer service is a key component of reducing the
    tax gap. GAO believes that, ``providing quality services to
    taxpayers is an important part of any overall strategy to
    improve compliance and thereby reduce the tax gap''.
        Over the past year, IRS has forwarded a number of cost-
    cutting proposals to its taxpayer service programs; however,
    stakeholders and auditors have raised questions about these
    proposals. For example, TIGTA reviewed the IRS analysis behind
    its proposal to close 68 walk-in taxpayer assistance centers
    and found that the IRS lacked accurate and complete information
    on its centers, which hindered the IRS's ability to make
    appropriate decisions when determining locations and services
    it provides to taxpayers seeking assistance.
        In addition, the IRS has justified some of its proposed
    cuts where programs' reduced usage of service was caused by the
    IRS's own policies. For example, the IRS established guidelines
    to reduce tax return preparation in the taxpayer assistance
    centers by 20 percent.
        Another example is the Electronic Tax Law Assistance, or
    ETLA, feature on the service's website. GAO reported that usage
    of this program has declined apparently by design.
    Specifically, the GAO found that the IRS purposely moved the
    ETLA feature to a less prominent position on the website and
    found that, ``in its current location, IRS does not expect
    taxpayers to be aware of the ETLA feature unless they stumble
    on it accidentally''. Because of these actions, the reduction
    in demand and usage of these particular programs becomes a
    self-fulfilling prophecy.
        The IRS must provide an accurate analysis of any reductions
    to ensure that taxpayer compliance and its effort to reduce the
    tax gap are maximized, especially as the tax code gets more and
    more complicated. IRS believes the tax gap includes, ``a
    significant amount of noncompliance due to the complexity of
    the tax law that results in errors of ignorance, confusion, and
    carelessness''. For those of you old enough to remember the
    cartoon strip Pogo, I believe it was his famous words that ``we
    have met the enemy, and he is us'', and that is Congress.
        The IRS repeatedly and justifiably touts the success of its
    E-filing service on its website with such tools as ``Where is
    my refund?''. However, I fear that taxpayers will begin to ask
    ``Where is my service?''.
        In addition to my concerns about the budget request, I
    raise concerns about the IRS privacy rule on section 7216 of
    the tax code and the recent problems identified with the ``Free
    File'' program.
        In terms of the IRS proposed regulations on disclosure and
    use of taxpayer information, there are concerns, legitimate
    concerns, about taxpayer privacy being compromised by the
    proposed regulations. Some of these concerns seem to be based
    on misunderstandings whereas others are legitimate issues
    regarding the disclosure of confidential taxpayer information.
    This is a complex issue with a number of land mines. As a
    result, many in Congress, including the Senate Finance
    Committee, thankfully, are examining the proposed rule and the
    underlying statute to address taxpayer privacy concerns. I look
    forward to the wise guidance of the Finance Committee and hope
    that the Treasury and IRS can balance the needs and problems to
    ensure that maximum confidentiality of all taxpayer information
    to the extent possible is under the current statute, but given
    the limitations under the current statute, additional
    legislative action may be needed to resolve these concerns.

                               PREPARED STATEMENT

        In terms of Free File, I am concerned that fewer taxpayers
    are using the program, which is impacting the overall number of
    E-filings. One possible solution that Senator Grassley and
    others have suggested is the creation of a direct electronic
    filing portal through the IRS website. I think that idea has
    merit and I ask the witnesses to look into that matter and we
    will be happy to discuss it with them.
        It is now my pleasure to turn to my colleague and ranking
    member, Senator Murray, for her statements and comments.
        [The statement follows:]

               Prepared Statement of Senator Christopher S. Bond

        The subcommittee will come to order. This morning, the Senate
    Transportation, Treasury, the Judiciary, HUD, and Related Agencies
    Appropriations Subcommittee will conduct its budget hearing on the
    fiscal year 2007 budget for the Internal Revenue Service. We have a
    distinguished panel of witnesses here today. I welcome back the IRS
    Commissioner Mark Everson to the hearing. I also welcome Ray Wagner,
    the Chairman of the IRS Oversight Board; J. Russell George, the
    Treasury Inspector General for Tax Administration; and Nina Olson, the
    National Taxpayer Advocate. I also note that the Government
    Accountability Office has submitted a statement for the record at my
    request and has sent two senior officials to answer any questions
    during the hearing. GAO has served us extremely well, especially with
    their detailed reviews and oversight of the IRS's Business Systems
    Modernization program.
        Before I begin my formal comments, I personally thank all of the
    witnesses today for their service and commitment to the IRS. The IRS is
    probably one of the least appreciated Federal agencies but is
    definitely one of the most important to the functioning of our
    government.
        The tax filing deadline ended 10 days ago, so today we will be able
    to review some of the preliminary results of the IRS's performance for
    this tax filing season. We also will focus on the agency's efforts and
    plans in addressing the so-called ``tax gap.'' I look forward to all
    the witnesses' views on these issues and their suggestions on how we
    can improve taxpayer compliance.
        To the IRS's credit, the IRS continues to improve its tax
    administration performance. Based on preliminary results from the
    current filing season, returns processing has been smooth and taxpayers
    are receiving refunds without too many problems. Electronic filing is
    growing. More taxpayers are turning to the IRS website for information.
    Telephone service has improved. The accuracy of IRS's responses to tax
    law and account questions has improved. Compared to the 1990's, the IRS
    has come a long way in service.
        On the enforcement front, the IRS has made major strides.
    Enforcement revenue over the past 5 years has increased by $13.5
    billion--from $33.8 billion to $47.3 billion--or by almost 40 percent.
    The IRS has accomplished these results by stepping up audits, combating
    illegal and abusive tax shelters, and increasing criminal convictions.
    These actions are very positive in not only deterring taxpayers from
    cheating, but in increasing honest taxpayers' confidence in government.
        There are, however, some troubling signs. Electronic filing is
    growing at a slower pace compared to previous years and the IRS will
    not meet the congressionally-mandated goal of 80 percent of taxpayers
    e-filing by 2007. IRS continues to be overly-dependent upon antiquated
    systems, which limits both service and enforcement capabilities. And
    most troubling is that the tax gap does not appear to be shrinking.
    Some believe that the tax gap may actually be higher than projected.
        The tax gap--the difference between what taxpayers timely and
    accurately pay in taxes and what they should pay under the law--not
    only creates an unfair burden on taxpayers who voluntarily and honestly
    pay their taxes but also hurts our Nation's fiscal stability for our
    future generations. I urge everyone to read the Comptroller General's
    February 15, 2006, testimony before the Senate Budget Committee. I
    believe the CG did a commendable job in putting the tax gap in context
    of our Nation's fiscal health. While most of the attention on our
    fiscal health is on discretionary spending or tax cuts or the economy,
    the CG adds that we cannot ignore the tax gap. He concludes that while
    ``our long-term fiscal imbalance cannot be eliminated with a single
    strategy, reducing the tax gap is one approach that could help address
    the looming fiscal challenges facing the nation.'' I agree.
        The views of the CG should be more than sobering. They should
    energize us to attack the tax gap because it is about good government.
    The government has a moral obligation in punishing those who unfairly
    burden honest citizens who voluntarily pay their taxes as their civic
    duty. It is also about our future. The consequences of a persistent tax
    gap hurt our long-term fiscal and economic health. It harms our
    children's future and the future of our children's children. And
    ultimately, their future will be directly impacted by the actions we
    take today in addressing the tax gap.
        Closing the entire tax gap is not realistic but this is no excuse
    to not dedicate ourselves to attacking this problem. Even small or
    moderate reductions in the tax gap will yield significant results. For
    example, even a 1 percent reduction in the tax gap would yield some $3
    billion annually. The administration has set a very laudable goal of
    addressing the tax gap by setting a goal to increase voluntary
    compliance to 85 percent by 2009. I support this goal but 85 percent
    should be a floor. However, we need a detailed plan. So today, I direct
    the IRS to work with the IRS Oversight Board, the National Taxpayer
    Advocate, and other important stakeholders to develop a plan to achieve
    this goal by 2009 and to quantify the amount by which this will reduce
    the tax gap.
        To achieve any reduction in the tax gap, multiple strategies will
    be required such as simplifying the tax code, conducting more sustained
    research, obtaining better data on noncompliance, improving taxpayer
    service, enhancing enforcement, and leveraging technology. I support
    all of these strategies. But, I recognize that some of these strategies
    require additional resources. Therefore, it is through the lens of the
    tax gap that we scrutinize the budget request before us today.
        In terms of the fiscal year 2007 budget request, the administration
    proposes some $10.6 billion for the IRS. This budget request is an
    increase of $18.1 million or 0.2 percent above the fiscal year 2006
    enacted level. The request, however, contains a number of budget
    assumptions that pose significant risks to the IRS. Specifically, it
    assumes $135 million in new user fee revenues, some $121 million in
    savings through ``program efficiencies'', and $137 million in a budget
    ``cap adjustment.'' There is some merit to these ideas. But, if these
    assumptions are not attained, the IRS will face a cut of some $240
    million from the fiscal year 2006 enacted level. And to be blunt, I
    question whether these assumptions will be achieved.
        Moreover, even if the IRS attains these savings and new fees, the
    GAO calculates that the budget request is still a small decrease
    compared to the fiscal year 2006 enacted level after adjusting for
    expected inflation. In fact, the GAO notes that the budget request
    would result in staffing cuts to both service and enforcement.
        The budget request cuts the IRS's Business Systems Modernization
    program by $30 million or 15 percent. I will be the first to say that
    BSM has many challenges and risks. However, cutting this program by 15
    percent when the IRS continues to be highly dependent upon systems from
    the dark ages makes no sense to me. It is equivalent to running a
    formula one race today with a Ford Pinto. I strongly believe that BSM
    should be the IRS's top priority due to its impact on service and
    enforcement and, ultimately, in reducing the tax gap. GAO noted that
    the reduction to BSM ``could delay delivery of improved services for
    taxpayers.'' Further, the IRS team, led by a very competent Associate
    CIO, has begun to make real progress on BSM. For example, the new
    Customer Account Data Engine system processed over 6 million returns
    and dispersed 5.3 million refunds this year without disruptions and
    faster than under the old system. Cutting BSM greatly damages the
    momentum built up over the past 2 years. In other words, cutting BSM is
    equivalent to punishing good behavior.
        Frankly, I question cutting any part of the IRS's budget. The IRS
    needs more resources. It needs more resources for taxpayer services. It
    needs more resources for enforcement. It needs more resources for
    systems modernization.
        In terms of taxpayer services, this budget request cuts these
    activities by some $85 million from the fiscal year 2006 enacted level
    without assuming the new user fees. While I do not object to the IRS
    retaining user fee revenues for their activities, using them to off-set
    direct appropriations is inappropriate. The IRS has made significant
    improvements in taxpayer services over the past several years. However,
    some of the services may be in peril. Since fiscal year 2004, IRS
    taxpayer service programs have been cut by some $180 million or 4.8
    percent. While these cuts have not appeared to have impacted
    performance, IRS officials have cautioned that ``the agency cannot
    continue to absorb reductions in taxpayer service without beginning to
    compromise some services.''
        All of the witnesses here today have acknowledged that improving
    taxpayer service is a key component of reducing the tax gap. GAO
    believes that ``providing quality services to taxpayers is an important
    part of any overall strategy to improve compliance and thereby reduce
    the tax gap.''
        Over the past year, the IRS has forwarded a number of cost-cutting
    proposals to its taxpayer service programs. However, stakeholders and
    auditors have raised questions about these proposals. For example,
    TIGTA reviewed the IRS's analysis behind its proposal to close 68 walk-
    in taxpayer assistance centers and found that the IRS lacked accurate
    and complete information on its centers, which hindered IRS's ability
    to make appropriate decisions when determining the locations and
    services it provides to taxpayers seeking assistance.
        In addition, the IRS has justified some of its proposed cuts where
    a program's reduced usage of services was caused by the IRS's own
    policies. For example, the IRS established guidelines to reduce tax
    return preparation in the taxpayer assistance centers by 20 percent.
        Another example is the Electronic Tax Law Assistance feature on
    IRS's website. The GAO reported that usage of this program has declined
    apparently by design. Specifically, the GAO found that the IRS
    purposely moved the ETLA feature to a less prominent position on the
    website. GAO found that ``in its current location, IRS does not expect
    taxpayers to be aware of the ETLA feature unless they stumble upon it
    accidentally . . .''.
        Because of these actions, the reduction in demand and usage of
    these particular programs became a self-fulfilling prophecy.
        The IRS must provide an accurate analysis of any reductions to
    ensure that taxpayer compliance and its efforts to reduce the tax gap
    are maximized, especially as the tax code gets more and more
    complicated. IRS believes that the tax gap includes ``a significant
    amount of noncompliance due to the complexity of the tax laws that
    results in errors of ignorance, confusion, and carelessness.'' The IRS
    repeatedly and justifiably touts the success of its e-filing services
    and its web site with such useful tools as ``Where's my refund?''
    However, I fear that taxpayers will begin to ask ``Where's my
    service?''
        In addition to my concerns about the budget request, I raise
    concerns about the IRS's privacy rule on section 7216 of the tax code
    and the recent problems identified with the ``Free File'' program.
        In terms of the IRS's proposed regulations on disclosure and use of
    taxpayer information, there are concerns about taxpayer privacy being
    compromised by the proposed regulations. Some of these concerns seem to
    be based on misunderstandings whereas others are legitimate issues
    regarding the disclosure of confidential taxpayer information. This is
    a complex issue with a number of landmines. As a result, many in
    Congress, including the Senate Finance Committee, are examining the
    proposed rule and the underlying statute to address taxpayer privacy
    concerns. I am hopeful that the Treasury and the IRS can balance out
    the needs and problems to ensure the maximum confidentiality of all
    taxpayer information to the maximum extent possible under the current
    statute. But given the limitations under the current statute, some
    additional legislative action may be needed to resolve these concerns.
        In terms of Free File, I am concerned that fewer taxpayers are
    using the program, which is impacting the overall number of e-filing.
    One possible solution that Senator Grassley and others have suggested
    is the creation of a direct electronic filing portal through the IRS
    web site. I think this idea has merit and request that all the
    witnesses look into at this matter.
        I now turn to my colleague and ranking member, Senator Murray for
    her statement and any comments.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you very much, Mr. Chairman.
        Exactly 10 days ago, millions of taxpayers hurried to the
    Post Office to file their 2005 tax return right at the
    deadline. American taxpayers have come to expect certain things
    when it comes to the way their taxes are prepared, processed,
    and collected in this country. First, they expect honesty. They
    expect that, like themselves, the vast majority of their
    neighbors are paying what they owe and that the IRS is there to
    ensure that everyone pays his or her fair share.
        Second, they expect integrity. They expect that their taxes
    will be processed correctly, especially if they have paid a tax
    preparation firm to do it for them.
        Third, they expect privacy. They expect that the personal
    financial information that they share with the IRS will be kept
    private and will stay private whether it is in the hands of tax
    preparers or the IRS.
        And, finally, they expect some help. They expect that if
    they need some help understanding the very complex tax code,
    the IRS will be there to assist them.
        Those are all reasonable expectations. Unfortunately, today
    the IRS is falling short of meeting those expectations. Rather
    than everyone paying his or her fair share, it has become clear
    that we have a huge tax gap in this country--estimated at $345
    billion. That is the difference between the amount that the
    Americans owe and the amount that the IRS actually collects.
    Now, I want to note that the IRS Commissioner deserves some
    credit for being outspoken on this problem.
        When it comes to taxes being prepared accurately, the IRS
    has at times had a spotty record in providing accurate tax
    advice to inquiring citizens. Now we see more recent reports
    indicating that even the tax preparation professionals are
    doing an inadequate job of preparing people's taxes, exposing
    our citizens to potentially significant fines and tax debts.
        When it comes to keeping taxpayer information private, we
    have seen several instances where IRS contractors have been
    granted inappropriate access to taxpayers' information--access
    they do not need to do their job. And now we have a new
    regulatory proposal from the IRS to modernize the rules that
    pertain to privacy. In some cases, that proposal actually makes
    it easier for taxpayer information to be sold to private
    vendors.
        Let me be clear. Taxpayers deserve more privacy, not less.
    If taxpayers really want salesman to have access to their tax
    returns, they can mail it to them themselves. The IRS should
    not be an accomplice in selling taxpayer information.
        Now, I recognize the IRS's new privacy proposal is
    complicated and some aspects of it can be seen to improve
    privacy while some aspects certainly can be seen to degrade it.
    But for me the question is not whether we should make it
    slightly harder or easier for an individual's taxpayer
    information to be sold. For me the question is whether any of
    this taxpayer information should be sold to anybody, ever. What
    consumer wants to have this information available to marketing
    firms? What consumer really wants to have their dinner
    interrupted by a telemarketer who is looking at a copy of their
    private tax return? If those taxpayers are out there, I don't
    know any of them.
        So I hope the IRS will take a fresh look at those
    regulations and provide an outright prohibition on this
    information being shared with anybody. When it comes to the
    taxpayers getting help from the IRS, the IRS is moving in the
    wrong direction by trying to cut back on taxpayer services.
        Worse still, when the IRS tried to minimize the impact of
    these service cuts, they couldn't get it right. Last year,
    Commissioner Everson testified to us his desire to close almost
    70 Taxpayer Assistance Centers across the Nation. He told us
    these reductions would only be made after his careful analysis
    of the location, costs, demographics, and workloads of those
    centers. Now, many of us in Congress, including the chairman
    and myself, had deep-seated doubts about the wisdom of that
    proposal. As a result, we added language to the fiscal year
    2006 Appropriations act that prohibited the Commissioner from
    closing those centers until the Inspector General completed a
    study on the impacts of reducing taxpayer services on
    compliance and assistance. That act further directed the IRS to
    consult with and get approval from the Appropriations
    committees prior to any such eliminations, consolidations, or
    reorganizations of the workforce.
        Well, the Inspector General has now reported that the data
    the IRS used to close those centers was faulty and outdated.
    The report makes it clear that the IRS was hastily putting
    together inaccurate data simply for the purpose of defending
    its plan to close those centers without any real regard for the
    needs of local citizens. The record with this proposal raises
    the question as to whether this subcommittee should believe any
    representation from the IRS when it comes to the availability
    of adequate taxpayer services.
        Officially, the President's budget for fiscal year 2007
    does not include formal cuts to taxpayer services though it is
    notable that the increase is less than the rate of inflation;
    however, included in this budget is more than $84 million in
    so-called efficiencies--areas where the IRS intends to make
    budget cuts next year with consequences that are either unknown
    or unexplained.
        Mr. Chairman, I hope we will pursue today exactly what
    efficiencies the Commissioner intends to launch next year so we
    don't find out after the fact that taxpayers have once again
    lost access to important forms of assistance when they are
    preparing their taxes. Taxpayers should not have their
    reasonable expectations dashed again.
        Thank you, Mr. Chairman.
        Senator Bond. Thank you, Senator Murray.
        Now we turn to Senator Dorgan for his comments and any
    questions he may wish to leave for the record.

                      STATEMENT OF SENATOR BYRON L. DORGAN

        Senator Dorgan. Mr. Chairman, thank you very much. I won't
    be able to stay for the entire hearing, but I wanted to be
    here. The hearing with respect to the appropriations request
    for the Internal Revenue Service is very important.
        I used to be a tax commissioner, I think probably about the
    time that the chairman of the committee was the Secretary of
    State in Missouri and I was State Tax Commissioner in North
    Dakota.
        Senator Bond. When was that?
        Senator Dorgan. Back in the 1970's.
        Senator Bond. I was Governor.
        Senator Dorgan. You were Governor then.
        Being a tax commissioner, I understood we had an income
    tax. I understood that there are fines and jail time for
    unauthorized disclosure of tax information. And I understood
    the need for safeguarding taxpayers' information is very
    important. I want to talk about that for just a moment.
        First, I notice the discussion about the tax gap. The tax
    gap has been around a long time. I want to put up a picture
    that I have used before. This is called the Ugland House. It is
    on Church Street in the Cayman Islands. I think perhaps I used
    this with the IRS previously, but David Evans from Bloomberg
    News has done some pretty good work of pointing out that this
    five-story building is home to 12,748 corporations. Let me say
    that again. This five-story building on a quiet street called
    Church Street in the Cayman Islands is home to 12,748
    corporations. Are they there? No, they are not there. They just
    use the address. An attorney fixed them up with an address
    here.
        What does that mean? They are avoiding a lot of taxes. I
    have used this picture on the floor of the Senate many times. I
    am wondering whether anybody has been sent down there to take a
    look at who all these companies are. I assume Treasury or IRS
    has done that, but if not, I am going to ask if you can give us
    some information about it.
        My point is this: Hundreds of billions of dollars are being
    shifted away from the tax authorities in this country, some
    legally, some illegally. Part of that responsibility has to be
    Congress'. We have to plug the holes here. And part of it has
    to be aggressive enforcement by the Internal Revenue Service.
    Frankly, I don't think either has done its job with respect to
    this, but I point this out as an example of what is going on.
    It is unbelievable, and we are losing a substantial amount of
    tax revenue as a result of it.
        The new construct, as you know, is to export good American
    jobs, import cheap labor, and sell your products in America and
    run the income through the Cayman Islands so you don't pay U.S.
    taxes. That is a strategy I think that weakens this country
    dramatically.
        But let me get to the point on the IRS's proposed
    regulation involving section 7216 of the Internal Revenue Code,
    that one of my colleagues just described. Mr. Commissioner, you
    have sent me a letter dated yesterday in response to my letter
    to you about section 7216. This issue about disclosure and the
    use of taxpayers' information is not about regular business. In
    your letter to me, Mr. Commissioner, you suggest somehow that
    there is an unfairness to certain tax preparers because some
    tax preparers are in businesses with affiliated groups and so
    they have a broader range of opportunities to use taxpayer
    information that they have acquired through their tax
    preparation business for other business enterprises, or
    business solicitations and because some of the smaller and
    other tax preparers aren't involved in affiliated groups, you
    need to give them an opportunity to have as much business
    opportunity as others do.
        This is not about business. With all due respect, this is
    about safeguarding the information that is filed by the
    American taxpayers and by preparers. Frankly, I don't believe
    when someone holds themselves out to do business as a tax
    preparer and gets paid for it that they ought to be using that
    tax return information that is given them by American taxpayers
    for unrelated purposes. You seem to suggest in your written
    testimony that this might be a radical proposal.
        You say if Congress would prohibit the use of tax return
    information by tax preparers to solicit additional business,
    that somehow that would be a disadvantage. I don't think so.
    You say the law has existed 30 years. It may have existed 30
    years, but eliminating the affiliated group requirement for
    solicitations and providing greater opportunity for others is
    not going to solve the problem. I would say as well, in 30
    years, there has been much greater concentration in business
    through mega-mergers and that has dramatically changed what
    this affiliated group definition really means.
        So I think you are headed in the wrong direction. You say
    that the rule is not complete and you also say that you are
    surprised by the furor over this. Don't be surprised. The furor
    is going to get worse if you go ahead and do this.
        This is not about business, about allowing someone to
    generate additional business by using confidential return
    information from their tax preparer business. If that is what
    we want to do, we are dead wrong, and I hope you will close the
    door rather than open the door.
        Having said all of that, I am going to submit a list of
    questions on the issues that I have raised, the tax gap, the
    Ugland House, and the section 7216 proposed regulations. I
    don't want to browbeat here, but I hope at the end of the day
    that you will not be surprised by the outcry from the American
    people and from Congress about this. They expect the
    information they file on their tax returns to be kept
    confidential. Those who would disclose tax return information
    in an unauthorized basis are subject to fines and jail terms
    because it is sensitive information. We should not expect this
    to be widely distributed for commercial or business purposes,
    and that is where I think this proposed regulation is heading.
    I think it is dead wrong and I think it disserves American
    taxpayers. I hope you will re-think that and make a change.
        At any rate, thank you for being here. You have a tough
    job, and you have a chairman and a ranking member who I have
    the privilege of working with that want you to do your job
    successfully. This is a tough, tough job, trying to figure out
    how you collect these taxes, diminish the tax gap, and get rid
    of tax avoidance and tax evasion. Because it is not easy, we
    want to work with you to do that.
        Mr. Chairman, thank you.

                   PREPARED STATEMENT OF SENATOR TED STEVENS

        Senator Bond. Thank you very much, Senator Dorgan. We will
    be happy to include your questions for the record. We will also
    include Senator Stevens' statement for the record at this time.
        [The statement follows:]

                   Prepared Statement of Senator Ted Stevens

        I support the IRS' technology modernization and agree that many
    benefits are derived from the modernization. However, I am concerned
    with the difficulties experienced by rural Alaskan taxpayers when they
    have attempted to use the national toll-free information line. In light
    of these difficulties, many Alaskans have sought the assistance of the
    Taxpayer Advocate Service Center when they need help to complete their
    tax submissions. The Center provides a necessary service to Alaskans. I
    support the Taxpayer Advocate Service Center in Alaska and believe the
    Center should be fully staffed in order to answer tax questions.

                          STATEMENT OF MARK W. EVERSON

        Senator Bond. Now, with that, we will turn to the
    Commissioner.
        Welcome, Mark. We will have your full statement, all of
    your full statements, included for the record, and if you would
    highlight what you think is most important for us to focus on.
        Mr. Everson. Certainly. Thank you, Mr. Chairman, Senator
    Murray, Senator Dorgan.
        Before I start, I would like to introduce two people. This
    is Take Your Kid to Work Day, I am informed, and Emma Everson,
    if she could stand up, is here. She knows the chairman pretty
    well. She has not met the ranking member, but I want to point
    out that she has never been to Missouri. After school ends this
    year, she is going to take a trip out to see her cousins in
    Seattle. So if that gets us some help in the questioning and
    you choose not to embarrass me a little because my daughter is
    here, I will take whatever I can get.
        Senator Bond. A cheap trick, but a very good defense.
        Mr. Everson. I try to be effective.
        The other person I would like to introduce is Evelyn
    Petchek. Evelyn, if you could stand. She is my chief of staff
    who has served for 2 years, and as the chairman knows, she has
    played an important role from time to time in terms of sorting
    some things out with the committee. She is retiring about a
    month from now and she is going back to her beloved New Mexico,
    but she has done a great job in a long career with the IRS. So
    I thank her as well.
        Senator Bond. We thank her for her service and wish you
    well and know that it is going to be tough to find somebody to
    support the Commissioner.
        Mr. Everson. And, Senator Dorgan, if you have to leave, I
    would certainly want to come see you directly and visit you
    soon to talk about some of these important issues, which we
    will cover.
        Senator Dorgan. I would be happy to do that, and we would
    invite your daughter if she is driving from here to Seattle to
    stop in North Dakota for an extended stay.
        Mr. Everson. Very good.
        Okay. It is good to be back before the subcommittee to
    discuss the 2007 budget as proposed by the President. We
    believe, if fully funded, we can maintain the important balance
    between strong taxpayer service and the enforcement that is
    necessary to reduce the tax gap.
        Before I discuss the proposed budget, let me first thank
    the members of the subcommittee for fully funding the IRS as
    part of the 2006 budget process. This has allowed us to move
    forward on several important initiatives, particularly in the
    area of enforcement.
        The 2007 budget would sustain this progress. Our request is
    for $10.6 billion in direct appropriation supplemented by $135
    million in an incremental user fee to represent a total
    operational level of about $10.7 billion or 1.4 percent above
    the previous budget.
        Before taking your questions, let me turn briefly to IRS
    efforts in our three areas of strategic focus, services,
    enforcement, and modernization, and then make brief comments on
    certain legislative proposals accompanying the 2007 budget
    which would help to close the tax gap.
        First, services. We are drawing to a close of a successful
    filing season. Electronic filing is up by over 6 percent from
    last year, reflecting in particular a strong increase in the
    use of tax software on home computers. Our phone level of
    service is consistent with last year. The accuracy of our
    answers to tax law questions has improved. I would note that
    the results on the phones have exceeded our expectations,
    explained by the fact that call volumes are down from last
    year.
        We have also seen strong growth in our community-based
    volunteer tax preparation program. The VITA sites are an
    increasingly important part of our efforts, and, in fact, last
    year the IRS was recognized by the Points of Light Foundation
    for its successful efforts. This is the first time a government
    agency has received this recognition. Usually it has been
    Mothers Against Drunk Drivers, March of Dimes, organizations
    like that. This program has grown by 8 percent compared to last
    year.
        As to enforcement, the fiscal year 2005 results demonstrate
    that we have restored the credibility of our enforcement
    programs. Individual audits were up 20 percent from 2004 to 1.2
    million. They are up 97 percent since 2000. High income audits
    were also up and have increased 120 percent since 2000.
    Corporate audits bottomed out in 2003, but by 2005 had
    recovered by over 50 percent. Collections are more robust. Last
    year, we had 2.7 million levies versus 200,000 in 2000. All
    told, enforcement revenues increased from 43.1 billion in 2004
    to 47.3 billion last year.
        Concerning 2006, we expect continued progress, although not
    as dramatic as some of these double-digit increases that I have
    just indicated. We are bringing on new personnel with the
    monies you provided, but it will take some time before they
    fully get up to speed.
        In terms of modernization, we have realized a number of
    achievements. In particular, I would note the progress of our
    taxpayer master file update, the CADE system. Last year CADE
    posted 1.4 million returns. This year, we have processed 6.6
    million returns through CADE and refunded more than $3 billion.
        The 2007 budget request has two important components. The
    funding request keeps the IRS basically at level funding up
    just slightly to largely absorb inflation. Part of this funding
    is from increased user fees. If the appropriation request is
    fully funded, these monies will allow us to maintain the
    progress we are making both in the service and enforcement
    missions of the agency as well as to continue our modernization
    efforts.
        Before taking your questions, let me make one additional
    point. We recently refined our estimates of the tax gap. We
    will be using this information to update our audit models and
    selection procedures and to calibrate our resource allocation
    within business units. The research also clearly indicated that
    where there is a third-party reporting, there is better
    compliance.
        What this chart says, over to the left, you have a
    noncompliance rate of about 1 percent on wages. One-hundred-
    fifty million Americans get W-2s. They don't get it wrong when
    they report the information to us. All the way out at the
    right, you have categories where we don't get any information
    or very little information. Principally, this is about
    individuals who organize themselves as small businesses, but
    aren't incorporated and there is no reporting that comes to us.
    There, the noncompliance rate is over 50 percent.

                               PREPARED STATEMENT

        In the President's budget request, we have made several
    administrative and reporting proposals. The most important of
    these is the proposal to mandate reporting to the IRS of gross
    receipts by credit card issuers for their business customers. I
    believe the five legislative proposals that accompany the
    funding request can make a significant contribution to reducing
    the tax gap. So I hope they will enjoy your support.
        Finally, let me indicate that I remain a strong advocate of
    simplification of the code. Thank you.
        [The statement follows:]

                       Prepared Statement of Mark Everson

                                  INTRODUCTION

        Senator Bond, Ranking Member Murray and members of the
    subcommittee, it is good to be back before the subcommittee to discuss
    the fiscal year 2007 IRS budget as proposed by the President. We
    believe if funded fully, we can maintain the important balance between
    strong taxpayer service and the enforcement that is necessary to reduce
    the tax gap.
        Before I discuss the proposed budget, let me first thank the
    members of the subcommittee for fully funding the IRS as part of the
    fiscal year 2006 budget. This allowed us to move forward on several
    important initiatives, particularly in the area of enforcement.
        My goal this morning is to offer you insight on what we are
    accomplishing with that full funding in fiscal year 2006 and to offer
    some insight in what we hope to accomplish in fiscal year 2007. I also
    hope to touch on some current issues that I know are of concern to
    subcommittee members as well as other Senators.
        First, however, I want to provide you the latest information on
    2006 Filing Season.

                               2006 FILING SEASON

        We expect to process almost 135 million individual tax returns in
    2006, and we anticipate a continued growth in the number of those that
    are e-filed. In the 2005 filing season, over 50 percent of all income
    tax returns were e-filed.
        We fully expect to exceed that number this year. As of April 15, we
    have received over 63 million tax returns filed through e-file, an
    increase of 2.25 percent compared to the same period last year. This
    represents 63 percent of the more than 100.3 million returns that had
    been filed as of that date.
        This increase in e-filing is being driven by people preparing their
    tax returns using their home computers. The total number of self-
    prepared returns that are e-filed is up by over 13 percent compared to
    this time a year ago. Over 17.3 million returns have been e-filed by
    people from the comfort of their own home, up from 15.3 million for the
    same period a year ago. Fully, 27 percent of all electronically filed
    returns have been done on home computers. This is 2.6 percentage points
    above last year.
        Encouraging e-filing is good for both the taxpayer and for the IRS.
    Taxpayers who use e-file can generally have their tax refund deposited
    directly into their bank account in 2 weeks or less. That is about half
    the time it takes us to process a paper return. Moreover, the error
    rate for e-filed returns is less than for paper returns, saving IRS
    resources and avoiding taxpayer inconvenience.
        Despite this overall growth in e-file, we are disappointed that we
    are experiencing a significant decline in the number of taxpayers that
    are using our Free File program. Currently, we have almost 24 percent
    fewer taxpayers choosing to use Free File as compared to 2005. I will
    discuss this in more detail later in my testimony.
        More people are choosing to have their tax refunds directly
    deposited into their bank than ever before. So far this year, we have
    directly deposited more than 49 million refunds, or 64 percent of all
    refunds issued this tax filing season. This is up from 60 percent for
    the same period in 2005.
        People are also visiting our web site, IRS.gov, in record numbers.
    The IRS has recorded over 114 million visits to our web site, up from
    110 million for the same period a year ago. This is a 3.4 percent
    increase.
        The millions of taxpayers that have visited IRS.gov have benefited
    from many of the updates that we have made for this filing season. We
    have made it easier for taxpayers to get answers to many of their tax
    questions. The web site:
      --Allows a taxpayer to determine whether he or she might qualify for
            the Earned Income Tax Credit (EITC);
      --Assists the taxpayer in determining whether he or she is subject to
            the Alternative Minimum Tax (AMT);
      --Allows more than 70 percent of taxpayers the option to actually
            file their tax returns at no cost through the Free File
            program;
      --Assists hurricane victims with information on many of the changes
            in the tax laws that are designed to help them and provides a
            toll free number for victims to get their questions answered;
            and
      --Allows taxpayers who are expecting a refund to track its progress
            via the ``Where's My Refund?'' feature on the site.
        The 100.3 million individual tax returns received as of April 15
    represents a decline of 3.7 percent over the same period as last year.
    We have issued 78.1 million refunds this year for a total of $177
    billion. The average refund this year is $2,265, $98 more than last
    year. In addition, more than 20 million taxpayers have tracked their
    refund on IRS.gov, up 14 percent over last year.
        Our planning assumptions called for reducing toll-free operating
    hours from 15 hours to 12 hours while still maintaining the same level
    of taxpayer service. When this change was not implemented, the expected
    savings were restored and used to increase overtime. In addition,
    resources from answering paper correspondence were diverted to
    telephones. To date, these strategies have produced positive results.
        In addition to these personnel actions, we have not yet experienced
    some of the workload increases that were anticipated as a result of the
    hurricane disasters. Overall, this filing season through April 15, we
    have actually received about 1.4 million fewer telephone calls than
    last year (32.4 million in 2006 vs. 31 million in 2005). As a result,
    our Customer Service Representative (CSR) Level of Service (percent of
    calls answered) is above last year (83.25 percent in 2006 vs. 81.65
    percent in 2005). However, because we deployed Adjustments staff to the
    telephones, paper inventories are 117.2 percent of last year (1,108,774
    in 2006 vs. 946,223 in 2005). The number of cases that are over-age has
    also increased significantly (123,425 in 2006 vs. 63,580 in 2005).
        As of April 8, our Taxpayer Assistance Centers (TACs) are reporting
    a 12.5 percent decline in face to face contacts this filing season as
    compared to last year. We believe that the decline in visits to our
    TACs as well as the reduction in the number of calls is largely
    attributable to taxpayers increasing their use of IRS.gov and other
    electronic means to get their questions answered and obtain tax forms.
        The use of other service alternatives, such as volunteer return
    assistance at Volunteer Income Tax Assistance (VITA) sites and Tax
    Counseling for the Elderly sites (TCEs), has steadily increased while
    the numbers of TAC contacts have decreased. In fiscal year 2005 over
    2.1 million returns were prepared by volunteers. As of April 15,
    volunteer return preparation is up 7.3 percent above last year's level.
    Volunteer e-filing is also up, by 4.7 percent over the same period in
    the last tax filing season. This is reflective of continuing growth in
    existing community coalitions and partnerships.

       PRESIDENT'S FISCAL YEAR 2007 BUDGET MAINTAINS THE BALANCE BETWEEN
                        TAXPAYER SERVICE AND ENFORCEMENT

        Our total budget request for fiscal year 2007 is $10.6 billion in
    direct appropriations, supplemented by $135 million in new user fee
    revenue, for a total operating level of $10.7 billion. This request
    represents a total increase of 1.4 percent from the fiscal year 2006
    enacted level. The fiscal year 2007 budget sustains the enforcement
    funding increase provided in fiscal year 2006 to improve tax
    compliance. More importantly, the budget maintains the balance between
    service and enforcement.
        The IRS's taxpayer service and enforcement activities are funded
    from three appropriations: Processing, Assistance and Management (PAM);
    Tax Law Enforcement (TLE); and Information Systems (IS). The total
    fiscal year 2007 budget request for these three operating accounts is
    $10.4 billion supplemented by the $135 million in new user fee revenue,
    for a total operating level of $10.5 billion, or 1.8 percent increase
    over the fiscal year 2006 enacted level.
        The $135 million in new user fees revenue will be generated from
    several increased and new user fees earned from special or non-routine
    services provided to taxpayers by the IRS. These would include such
    services as providing private letter rulings for interpretations of tax
    law and applications for exempt status. The largest portion of the
    anticipated increase in fees will come from new and restructured
    installment agreements ($66.7 million). Another $47.1 million is
    expected from letter rulings and determinations. The remainder will
    come from technical training and enrolled agent fee increases. These
    increased fees were designed to more fully reflect the actual cost of
    providing these services, as required by OMB Circular A-25.
        The budget includes an additional $137 million for enforcement to
    fund the pay raise and other cost adjustments needed to maintain the
    fiscal year 2006 enforcement initiative increase, a 2 percent increase.
    Similar to last year, the President's budget proposes to fund this
    enforcement increase through an adjustment to the discretionary cap,
    which in effect would increase the amount of funding dedicated to tax
    enforcement from $6.82 billion in fiscal year 2006 to $6.96 billion in
    fiscal year 2007. The IRS will continue to focus its enforcement
    resources on efforts designed to increase compliance and reduce the tax
    gap. We will continue our examination of tax-exempt entities used to
    facilitate abusive transactions and our examination of tax strategies
    involving international elements for both corporations and high income
    individuals.
        I would remind the subcommittee that in fiscal year 2005 we brought
    in a record of $47.3 billion in enforcement revenue, an increase of
    $4.2 billion from the previous year. In fiscal year 2006, we expect
    that total to increase to $48.1 billion, a 42 percent increase from
    fiscal year 2001.
        We believe taxpayers have a right to expect a return on the
    additional investment in enforcement. We estimate that when we receive
    the full productive benefits of the fiscal year 2006 funding increase,
    the return on investment (ROI) for additional enforcement resources
    will be 4:1. Stated another way, we estimate that each $1 invested in
    enforcement will return $4 in additional enforcement revenue, although
    this should not be interpreted as a fixed ratio.
        This estimated ``return'' is based on the amount of additional tax
    collected and attributes the revenue to the enforcement occupations
    that originated each case. For each type of IRS enforcement employee,
    the associated amount of additional tax collections is estimated based
    on an extensive data base, covering the most recent 11 years of
    collection experience.
        This analysis does not include the indirect effect of increased
    enforcement activities in deterring taxpayers considering engaging in
    non-compliant behavior. Econometric estimates of the indirect effects
    indicate a significant impact from increased enforcement activities.
        The $3.58 billion for taxpayer service in the fiscal year 2007
    budget request, including the $135 million from new user fee revenue,
    will maintain our commitment to provide high-quality taxpayer services
    through improvements to information technology and other targeted
    efficiencies such as those resulting from increased electronic filing.
        The Business Systems Modernization appropriations account funds the
    IRS's costs to develop and deploy our critical, major information
    systems. The requested level for BSM is $167.3 million, a 15.1 percent
    reduction from the fiscal year 2006 level. This is discussed later in
    the testimony.
        Lastly, the Health Insurance Tax Credit appropriation (HITCA)
    remains a separate account that funds the administration of a
    refundable tax credit. The fiscal year 2007 request for HITCA is $14.9
    million, a 25.8 percent reduction from the fiscal year 2006 enacted
    level.

                    FISCAL YEAR 2007 DETAILED BUDGET SUMMARY

        Our fiscal year 2007 budget request of $10.7 billion, which
    includes the $135 million in new user fee revenue, primarily funds
    costs to maintain the IRS's current levels of service and enforcement
    ($272.2 million) and an initiative to consolidate the Philadelphia
    Campus ($20.9 million). This request also includes several program
    savings and efficiencies that reflect the IRS's aggressive efforts to
    identify and deploy technology improvements that will benefit both
    taxpayer service and enforcement programs. Collectively, these cost
    savings total $116.1 million:
      --E-File Savings: -$6,760,000/-174 FTE.--This savings results from
            increased electronic filing (e-file) and a reduction in
            Individual Master File paper returns. Estimated e-file savings
            are based on the projected reduction in the number of paper
            returns processed each year, offset by the cost of processing
            e-filed returns.
      --Improvement Project Savings: -$8,215,000/-135 FTE.--This savings
            results from operational improvements generated by the Contact
            Recording, Queuing Management (Q-Matic), Correspondence Imaging
            Systems, and End-to-End Publishing improvement projects already
            in progress.
      --Competitive Sourcing Savings: -$17,000,000/-242 FTE (The -242 FTE
            is a revised figure which corrects an error included in the
            fiscal year 2007 President's budget request for the IRS).--
            These savings reflect efficiencies and savings that will be
            achieved through the IRS's competitive sourcing efforts
            resulting from six different projects in various phases of
            implementation.
      --Program Efficiencies: -$84,100,000/-873 FTE (-873 FTE is a revised
            figure, which corrects an error included in the fiscal year
            2007 President's budget request for the IRS).--These savings
            reflect Service-wide efficiencies resulting from the
            elimination of duplicative overhead in internal support
            functions, increased productivity through improved workload
            selection, and distribution techniques, automation of certain
            taxpayer assistance functions, and deployment of the fiscal
            year 2006 enforcement hires to full time examiner positions.
            These efficiency savings can be realized with no adverse impact
            on taxpayer service and enforcement operations.
        The $84.1 million in efficiency savings is broken down into three
    major categories.
        Shared Services in Support of Taxpayer Service and Enforcement
    Operations ($31.4 million).--This includes approximately $24 million in
    expected savings from renegotiated information systems and
    telecommunication contracts that the Treasury Department plans to
    award. Another $7.2 million will come from implementing improved
    processes for issuing notices.
        Enhanced Productivity and Efficiencies in Enforcement Programs
    ($35.0 million/433 FTE).--The Service will realize $14.5 million (256
    FTE) in savings due to the implementation of several productivity
    efficiencies. These savings will be achieved through an improved
    employee to management span of control, the elimination of non-critical
    vacancies, and the reduction of resources allocated to overhead and
    internal support functions. In addition, the Service will benefit from
    higher productivity levels resulting from the transition of the new
    hires to examiner work and the return of trainers to full time exam
    work. Other savings in this area include:
      --$500,000 (5 FTE) due to improved productivity stemming from more
            effective workload selection techniques such as creating and
            implementing new discriminate index function (DIF) formulas,
            which also will decrease taxpayer burden by allowing us to
            focus enforcement resources on the most egregious examples of
            abuse.
      --$12.1 million (120 FTE) by implementing improvements in the
            corporate examination process through improved techniques in
            data collection and risk identification. These improvements
            will result in earlier issue resolution, reduced audit cycle
            time, and increased inventory turnover. In addition, scanned
            returns will allow examiners to follow and evaluate data
            electronically.
      --$800,000 (13 FTE) due to the deployment of various technology
            improvements. The Generalized Integrated Data Retrieval System
            (IDRS) Interface and the Intelligent Call Management system
            will increase productivity and improve the quality and level of
            service to taxpayers.
      --$7.1 million (39 FTE) from enhanced investigations of tax fraud
            through the implementation of technology improvements to
            systems that process electronic data and evidence. The
            streamlined work processes and technological advancements will
            reduce administrative burden of investigations involving
            domestic and offshore abusive scheme promoters, corporate
            fraud, and other complicated investigations involving multi-
            national financial transactions.
        Taxpayer Service Programs and Processes ($17.7 million/440 FTE).--
    IRS operations will improve through a variety of efforts, including
    enhanced workload distribution and the automation of certain taxpayer
    assistance functions. The IRS will achieve $14.6 million (355 FTE) in
    efficiencies from improved employee to management span of control
    throughout the organization, judicious distribution of management work,
    identification and elimination of non-critical vacancies, and the
    replacement of journeymen losses with lower-graded/entry-level
    positions. The deployment of the Individual Taxpayer Identification
    Number Real Time System saves time and money for both the Service and
    taxpayers. The system automates the process of providing a Taxpayer
    Identification Number (TIN) to those taxpayers ineligible for a Social
    Security Number but required to provide identifying information on a
    tax return. The Service anticipates $3.1 million (85 FTE) in
    efficiencies due to this new automated system.
        In addition to the program savings and increases for taxpayer
    service and enforcement, the fiscal year 2007 budget includes a $5.5
    million reduction to the Health Insurance Tax Credit Administration
    (HICTA) Program. This funding adjustment for HITCA reflects the
    program's effort to align fiscal year costs with contract year
    expenditures.

                               IRS MODERNIZATION

        The requested level for BSM of $167.3 million, a decrease of $29.7
    million, will continue the support for Customer Account Data Engine
    (CADE), Filing and Payment Compliance (F&PC) and the Modernized e-File
    (MeF) project along with some of the needed investments to upgrade our
    infrastructure.
        After several years of cost, schedule, and performance problems,
    the BSM program has improved its performance in the past 2 years by
    delivering projects and releases on time, on budget, and meeting or
    exceeding expectations. Taxpayers are now realizing the benefits of our
    enhanced BSM program management capabilities. In fiscal year 2006 and
    continuing in fiscal year 2007, we are revising our modernization
    strategy to emphasize the release of projects to deliver business value
    sooner at a lower risk. We will concentrate on delivering releases of
    major tax administration projects, along with infrastructure
    initiatives that support all modernization projects, and continuing our
    improvements to program management operations. These projects and
    initiatives address core IRS strategic priorities: taxpayer service,
    enforcement, and modernization.
        As part of our continuing effort to improve taxpayer service, we
    plan to expand services provided and the number of taxpayers served by
    Modernized E-File (MeF). MeF uses the latest secure Internet technology
    and speeds turnaround time for tax return submissions, equating to
    significant reductions in burden and time for corporate and tax-exempt
    taxpayers.
        As of April 16, MeF had processed nearly 684,000 returns. This
    compares to approximately 176,000 in 2005, a 289 percent increase. In
    recent regulations, the IRS has mandated the Nation's largest
    corporations and tax exempt organizations file electronically in 2006
    through the use of MeF.
        Finally, we will continue to expand the use of the Customer Account
    Data Engine (CADE). CADE will ultimately replace our antiquated Master
    File system, which is the repository of taxpayer information. CADE
    allows faster refunds, improved taxpayer service, faster issue
    detection, more timely account settlement, and a robust foundation for
    integrated and flexible modernized systems. CADE posted more than 1.4
    million returns and generated more than $427 million in refunds in
    2005. In 2006, CADE has posted over 6.4 million returns and generated
    over $3 billion in refunds. In the 2007 filing season, we expect CADE
    to process 33 million returns. CADE serves as the single authoritative
    repository for account and return data for those returns.

                       PRIVATE COLLECTION AGENCIES (PCA)

        The American Jobs Creation Act of 2004 created section 6306 of the
    Internal Revenue Code, which allows the IRS to use private contractors
    to collect delinquent taxes in instances where the amount owed is not
    in dispute. It is important to understand that these PCAs will only be
    assigned cases where the tax balance is not in dispute and will not be
    performing audits or assessing penalties, or taking enforced collection
    actions of any kind. They will only be used in instances where what is
    owed has been determined but the taxpayer has not paid.
        On March 9, we announced the award of contracts to 3 PCAs. It is
    our expectation that these firms will begin work as soon as issues are
    resolved regarding protests to these awards. If cases are placed in
    fiscal year 2006, as allowed by statute, the IRS will retain 25 percent
    of any posted revenue receipts from this program which we will use to
    supplement our existing budget (for collection related activities). We
    anticipate an even greater return for fiscal year 2007 since case
    placements are expected to increase.

                                  THE TAX GAP

        To understand the need for full funding of IRS's proposed fiscal
    year 2007 budget, one also must understand the nature of the tax gap.
    The tax gap is the difference between the amount of tax imposed on
    taxpayers for a given year and the amount that is paid voluntarily and
    timely. The tax gap represents, in dollar terms, the annual amount of
    noncompliance with our tax laws.
        It is the need to reduce that gap that drives much of what we do.
    This is true not only from a revenue standpoint, but also from a
    taxpayer fairness perspective. Our tax system is largely based on
    voluntary compliance and that compliance is enhanced if taxpayers
    believe that everyone is paying their fair share.
        A year ago, we released preliminary estimates of the tax gap based
    on data derived from a National Research Program (NRP) study conducted
    on individual income tax returns from Tax Year 2001. This was the first
    comprehensive update of our tax gap estimate since 1988. We have now
    revised those estimates and I would like to summarize them for you.
        Our latest numbers show that the overall gross tax gap for Tax Year
    2001 was approximately $345 billion, resulting in a noncompliance rate
    of 16.3 percent. Both of these numbers are in the upper end of the
    range of estimates provided last spring. Our estimate of the
    corresponding net tax gap, or what remains unpaid after enforcement and
    other late payments, is $290 billion, also in the upper end of the
    earlier range.
        Noncompliance takes three forms: not filing required returns on
    time; not reporting one's full tax liability even when the return is
    filed on time; and not paying by the due date the full amount of tax
    reported on a timely return. We have separate tax gap estimates for
    each of these three types of noncompliance.
        Underreporting constitutes 82.6 percent of the gross tax gap, up
    slightly from our earlier estimates. Nonfiling constitutes 7.8 percent
    and underpayment 9.6 percent of the gross tax gap.
        Individual income tax accounts for 46 percent of all tax receipts.
    However, individual income tax underreporting amounts to approximately
    $197 billion, or 57 percent of the overall tax gap.
        As in previous compliance studies, the NRP data suggest that well
    over half ($109 billion) of the individual underreporting gap came from
    understated net business income (unreported receipts and overstated
    expenses). Approximately 28 percent ($56 billion) came from
    underreported non-business income, such as wages, tips, interest,
    dividends, and capital gains. The remaining $32 billion came from
    overstated reductions of income (i.e. statutory adjustments,
    deductions, and exemptions), and from overstated tax credits. The
    corresponding estimate of the self-employment tax underreporting gap is
    $39 billion, which accounts for about 11 percent of the overall tax
    gap. Self employment tax is underreported primarily because self-
    employment income, which is not subject to third party reporting, is
    underreported for income tax purposes. Taking individual income tax and
    self employment tax together, then, we see that individual
    underreporting constitutes over two-thirds of the overall tax gap.

             INCREASING COMPLIANCE THROUGH SERVICE AND ENFORCEMENT

        It is important to understand that the complexity of our current
    tax system is a significant reason for the tax gap. It is easy for even
    sophisticated taxpayers to make honest mistakes. Accordingly, helping
    taxpayers understand their obligations under the tax law is a critical
    part of addressing the tax gap.
        IRS is committed to assisting taxpayers in both understanding the
    tax law and remitting the proper amount of tax. We are continuing to do
    this by maintaining the balance between service and enforcement that is
    so critical to tax administration.
    Service
        I have already talked about IRS.gov and how it can answer many
    taxpayer questions on issues ranging from the Earned Income Tax Credit
    (EITC) to the Alternative Minimum Tax (AMT) to refund tracking. On a
    recent day, our site ranked third in overall hits according to Yahoo's
    Buzz Index. The American Customer Satisfaction Index has ranked our
    site well ahead of the government benchmark in the areas of content,
    functionality, navigation, privacy, satisfaction and in many other
    areas. Thus far this year, visits to our site are up 3.4 percent over
    the same period a year ago.
        This success has been recognized by others. In 2004, IRS.gov won
    the Keynote Performance Award as the most reliable Federal web site for
    performance and availability. It won the 2005 Government Computer News
    agency award for innovation and is a finalist for the 2005
    Excellence.gov Award in recognition of being an outstanding Federal
    interactive web site.
        We believe the internet has become our primary vehicle for
    delivering service information to taxpayers. Please note that I said
    primary and not exclusive. We recognize that we will always have a
    percentage of taxpayers that we need to serve through either direct
    personal service or over the telephone, but we hope to continually
    drive that number down, while at the same time improving the levels of
    service and taxpayer satisfaction. This will not only save us time and
    resources, but also will provide a valuable service to taxpayers. They
    can get answers to their questions at their home, at their convenience,
    rather than visiting a walk-in site.
        We continue to get good marks on various customer service surveys.
    Our toll free telephone service customer satisfaction rating is 94
    percent. In fiscal year 2005, the IRS's customer assistance call
    centers answered 59.1 million calls. We achieved an 82.6 percent toll-
    free-telephone CSR level of service, exceeding our fiscal year 2005
    target of 82 percent. We also improved our toll free tax law accuracy
    rate to 89 percent, an increase from 80 percent in fiscal year 2004.
    While this is the highest yearly rate ever, we continue to strive to
    improve. This filing season through March, the tax law accuracy rate is
    90 percent.
        We provided and staffed toll-free FEMA phone assistance lines for
    hurricane victims and answered approximately 950,000 calls. The IRS
    also implemented numerous tax law changes to help the victims of
    Hurricanes Katrina, Rita and Wilma, businesses located in the disaster
    areas, and individuals donating to charities to support the victims.
        We continue to leverage community partnerships to provide free tax
    return preparation assistance through successful programs such as
    Volunteer Income Tax Assistance (VITA) and Tax Counseling for the
    Elderly (TCE). In 2005, 62,000 trained volunteers at 14,000 locations
    across the country prepared more than 2.1 million tax returns, an 80
    percent increase since 2001. We expect the number of customers served
    this year to exceed 2.2 million.
        I personally have had the opportunity to visit several VITA sites
    and I remain impressed by the diligence, the competence, and the
    commitment of the thousands of volunteers that make this program work.
        For small businesses, we simplified the employment tax filing
    process for more than 950,000 small companies by allowing them to file
    their employment tax returns and pay their employment tax liabilities
    annually, rather than quarterly. Our office of Taxpayer Burden
    Reduction led a collaborative effort to redesign the Form 1041 Schedule
    K-1, which among other things, is used to report income, deductions,
    and credits from trusts and estates to beneficiaries.
        We are also making progress on our Taxpayer Assistance Blueprint
    (TAB). This is an ambitious, agency-wide, 5-year taxpayer services plan
    aimed at improving IRS services.
        Over the past 5 years we have taken significant steps to understand
    the needs and preferences of individual taxpayers, our primary
    customers, and their representatives. Many studies, such as the
    Multilingual Initiative, the EITC outreach, and partnerships with
    organizations such as AARP and the National Community Tax Coalition
    have focused on understanding key demographic and behavioral
    differences in our customers. Before now, those initiatives have not
    been integrated to form a complete picture of customer needs.
        The TAB project will pull the pieces of the puzzle together and
    develop a complete picture of our customer base. Through a systematic
    data collection and analysis process, a dynamic plan (or Blueprint)
    will be developed to meet our short and long term business needs as it
    relates to taxpayer assistance and address concerns expressed by
    Congress and other oversight bodies.
        In short, TAB will help us better understand our customers--their
    characteristics, how they access our services, what services they use
    and prefer, and if our services truly meet their needs.
        We have completed the first phase of the TAB project. In Phase 1,
    we conducted research and surveyed taxpayers, stakeholders, and IRS
    employees to form a preliminary assessment of taxpayer needs,
    preferences, and demands. We have just recently delivered our Phase 1
    report to the subcommittee. In Phase 2, we will perform extensive
    primary research with taxpayers to refine our assessment and conclude
    by creating an IRS blueprint for taxpayer service delivery. We will
    complete this phase in October 2006.
    Enforcement
        The IRS made significant progress towards achieving its enforcement
    related goals in fiscal year 2005. We achieved increases in every major
    area of enforcement. We have:
      --Audited nearly 220,000 high income taxpayers in 2005, more than
            double the number audited in 2000.
      --Increased audits for individuals to 1.2 million, 20 percent more
            than 2004 and almost double the level 5 years earlier.
      --Audited nearly 5,000 businesses with assets over $250 million, an
            increase of 11 percent. In addition, we audited one out of
            every five companies with assets of $10 million. Finally,
            audits of businesses with less than $10 million in assets rose
            145 percent from 2004.
      --Generated more than $4.7 billion in revenue through two prominent
            settlement initiatives aimed at reducing examination and
            litigation expenses while deterring the use of abusive tax
            shelters.
      --Increased collection closure cases by 12 percent and dollars
            collected by 14 percent over 2004.
      --Increased criminal convictions to 2,151 (from 1,926 in 2002).
      --Increased overall collections by 10 percent through heightened
            enforcement efforts, from $43.1 billion in 2004 to $47.3
            billion in 2005.
        Combating abusive tax shelters remains a high priority in fiscal
    year 2006. Last October we announced a global settlement initiative
    that covered 21 listed and non-listed transactions. They include a wide
    range of transactions involving funds used for employee benefits,
    charitable remainder trusts, offsetting foreign currency contracts,
    debt straddles, lease strips, and certain abusive conservation
    easements.
        Taxpayers had until January 23, 2006 to file an election to take
    part in the global settlement program. Under the terms of the
    settlement, taxpayers will generally be required to pay 100 percent of
    taxes owed, interest and, depending on the transaction, either a
    quarter or half the accuracy-related penalty the IRS will otherwise
    seek.
        We have been pleased by the response to this initiative, and we
    believe the response was buoyed by provisions in the Gulf Opportunity
    Zone Act of 2005 that modified the rules for calculating interest on
    tax deficiencies of individual taxpayers who participated in certain
    abusive tax shelters, increasing the incentives for individuals to come
    forward as part of this program.
        In addition, our Large- and Mid-Sized Business Division (LMSB) has
    issued more than 500 administrative summonses as part of our attack on
    shelter promoters, and we have approximately 200 active promoter
    examinations under way. Entities being looked at include banks,
    accounting firms, law firms and brokerage houses. We want to make it
    clear that taxpayers who take aggressive return positions relying on
    the ``audit lottery'' and the chance they will not be examined have
    made a really bad decision.
        In addition, we are continuing to focus on improper uses of certain
    tax exempt bonds and trusts, questionable transfer-pricing practices,
    offshore accounts, and charitable donations of intangible assets.
        Another enforcement priority is to assure that attorneys,
    accountants, and other tax practitioners adhere to professional
    standards and follow the law. Our system of tax administration depends
    upon the integrity of practitioners. The vast majority of practitioners
    are conscientious and honest, but even the honest tax professionals
    suffered from the sad and steep erosion of ethics in recent years by
    being subjected to untoward competitive pressures.
        We have done quite a bit to restore faith in the work of tax
    professionals. We have strengthened regulations governing the standards
    of tax practice to discourage the manufacturing of bogus legal opinions
    on the validity of tax shelters. New Treasury Department regulations
    took effect last June that revise Circular 230 governing tax
    practitioner behavior. The new regulations establish standards for
    written tax advice prepared by practitioners.
        Further, additional revisions to Circular 230 were recently
    proposed to make disciplinary proceedings more transparent so that
    practitioners may learn the types of behavior IRS is likely to
    challenge under the Circular.
        The IRS has made noncompliance by tax exempt and governmental
    entities and misuse of the tax exempt status of such entities by third
    parties for tax avoidance purposes another major enforcement priority.
    For example, earlier this year, we concluded that more than 30 credit
    counseling firms, accounting for more than 40 percent of the industry's
    revenues, are not entitled to tax exempt status. The proposed
    revocations of the tax exempt status of these entities are the
    culmination of more than 2 years of work covering more than 60 credit
    counseling organizations.
        These organizations were originally granted tax exempt status
    because they were supposed to be educating and assisting people who
    have credit or cash flow problems. Unfortunately, too many of these
    organizations instead operate for the benefit of insiders or are
    improperly in league with profit making companies. We want to make sure
    that money donated to charities goes for the purpose intended and not
    into the pockets of individuals associated with the charitable
    organization.
        In 2006, our Tax Exempt/Government Entities (TE/GE) division will
    continue to focus on key areas where organizations are abusing their
    exempt status or where others are using them for unintended purposes.
    Three of the areas in which we anticipate renewed enforcement include
    political intervention, executive compensation and abusive
    transactions.
        Regarding political intervention by entities claiming tax exempt
    status, in 2006 we will be finishing up contacts with 130 organizations
    suspected of political intervention in the 2004 election. Almost half
    of these are churches. Thus far we have completed 82 examinations and
    have concluded that nearly three-quarters of the non-profits examined,
    including churches, engaged in some level of prohibited activity. Most
    of these exams concerned one-time, isolated occurrences of prohibited
    campaign activity, which the IRS addressed through written advisories
    to the organizations. In three cases involving non-churches, the
    prohibited activity was egregious enough to warrant the IRS proposing
    the revocation of the organization's tax-exempt status.
        We have also issued a fact sheet designed to offer guidance to non-
    profits on what is and is not permissible activity for tax-exempt
    organizations. In addition, we have taken steps to ensure that all
    referrals regarding campaign activity that the IRS receives from the
    public, as well as activity the IRS itself uncovers, are reviewed
    expeditiously, and treated consistently and fairly.
        Excessive compensation of executives also will be a main focus of
    our enforcement efforts. There are indications that tax-exempt
    organizations have allowed key executives too great a voice in
    determining their own compensation or otherwise have not used due
    diligence in setting compensation levels. We have contacted almost
    2,000 Section 501(c)(3) organizations, including about 400 private
    foundations regarding this issue. In addition, we are exploring
    compensation to tax-exempt hospital executives.
        In the fiscal year 2006 budget, our enforcement resources increased
    by $442 million (post-rescission). I know it is important to you, and
    it is equally important to us, to show a return on that investment.
        Of the total $442 million in increased funding, $180 million funds
    the pay and non-pay inflationary costs to maintain the $6.4 billion
    devoted to enforcement. The remaining $262 million funds direct costs
    for enhanced enforcement hiring, including staff for the Counsel and
    Appeals organizations, and associated indirect costs for these hires.
    We will focus these resources on:
      --Increased coverage of high-risk compliance problems to address the
            largest portion of the tax gap--the underreporting of tax--
            across all major compliance programs;
      --Complex high-risk issues in abusive tax avoidance transactions,
            promoter activities, corporate fraud and aggressive
            transactions, resulting in increased corporate and high income
            audit coverage;
      --Efforts aimed at reversing the erosion of individual tax compliance
            and support of the strategy to implement a balanced compliance
            program;
      --Improved ability to identify compliance risks and significantly
            expanded coverage of tax-exempt communities;
      --Safeguarding compliant customers from unscrupulous promoters
            through earlier detection of abusive schemes and heightened
            efforts to prevent their proliferation; and
      --Increased vigilance to ensure the assets of tax-exempt
            organizations are put to their intended tax-preferred purpose
            and not misdirected to fund terrorism or for private gain,
            including enhanced processing of questionable exemption
            applications and increased technical support to the examination
            process.

                             LEGISLATIVE PROPOSALS

        While fundamental tax reform is the only comprehensive solution to
    reducing the tax gap, until that is achieved, we must work within the
    current system to reduce the tax gap as much as possible. Allow me to
    discuss five specific legislative proposals that are offered as part of
    the fiscal year 2007 budget and designed to reduce the tax gap.
    Collectively, these five changes should generate $3.6 billion over the
    next 10 years.
        The first and perhaps most important proposal would increase
    reporting on payment card transactions. Our tax gap study shows clearly
    that increased information reporting and backup withholding are highly
    effective means of improving compliance with tax laws. More than 150
    million wage earners already have their information reported directly
    by their employer to the IRS and the non-compliance rate for this group
    is less than 1 percent. All of these wage earners are also subject to
    mandatory withholding of taxes.
        Payment cards (including credit cards and debit cards) are a
    growing form of payment in retail business transactions. The failure of
    some merchants to accurately report their gross income, including
    income derived from payment card transactions, accounts for a
    significant portion of the tax gap and creates a significant
    competitive advantage for those businesses that underreport.
        The administration proposes that the Treasury Secretary be given
    the authority to promulgate regulations requiring annual reporting of
    the aggregate reimbursement payments made to merchants in a calendar
    year, and to require backup withholding in the event that a merchant
    payee fails to provide a valid taxpayer identification number.
        Because reimbursement information is already provided to merchants,
    requiring this information to be reported to the IRS on an aggregate
    annual basis will impose minimal burden on payment card companies and
    no burden on the affected merchants. In addition, implementing a backup
    withholding system for payment card reimbursements to businesses would
    lead to material improvements in the compliance rates of these
    taxpayers without imposing a significant burden on the card companies.
    Finally, the IRS will be able to use payment card reporting information
    to better focus its resources and relieve the burden that existing
    audits place on businesses that accurately report their gross income.
        The second legislative proposal would clarify when employee leasing
    companies can be held liable for their clients' Federal employment
    taxes. Employee leasing is the practice of contracting with an outside
    business to handle certain administrative, personnel, and payroll
    matters for a taxpayer's employees. Typically, these firms prepare and
    file employment tax returns for their clients using the leasing
    company's name and employer identification number, often taking the
    position that the leasing company is the statutory or common law
    employer of the clients' workers.
        Non-compliance with the Federal employment tax reporting and
    withholding requirements is a significant part of the tax gap. Under
    present law, there is uncertainty as to whether the employee leasing
    company or its client is liable for unpaid Federal employment taxes
    arising with respect to wages paid to the client's workers. Thus, when
    an employee leasing company files employment tax returns using its own
    name and employer identification number, but fails to pay some or all
    of the taxes due, or when no returns are filed with respect to the
    wages paid by a company that uses an employee leasing company, there
    can be uncertainty as to how the Federal employment taxes are assessed
    and collected.
        The administration's proposal would set forth standards for holding
    employee leasing companies jointly and severally liable with their
    clients for Federal employment taxes. The proposal would also allow
    employee leasing companies to qualify to be solely liable if they met
    certain specified standards.
        Our third proposal would amend collection due process procedures
    for employment tax liabilities. Currently, we are authorized to take
    various collection actions including issuing Federal tax levies to
    collect past-due taxes. Before a tax levy can be issued, however, the
    IRS generally must provide the taxpayer with notice and an opportunity
    for an administrative collection due process (CDP) hearing, and for
    judicial review.
        Frequently, an employer who fails to satisfy its Federal tax
    liabilities for one period will also fail to satisfy them for later
    periods, resulting in a ``pyramiding'' of unpaid taxes. Some employers
    who request a CDP hearing or judicial review for one tax period will
    continue to accrue, or pyramid, their employment tax liabilities during
    the CDP proceedings. Liabilities for the subsequent periods cannot be
    collected by levy until the employer has been given notice and
    opportunity for a hearing and judicial review for each period. The
    existing CDP framework compounds the pyramiding problem by depriving
    the government of enforced collection as a tool to encourage employers
    to satisfy their current Federal employment tax obligations.
        Our proposal would allow the levy to be imposed prior to a CDP
    hearing in a fashion similar to current law provisions for levies
    issued to collect a Federal tax liability from a State tax refund.
    Taxpayers would have the right to a CDP hearing with respect to
    employment tax liabilities within a reasonable time after the levy.
    Taxpayers would also continue to have access to existing pre-collection
    administrative appeal rights other than CDP.
        The fourth proposal would require increased information reporting
    and backup withholding for certain government payments for property and
    services. It should be noted that present law generally requires
    information reporting for the provision of services and direct sales,
    but does not for provisions of goods and other property. This proposal
    will extend information reporting, with some exceptions, to the
    purchase of property by Federal, State, and local governments.
        Our proposal would authorize the Treasury Secretary to promulgate
    regulations requiring information reporting and backup withholding on
    non-wage payments by Federal, State and local governments to procure
    property and services. Certain payments would, of course, be exempt.
    These include payments of interest, payments for real property,
    payments to tax exempt entities or foreign governments,
    intergovernmental payments, and payments made pursuant to a classified
    or confidential contract.
        The final legislative proposal would expand the signature
    requirement and penalty provisions applicable to paid tax return
    preparers. Under current law a paid tax return preparer is required to
    sign and include his/her taxpayer identification number (TIN) on an
    income tax return and related documents that he/she prepares for
    compensation. Paid return preparers, however, are not required to sign
    and include their TINs on non-income tax returns, such as employment
    tax returns, excise tax returns, and estate and gift tax returns, and
    tax return related documents filed with the IRS. The administration's
    proposal would expand preparer identification and penalty provisions to
    non-income tax returns and tax return-related documents prepared for
    compensation. Further, it would impose penalties for preparing tax
    return related documents that contain false, incomplete, or misleading
    information or certain frivolous positions that delay collection.
        These five legislative changes strategically target areas where:
    (1) research reveals the existence of significant compliance problems;
    (2) improvements will burden taxpayers as little as possible; and (3)
    the changes support the administration's broader focus on identifying
    legislative and administrative changes to reduce the tax gap.
        In addition to these specific legislative proposals, we will study
    the distinction between independent contractors and employees under
    current law. The improper classification of employees as independent
    contractors is a significant problem and substantial contributor to the
    tax gap.

                                   FREE FILE

        The IRS wants to make free filing of tax returns available to as
    many taxpayers as possible. We have looked to the private sector for
    assistance to make this happen as quickly as possible. I referenced
    earlier the fact that we are experiencing a significant decline in the
    use of the Free File program in the 2006 Filing season. I also
    recognize there have been some questions raised as to the renewal of
    our Free File agreement. Allow me to update you on both the background
    of Free File and the new agreement.
        Free File's roots can be found in the President's fiscal year 2002
    Management Agenda. It contained five Government-wide initiatives, one
    of which was to expand electronic government. The overarching goal was
    to ``champion citizen-centered electronic government that will result
    in major improvements in the federal government's value to the
    citizen.''
        Subsequently, in November 2001, OMB's Quicksilver Task Force
    established 24 e-government initiatives as part of the President's
    Management Agenda. These initiatives were designed to improve
    government-to-government, government-to-business, and government-to-
    citizen electronic capabilities.
        One initiative instructed the IRS to provide free online tax return
    preparation and filing services to taxpayers. In accordance with this
    OMB directive, the IRS began working in partnership with the tax
    software industry to develop a solution.
        The IRS believes that private industry, given its established
    expertise and experience in the field of electronic tax preparation,
    has a proven track record in providing the best technology and services
    available. IRS's partnership with private industry: (1) provides
    taxpayers with high quality services by using the existing private
    sector expertise; (2) maximizes consumer choice; (3) promotes
    competition within the marketplace; and (4) meets these objectives at
    the least cost to taxpayers.
        On October 30, 2002, the IRS and the Free File Alliance, LLC,
    signed an agreement that created a public-private partnership to
    provide free services to the majority of taxpayers. The Free File
    Alliance, LLC, is a private-sector consortium of tax preparation
    software companies. The original agreement was for 3 years with a
    series of 2-year renewal options. The primary candidates for Free File
    services were those taxpayers who prepare their own taxes and still
    file paper returns.
        While membership in the Alliance may change from time to time, all
    members must meet certain IRS standards. Specifically, we must approve
    each member's proprietary tax preparation software. In addition, each
    member must obtain third party privacy and security certification.
    Finally, all Alliance members must adhere to all Federal laws regarding
    taxpayer privacy.
        Each Free File Alliance member was allowed to set taxpayer
    eligibility requirements for its program. Generally, eligibility was
    based on such factors as age, adjusted gross income, State residency,
    eligibility to file a Form 1040EZ or for the Earned Income Tax Credit.
    But, as a whole, under the original agreement, the Alliance was
    required to provide free filing services to at least 60 percent or 78
    million of the Nation's individual taxpayers. In addition, all active
    armed forces, Federal reservist and National Guard personnel were
    eligible to free file through a separate program operated by the
    military.
        While the IRS did not support or endorse any Free File Alliance
    company or product offering, it did provide a listing of the Alliance
    members via the Free File web page, which is hosted on IRS.gov.
    Companies were allowed to offer ancillary services to taxpayers for a
    fee, but the taxpayer was under no obligation to purchase any of those
    services as a condition of getting their Federal tax return prepared
    free of charge.
        The intent of the Free File program was to reduce the burden on
    individual taxpayers, make tax preparation easier and expand the
    benefits of electronic filing to a majority of Americans. In the 2003
    filing season, 2.8 million taxpayers took advantage of Free File. This
    number rose to 3.4 million in 2004. In 2005, the number increased to
    over 5 million. Nearly 3.9 million taxpayers have utilized Free File in
    this filing season.
        The 2005 number may be a bit of an aberration in that many of the
    companies in the Alliance opted to lift qualification restrictions on
    taxpayers thus allowing any taxpayer, regardless of income, to utilize
    Free File. This started as some companies sought a competitive
    advantage by expanding their base and ended with many of the companies
    in the Alliance offering free return preparation services to anyone.
        While this was good for taxpayers in general, it posed a serious
    threat to the survival of the Alliance and was a prime topic of
    discussion when the contract was up for renewal at the end of last
    year. Many of the companies could not continue in the Free File
    Alliance unless it returned to offering the free service to low and
    moderate income individuals. The loss of these companies would have
    jeopardized the continued existence of the Alliance.
        As we prepared for negotiations to extend the Free File agreement
    in 2005, the IRS took the position that Free File should be available
    to as many taxpayers as possible. The Alliance's position was that Free
    File should only be available to low and moderate income taxpayers.
        As is the case in most negotiations, we compromised and agreed that
    Free File would be offered to 70 percent of taxpayers, or anyone with
    an AGI of $50,000 or less in 2005. This covers approximately 93 million
    of the 133 million individual taxpayers expected to file returns this
    year. This is an improvement over our prior agreement which only
    guaranteed coverage of 60 percent or availability to 78 million
    taxpayers. The active armed forces, Federal reservist and National
    Guard personnel continue to be eligible to free file under their own
    program.
        In 2006, three Free File Alliance members are offering State filing
    for free. Seven members are offering to file Form 4868, Extension of
    Time to File Individual return. Approximately 46,000 extension forms
    had been filed as of April 15. In addition, there are two companies
    offering free packages in Spanish.
        While the number of taxpayers taking advantage of Free File in 2006
    will likely be less than in 2005, we are unable at this time to fully
    explain the decline. Certainly the fact that it is not available to
    everyone is one factor, but there likely are other factors as well.
        A year ago, the Free File program benefited greatly from a major
    article on the front page of USA Today. Immediately following that
    article, there was a tremendous surge of positive publicity as well as
    a surge in Free File usage by taxpayers. We have not been the
    beneficiary of similar publicity this year and to the extent we have
    received coverage much of it has focused on the taxpayers that Free
    File does not cover.
        One of the major concerns that many critics of the Free File
    program have had has been the ability of the Alliance members to use
    Free File to market other services to taxpayers. These include the
    filing of State tax returns and the offering of refund anticipation
    loans (RALs). We make it clear to taxpayers that the IRS does not
    endorse any of these products or services nor is the completion of
    their tax return at no cost conditioned on the purchase of any product
    or service.
        Because the IRS does not directly monitor Free File return
    preparation, we generally do not know what, if any, fee services
    taxpayers actually use from the Free File vendors. The one service that
    we do have data on is refund anticipation loans (RALs). RALs are
    designed to provide the taxpayer an immediate refund in the form of a
    consumer loan. Often the costs incurred with the RAL are
    disproportionate to the amount of the refund, especially considering
    that a taxpayer that files electronically will get the refund from the
    IRS in about 2 weeks. Unfortunately, it is often low income taxpayers,
    the ones who can least afford it, who choose RALs.
        What we are seeing from our Free File data thus far in this regard
    is encouraging. Only 0.6 percent of the taxpayers utilizing Free File
    have utilized a RAL. In fact, half of the Free File vendors do not even
    offer refund anticipation loans. In part this may be due to the strong
    consumer protection language included in the new agreement. The
    agreement specifies that any alliance member offering a RAL must
    include clear language indicating that RALs are a loan and not a faster
    way of receiving an IRS refund. It also requires them to specify that
    because the RAL is a short term loan, interest rates may be higher than
    some other forms of credit available to consumers. The agreement also
    limits an Alliance member to asking a taxpayer about a RAL only once.
    If the taxpayer says no, then there can be no other pressure applied to
    convince him or her to change his or her mind.
        This 0.6 percent RAL participation for Free File is the lowest of
    any of our electronic filing groups. Other online filers have a 0.8
    percent participation rate. The rate for online returns done by paid
    tax return preparers is the highest. Approximately 20 percent of the
    paid preparer returns submitted electronically include a RAL.

                           7216 PROPOSED REGULATIONS

        Another issue about which there has been considerable controversy
    is the proposed modification of regulations under section 7216 of the
    Internal Revenue Code, which addresses use and disclosure of tax return
    information by tax preparers. I must admit that I was somewhat
    surprised by the reaction to the proposed regulations particularly
    since the current regulations have allowed for taxpayer consent to
    disclosure for more than 30 years. Protecting the confidentiality of
    tax return information is of paramount importance to the IRS and our
    intent in proposing the regulations was to tighten existing rules and
    articulate how the tightened rules should be applied in an electronic
    return preparation environment.
        The furor that has arisen in recent weeks over the proposed changes
    tells me that few taxpayers were previously aware of this provision and
    of the consequences of consenting to disclosure or use of their tax
    return information. To that extent, the debate has been good in that
    taxpayers are hopefully now better educated about disclosure and
    sharing of information and will be more careful about what they consent
    to.
        Beyond that, it is important to remember several things. First,
    this is only a proposed regulation. We have had numerous comments both
    in writing and at the public hearing we held on April 4. We will
    evaluate all those comments before going forward with any final
    regulation.
        Second, the proposal contains some important taxpayer protections
    relative to what a tax return preparer would have to do in order to get
    consent to share or use any of the taxpayer information the taxpayer
    gave the return preparer to prepare his or her tax return. In addition,
    there are important new restrictions on the ability of tax return
    preparers to shift tax return information overseas for tax return
    preparation or data processing purposes.
        Third, the proposed regulations would treat all tax return
    preparers the same way. Under the current regulations, tax return
    preparers that are part of an ``affiliated group'' of corporations can
    obtain taxpayer consent to use information to solicit business for
    their corporate affiliates. This rule was written over 30 years ago and
    has no application to the vast majority of return preparers that are
    not organized as affiliated groups of corporations. This leads to
    illogical results, particularly when contrasted with the provision in
    the current rules that allows taxpayers to consent to ``disclose''
    their tax return information to third parties that have no connection
    whatsoever with the tax return preparer. The IRS has received a number
    of comments on this issue and will carefully consider them in
    finalizing the proposed regulation to ensure that the goal of
    protecting taxpayer privacy is achieved.
        Finally, an outright ban on sharing of tax return information
    raises some interesting questions and may lead to illogical results if
    taxpayers were prohibited by law from ever consenting to a tax return
    preparer disclosing or using their tax return information for any
    purpose.

                                  CONCLUSIONS

        Mr. Chairman, members of the subcommittee, I would like to
    emphasize the following points:
      --E-Filing continues to grow. Over 63 million people have already e-
            filed their return, 63 percent of all returns filed.
      --Taxpayers who are e-filing from their home computers show the
            greatest increase in e-filing, up almost 13 percent from a year
            ago.
      --Hits to IRS's web site, IRS.gov are almost 114 million, up 3.39
            percent over last year.
      --Returns filed by VITA and TCE sites are up 7.3 percent over a year
            ago.
        In addition, the best way to maintain our success in our compliance
    and enforcement efforts, reduce the tax gap, and continue the
    achievements made in 2006 is the adoption of the President's proposed
    budget for fiscal year 2007, particularly the $137 million for
    enforcement that is part of a program integrity cap adjustment, and
    enactment of the five legislative proposals.
        Thank you, Mr. Chairman and I will be happy to respond to any
    questions.

                      STATEMENT OF RAYMOND T. WAGNER, JR.

        Senator Bond. Thank you very much, Commissioner, and now
    let me turn to Chairman Wagner.
        Mr. Wagner. Thank you, Mr. Chairman.
        Before I begin, I almost feel compelled to dial up my 11-
    year-old daughter, Mary Ruth, and put her on my speakerphone
    right here or at least take her photo and put it on the front
    side of my name tag.
        Mr. Chairman, members of the committee, Senator Murray,
    thank you for the opportunity to present the IRS Oversight
    Board's recommendations for the fiscal year 2007 budget. Before
    I begin my testimony on the budget, I would like to take a
    moment to commend the Commissioner and the Internal Revenue
    Service on what appears from all accounts to be a very
    successful filing season.
        I have submitted a detailed written statement and ask that
    it be made a part of the hearing record.
        The Oversight Board recommends a fiscal year 2007 IRS
    budget of $11.3 billion, an increase of $732 million or 6.9
    percent over the enacted fiscal year 2006 budget as compared to
    the administration's request of $10.6 billion. The two budgets
    share some essential elements. Both reflect the same
    adjustments for inflation of $272 million. Both show a savings
    and reinvestment of $122 million, and both are supplemented by
    $135 million in increased user fees.
        The board recognizes the theme of fiscal austerity in the
    President's budget and respects the administration's request;
    however, our statutory charge is to recommend a budget that
    will ensure that the IRS can carry out its mission and annual
    and long plans.
        Mr. Chairman, you are very aware of the large tax gap. You
    spoke of it in your opening statement. We believe that reducing
    the tax gap requires a comprehensive long-term plan with
    organizational commitment and actions described in my written
    statement. The board believes that a flat IRS budget does not
    do enough to shrink the tax gap and recommends an increase of
    $705 million in four program areas: $44 million for more
    taxpayer services, $368 million for more enforcement, $105
    million for management and infrastructure, $189 million for the
    Business Systems Modernization program.
        In the area of customer service, the board seeks to restore
    the telephone level of service on IRS's main toll-free line to
    the fiscal year 2004 level of performance or 87 percent. The
    board also recommends an additional $368 million for
    enforcement. Of that, $308 million would provide for the modest
    increase in IRS enforcement resources across all taxpayer
    segments. The IRS has demonstrated there is a positive return
    on these types of investments.
        The remaining $60 million for our enforcement increase is
    for additional research. The IRS needs to know much more about
    the noncompliance to mount a successful campaign against the
    tax gap. It is time that the IRS make up-to-date research the
    normal way of doing business. To this end, the board recommends
    that the IRS make the National Research Program permanent and
    perform compliance research annually. This effort should be
    guided by a long-term plan for research. We also need solid
    research on customer service needs and how customer service
    affects compliance.
        I want to emphasize that taxpayers want more service and
    more enforcement from the IRS. The board surveys of taxpayer
    attitudes in 2004 and 2005 indicates that approximately two-
    thirds of taxpayer support additional IRS funding for both
    service and enforcement.
        Time does not permit me to describe our recommendation for
    infrastructure and management fully, but I would like to
    highlight one specific recommendation, the need to restore
    leadership development training to fiscal year 2003 levels,
    which is especially critical during a period in which
    approximately 50 percent of IRS managers are eligible for
    retirement.
        It is also critical to discuss Business Systems
    Modernization. Despite productivity improvements, the IRS is
    still forced to rely on a 40-year-old information system for
    its central recordkeeping, which limits the IRS to weekly
    updates of its primary taxpayer records. No modern financial
    institution in the private sector could survive under these
    conditions. Eliminating these limitations are key to making the
    IRS as efficient and effective as a modern financial
    institution.

                               PREPARED STATEMENT

        Improved management focus has helped BSM deliver important
    technology projects that are generating greater efficiencies
    and real world benefits for taxpayers, such as CADE and
    modernized E-file. Cutting back on modernization will force the
    program to take longer and cost more than necessary in the long
    run. The board recommends that BSM move forward at an
    accelerated pace.
        Mr. Chairman, this concludes my oral statement and I will
    be pleased to accept your questions.
        [The statement follows:]

                  Prepared Statement of Raymond T. Wagner, Jr.

                           INTRODUCTION AND OVERVIEW

        Mr. Chairman, thank you for this opportunity to present the
    Oversight Board's views on the administration's fiscal year 2007 IRS
    budget request. I will explain in my testimony why the Board believes
    its proposed budget is needed to meet the needs of the country and of
    taxpayers. In developing these recommendations, the Board has applied
    its own judgment but has also drawn on the collective wisdom of others
    in the tax administration community, including the IRS, Government
    Accountability Office (GAO), the Treasury Inspector General for Tax
    Administration (TIGTA), National Taxpayer Advocate, and Congress.
        In fulfilling its responsibilities, the Board must ensure that the
    IRS's budget and the related performance expectations contained in the
    performance budget support the annual and long-range plans of the IRS,
    support the IRS mission, are consistent with the IRS goals, objectives
    and strategies and ensure the proper alignment of IRS strategies and
    plans. In addition to my statement today, the Board is developing a
    formal report in which it will explain why it has recommended this
    budget for the IRS.
        Now is a fiscally challenging time for our Nation. Defense and
    homeland security needs coupled with rebuilding efforts along the
    hurricane-ravaged Gulf Coast have placed an enormous strain on the
    Federal budget.
        In addition to our fiscal challenges, taxpayers are expected to
    comply with an increasingly complex tax code which places heavy burdens
    on honest taxpayers who wish to comply and offers untold opportunities
    for mischief by those who do not.
        Against this backdrop, it is imperative that government work better
    and smarter and get the most out of every taxpayer dollar. But there is
    also a drain on the Treasury that undermines our country's tax revenues
    and threatens the integrity of our tax administration system--the tax
    gap.
        The IRS recently disclosed that the Nation's annual tax gap--the
    difference between what is owed and what is collected annually--stands
    at $345 billion, and some experts believe it could be even more. The
    Board considers the existence of such a large tax gap to be an affront
    to honest taxpayers, and is pleased with the attention that Congress
    has focused on the tax gap in the last year, especially with the
    release of the IRS's latest tax gap estimates. The Board, along with
    many other members of the tax administration community, believe that
    reducing the tax gap requires a comprehensive, multi-faceted plan with
    action on many fronts--from a simpler tax code and more complete income
    reporting to better enforcement and quality customer service.
        Such an approach needs to be more thoughtful and comprehensive that
    merely increasing IRS resources and expecting that the gap will shrink.
    However, increased IRS resources are certainly a part of the solution.
    A successful strategy will encompass several separate but interrelated
    approaches that will reinforce each other to produce the desired
    result. In the Board's opinion, a number of actions that can be taken
    will require additional IRS resources.
        The Oversight Board recommends an integrated set of strategies to
    close the tax gap: (1) tax code simplification; (2) improved
    information reporting and enforcement tools related to the cash
    economy; (3) improved customer service to make taxpayers aware of their
    obligations and modern technology to ease their burdens; (4) greater
    focus on research; (5) more productive partnerships between the IRS and
    tax professionals; and (6) and more emphasis on personal integrity.
        There can be no doubt that in the last 5 years the agency has
    achieved significant progress in all dimensions of its mission.
    Customer service has rebounded from the lows of the 1990's and through
    targeted investments and greater management focus, IRS enforcement has
    also turned the corner.
        This across-the-board improved performance has not gone unnoticed--
    especially among taxpayers. According to the 2005 American Customer
    Service Index, overall satisfaction among individual tax filers with
    the Internal Revenue Service remains stable at 64 percent; it is even
    higher among e-filers. The IRS Oversight Board 2005 Annual Survey also
    found that American taxpayer support for overall compliance reached an
    all-time high. However, the IRS's job is far from complete and it must
    close the tax gap while achieving balance in other parts of its
    critical mission.
        The Board recommends budget increases in four IRS program areas in
    fiscal year 2007: customer service, enforcement, Business Systems
    Modernization, and infrastructure and management tools.
        To achieve balance and ultimately compliance, the Board recommends
    two modest investments in customer service to ensure that there is no
    slippage in hard won gains. For example, the toll-fee telephone level
    of service is slightly down and wait times have increased compared to
    fiscal year 2004. The Board proposes restoring customer service to
    fiscal year 2003-2004 levels and investing in telephone infrastructure.
    It is far less expensive to prevent or solve a problem early on than
    let it grow.
        The Board proposes a modest increase in resources for virtually all
    IRS enforcement activities. This is money well-spent and there is a
    growing recognition of the positive return on money invested in the
    IRS. The Board strongly believes that the enforcement increase includes
    a significant investment in research to better understand enforcement
    and customer service needs and the impact of customer service on
    voluntary compliance. The Board's recommended budget puts the IRS on
    track to make the National Research Program (NRP) permanent and produce
    annual tax gap estimates. The Board further recommends that the IRS
    consider developing a long-term strategic plan for research.
        Business Systems Modernization is also a priority and the Board
    advocates a larger investment in information technology to improve IRS
    productivity and reduce taxpayer burden. Despite productivity
    improvements in recent years, the IRS is still hampered in its efforts
    to modernize because of its reliance on a 40-year-old information
    system for its central recording-keeping functions, which limit the IRS
    to weekly updates of its central taxpayer records. No modern financial
    institution in the private sector could survive under these conditions
    and eliminating these limitations is key to making the IRS an efficient
    and effective modern financial institution.
        Lastly, the Board recommends a number of management increases that
    will help the IRS cope with unfunded mandates, implement BSM projects,
    and restore leadership training to fiscal year 2003 levels, which has
    become especially critical during a period in which over 50 percent of
    IRS managers are eligible to retire.
        Overall, the Oversight Board proposes a budget that is good for the
    country, good for taxpayers, and allows the IRS to achieve its
    strategic goals and objectives in an efficient and effective manner. It
    calls for $11.3 billion funding for fiscal year 2007, a 6.9 percent
    increase over last year's appropriation.
        The Board has also voiced concern that two items in the
    administration's proposed fiscal year 2007 budget for the IRS pose
    significant risks. First, the budget proposes $84 million in savings
    from program efficiencies. The Oversight Board believes there is a risk
    that these reductions will decrease performance. Second, last December
    the IRS announced that it would dramatically raise fees for certain
    services and the President's budget assumes that the IRS will receive
    an additional $135 million in fee revenue. Although the IRS has
    expressed confidence it would receive this amount in additional fees
    based on its estimates, there is still some risk whether the estimated
    fee revenue can be achieved. In addition, external stakeholders have
    expressed concern that the additional fees could have an unintended
    negative impact on taxpayer compliance.
        In conclusion, the Board believes that it has constructed a
    fiscally responsible and realistic budget for the IRS that meets
    national needs and priorities. It would help shrink the tax gap while
    providing taxpayers with a level of service they rightly deserve and
    need. It would speed the modernization of the IRS's antiquated
    technology and give it the research tools to better understand current
    and developing trends. Most importantly, it would maintain that
    delicate but critical balance between enforcement and customer service
    that America's taxpayers have said time and again they want, and which
    has been validated through the Board's Taxpayer Attitude Survey. The
    IRS is now solidly on the right track and is making progress, but we
    must give it the resources to do its job. It is the right investment
    for this and future generations of taxpayers.
    Recommended IRS Oversight Budget in Brief
        The IRS Oversight Board recommends an fiscal year 2007 IRS budget
    of $11.31 billion, an increase of $732 million over the enacted fiscal
    year 2006 budget.\1\ This recommendation compares to the President's
    budget request for the IRS of $10.59 billion in direct appropriations.
    The two budgets share the following characteristics:
    ---------------------------------------------------------------------------
        \1\ The President's budget includes on pages IRS-127 to IRS-129 of
    the Congressional Justification, as required by law, a copy of the
    fiscal year 2007 IRS budget the Oversight Board approved and submitted
    to the Department of the Treasury. The Board's recommended budget, as
    show on these pages, is higher than the request shown above; Appendix 6
    provides an explanation of the differences.
    ---------------------------------------------------------------------------
      --Both reflect the same adjustments for inflation, $272 million.
      --Both show a savings and reinvestment of $121.6 million.
      --Both are supplemented by $135 million in increased user fees to
            achieve a higher operating level.
        The Board's budget, however, proposes program increases of $705
    million compared to a proposed program decrease of nearly $9 million in
    the President's budget, as shown in the table below.

              COMPARISON OF BOARD AND PRESIDENT'S PROGRAM INCREASES
                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                                Oversight
                    Function                      Board        President's
                                             Recommendation      Request
    ------------------------------------------------------------------------
    Taxpayer Service.......................          43,637  ...............
    Enforcement............................         367,768  ...............
    Infrastructure and Mgt Modernization...         104,715          20,900
    Business Systems Modernization.........         188,600         (29,700)
    Total Program Increases (Decreases)....         704,720          (8,800)
    ------------------------------------------------------------------------

        Recommended initiatives for enforcement, customer service,
    infrastructure and management and Business Systems Modernization can be
    found in the individual sections of this statement and Appendices 2
    through 5.
    IRS Performance From Fiscal Year 2001 to Fiscal Year 2005
        The agency, which had become synonymous with poor customer service
    in the late 1990's, has demonstrated a remarkable performance
    improvement in the last 5 years. Toll-free telephone level of service
    has steadily increased from 56 percent in fiscal year 2001 to a high of
    87 percent in fiscal year 2004. (In fiscal year 2005, there was a
    slight 3 percent drop which the IRS attributes to reduced funding for
    taxpayer services.) Toll-free tax law accuracy also rose from 82
    percent in fiscal year 2003 to an impressive 88 percent in fiscal year
    2005.
        Perhaps the most important and notable gain recorded over the past
    5 years is the percent of individuals filing electronically--31 percent
    in fiscal year 2001 to 51 percent in fiscal year 2005.\2\ And although
    it will miss the 2007 deadline, the IRS is making steady progress in
    closing in on the 80 percent e-file goal established by the IRS
    Restructuring and Reform Act of 1998.
    ---------------------------------------------------------------------------
        \2\ Statistics provided to the Oversight Board by the IRS.
    ---------------------------------------------------------------------------
        Through targeted investments and greater management focus, IRS
    enforcement has also turned the corner. Enforcement revenue rebounded
    from $33.8 billion in fiscal year 2001 to $44.1 billion in fiscal year
    2005. Audit rates also steadily increased. For high-income individuals
    they rose from 0.79 percent in fiscal year 2001 to 1.61 percent in
    fiscal year 2005. Over the same time period, corporate and small
    business audits increased respectively from 13.5 percent to 16.9
    percent and 0.88 percent to 1.32 percent.
    Taxpayers Respond to Better Performance but Problems Remain
        This across-the-board improved performance has not gone unnoticed--
    especially among taxpayers. According to the 2005 American Customer
    Service Index, overall satisfaction among individual tax filers with
    the IRS remains stable at 64 percent. However, the number is much
    higher among e-filers who had an ACSI score of 77 percent.\3\ By way of
    comparison, the IRS received a 51 percent score in 1998. Taxpayer
    attitudes have also improved. Since 2002, the IRS Oversight Board has
    conducted an annual survey to gain a deeper understanding of taxpayers'
    attitudes. Of great concern was the growing number of individuals who
    thought it acceptable to cheat on their taxes.
    ---------------------------------------------------------------------------
        \3\ Professor Claes Fornell, ``ACSI Commentary: Federal Government
    Scores'', December 15, 2005.
    ---------------------------------------------------------------------------
        In 2003, 12 percent of respondents thought it acceptable to cheat a
    ``little here and there'' on their taxes, and 5 percent would cheat as
    much as possible. However, 2 years later those numbers have dropped to
    7 and 3 percent respectively and public support for tax compliance is
    at an all-time high. Moreover, the 2005 survey found that 82 percent of
    respondents say that their own personal integrity has the greatest
    influence on whether or not they report and pay their taxes honestly--
    double the number who cite any other factor. Significantly, the survey
    also found two out of three surveyed expressed continued support for
    additional funding for both IRS assistance and enforcement.\4\
    America's taxpayers want a balanced tax administration system.
    ---------------------------------------------------------------------------
        \4\ IRS Oversight Board, 2005 Taxpayer Attitude Survey.
    ---------------------------------------------------------------------------
        However, as welcome as the news may be, it cannot disguise the hard
    fact that the tax gap has remained unacceptably high. In testimony
    before the Senate Budget Committee, Comptroller General David Walker
    stated that the $345 billion tax gap estimated by the IRS could indeed
    be greater: ``IRS has concerns with the certainty of the overall tax
    gap estimate in part because some areas of the estimate rely on old
    data and IRS has no estimates for other areas of the tax gap. For
    example, IRS used data from the 1970's and 1980's to estimate
    underreporting of corporate income taxes and employer-withheld
    employment taxes.'' \5\
    ---------------------------------------------------------------------------
        \5\ Comptroller General David Walker, Testimony Before the Senate
    Budget Committee, ``Tax Gap: Making Significant Progress in Improving
    Tax Compliance Rests on Enhancing Current IRS Techniques and Adopting
    New Legislative Actions,'' February 15, 2006, GAO-06-453T.
    ---------------------------------------------------------------------------
        The tax gap is more that an abstract number. According to National
    Taxpayer Advocate Nina Olson, it hurts taxpayers in a very concrete
    way:

        ``The collective failure by certain taxpayers to pay their taxes
    imposes greater burdens on other taxpayers. The IRS receives
    approximately 130 million individual income tax returns each year.
    Given the size of the net tax gap, the average tax return includes a
    `surtax' of about $2,000 to make up for tax revenues lost to
    noncompliance. The tax gap may also impose significant costs on
    businesses in the form of unfair competition by noncompliant
    competitors who can pass along a portion of their tax `savings' to
    customers by charging lower prices.
        ``Most importantly, the tax gap can erode the level of confidence
    that taxpayers have in the government, thereby reducing Federal revenue
    and increasing the need for more examination and collection actions.
    The tax gap, then, can produce a vicious cycle of increased
    noncompliance and increased enforcement.'' \6\
    ---------------------------------------------------------------------------
        \6\ Nina E. Olson, National Taxpayer Advocate, Testimony Before the
    Senate Subcommittee on Federal Financial Management, Government
    Information, and International Security Committee on Homeland Security
    and Governmental Affairs, October 26, 2005.

        The IRS Oversight Board believes that its fiscal year 2007 IRS
    budget recommendations are part of the solution to reversing this
    corrosive trend.
    Budget Environment Should Not Discourage Investment
        The IRS does not operate in a vacuum and the Oversight Board
    recognizes that the current budget environment stresses fiscal
    restraint and austerity. However, at the same time, we should not throw
    up our hands in defeat and say we can do no more to improve tax
    administration. We should look at the larger picture.
        Unlike other government agencies, there is a positive return on
    money invested in the IRS. Senate Budget Committee Chairman Judd Gregg
    agrees. He observed at a recent hearing on the tax gap, ``We've got to
    talk to the CBO about scoring on that [investing in IRS enforcement],
    clearly there's a return on that money.'' \7\
    ---------------------------------------------------------------------------
        \7\ Tax Notes, February 16, 2006.
    ---------------------------------------------------------------------------
        The Board would welcome such a change but also recognizes that this
    is a problem that has plagued the IRS for decades. Former IRS
    Commissioner Charles O. Rossotti wrote:

        ``When I talked to business friends about my job at the IRS, they
    were always surprised when I said that the most intractable part of
    job, by far, was dealing with the IRS budget. The reaction was usually,
    `Why should that be a problem? If you need a little money to bring in a
    lot of money, why wouldn't you be able to get it?' '' \8\
    ---------------------------------------------------------------------------
        \8\ Charles O. Rossotti, ``Many Unhappy Returns: One Man's Quest to
    Turn Around the Most Unpopular Organization in America'', Harvard
    University Press, 2005. p. 278.

        Indeed, this lack of recognition of a direct return on investment
    has left many puzzled. In his April 14, 2004 column, Washington Post
    financial writer Al Crenshaw wondered why the administration and
    Congress ``aren't falling over themselves to give the IRS more money.
    Tax Enforcement pays for itself many times over, and it would be a good
    way to cut the deficit.'' \9\
    ---------------------------------------------------------------------------
        \9\ Al Crenshaw, ``Letting Cheaters Prosper,'' Washington Post,
    April 14, 2004.
    ---------------------------------------------------------------------------
        In its fiscal year 2007 budget recommendation, the Board calls for
    increases in enforcement that would result in a real return on
    investment, ranging from $3 to $6 on every $1 spent, resulting in $730
    million revenue by fiscal year 2009 on a $242 million investment.
        The Oversight Board urges Congress to adopt the Board's budget
    recommendations and invest in more effective tax administration.

                      SIX STRATEGIES TO REDUCE THE TAX GAP

        The Board considers the existence of such a large tax gap to be an
    affront to honest taxpayers, and is pleased with the attention that
    Congress has focused on the tax gap in the last year, especially with
    the release of IRS latest tax gap estimates. The Board, along with many
    other members of the tax administration community, believe that
    reducing the tax gap requires a comprehensive, multi-faceted plan with
    action on many fronts--from a simpler tax code and more complete income
    reporting to better enforcement and quality customer service.
        Such an approach needs to be more thoughtful and comprehensive than
    merely increasing IRS resources and expecting that the gap will shrink.
    That being said, however, increased IRS resources are a part of the
    solution. A successful strategy will encompass several separate but
    interrelated approaches that will reinforce each other to produce the
    desired result. In the Board's opinion, a number of actions that can be
    taken will require additional IRS resources.
        The Board supports six strategies that it believes would constitute
    an over-arching plan to reduce the tax gap. This information is
    presented here only to provide some additional background to understand
    the Board's fiscal year 2007 budget recommendations, so that these
    recommendations can be understood in the context of an overall approach
    where the individual elements reinforce each other.
        The first is a simplified tax code. Our complex and ever changing
    tax code not only confounds honest taxpayers who want to comply with
    their obligations under the law, but provides ample opportunity for
    those who exploit its complexity to cheat. The President's Advisory
    Panel on Federal Tax Reform observed:

        ``Since the last major reform effort in 1986, there have been more
    than 14,000 changes to the tax code, many adding special provisions and
    targeted tax benefits, some of which expire after only a few years.
    These myriad changes decrease the stability, consistency, and
    transparency of our current tax system while making it drastically more
    complicated, unfair, and economically wasteful. Today, our tax system
    falls well short of the expectations of Americans that revenues needed
    for government should be raised in a manner that is simple, efficient,
    and fair.'' \10\
    ---------------------------------------------------------------------------
        \10\ Statement by the Members of the President's Advisory Panel on
    Federal Tax Reform, ``America Needs a Better Tax System,'' April 13,
    2005.

        Second, the Oversight Board recommends improved information
    reporting and enforcement tools to address large areas of the tax gap
    related to what has been called the cash economy. Although the Board is
    prohibited by statute from endorsing any specific proposal, we note
    that in its fiscal year 2007 budget submission for the IRS, the
    administration makes five legislative recommendations to close the tax
    gap that include: (1) increasing information reporting on payment card
    transactions; and (2) expanding information reporting to certain
    payments made by Federal, State and local governments to procure
    property and services. They certainly merit congressional discussion
    and consideration.
        The National Taxpayer Advocate also recommended in her 2005 Annual
    Report to Congress that the IRS create a cash economy program office,
    similar to the Earned Income Tax Credit program office. The Board is
    pleased that the IRS Small Business/Self-Employed Operating Division
    Commissioner has agreed to establish a task force on the cash economy
    that will seek to determine the feasibility of this and other
    recommendations.
        In testimony before the Senate Budget Committee, the National
    Taxpayer Advocate further recommended that to address the tax gap ``we
    should begin by identifying various categories of transactions that
    currently are not subject to information reporting and determine, on a
    case-by-case basis, whether the benefits of requiring reporting
    outweigh the burdens such a requirement would impose.'' \11\ The Board
    supports such analysis.
    ---------------------------------------------------------------------------
        \11\ National Taxpayer Advocate, ``Testimony Before the Senate
    Budget Committee, Causes and Solutions to the Federal Tax Gap,''
    February 15, 2006.
    ---------------------------------------------------------------------------
        Third, the Board believes that the IRS must improve customer
    service to make taxpayers aware of their legal obligations and ease
    taxpayer burden through modernization. Indeed, not all non-compliance
    is willful; a significant amount of is due to the complexity of the tax
    laws that results in errors. IRS Commissioner Mark Everson recently
    testified:

        ``[T]he tax gap does not arise solely from tax evasion or cheating.
    It includes a significant amount of noncompliance due to the complexity
    of the tax laws that results in errors of ignorance, confusion, and
    carelessness. This distinction is important, though, at this point, we
    do not have sufficiently good data to help us know how much arises from
    willfulness as opposed to innocent mistakes. This is an area where we
    expect future research to improve our understanding.'' \12\
    ---------------------------------------------------------------------------
        \12\ IRS Commissioner Mark Everson, Testimony Before the Senate
    Budget Committee, February 15, 2006.

        Fourth, there should be a much greater emphasis and focus on
    research so the IRS can more effectively target areas of major non-
    compliance. It bears mentioning that a lack of research in the 1990's
    contributed in part to the IRS's failure to detect the emergence and
    subsequent epidemic of illegal tax avoidance schemes. The Board
    recommends an additional $60 million in funding for research. The IRS
    needs to know much more about non-compliance than it currently does to
    mount a successful campaign against the tax gap.
        Fifth, the Board urges a more productive partnership between IRS
    and the tax administration community. At the Board's 2006 open meeting,
    the AICPA supported the IRS's efforts to partner with professional
    organizations in the area of pro bono tax assistance, noting that such
    a synergy provides the IRS with the opportunity to leverage precious
    resources and increase customer service at the same time. The Board
    would add that such a partnership also contributes directly to
    compliance.
        Sixth, there must be more emphasis on personal integrity in making
    tax decisions. The Board has found that the vast majority of taxpayers
    state that their personal integrity is a very import factor in
    influencing their tax compliance. In the Board's most recent Taxpayer
    Attitude Survey, 82 percent of taxpayers cite personal integrity as the
    principal factor for reporting and paying their taxes honestly.
    Commissioner Everson also testified at the Senate Budget Committee tax
    gap hearing:

        ``[A]nother enforcement priority is to assure that attorneys,
    accountants, and other tax practitioners adhere to professional
    standards and follow the law. Our system of tax administration depends
    upon the integrity of practitioners. The vast majority of practitioners
    are conscientious and honest, but even the honest tax professionals
    suffered from the sad and steep erosion of ethics in recent years by
    being subjected to untoward competitive pressures.'' \13\
    ---------------------------------------------------------------------------
        \13\ Everson, op. cit.

        Our tax administration system should challenge taxpayers to be
    conscious of the need for integrity when making tax decisions.
        The Oversight Board recognizes that no single initiative or program
    will solve the tax gap--a multi-faceted effort must be taken to shrink
    it. The plan must be more comprehensive than just applying additional
    resources to do more of what is being done today. Indeed as
    Commissioner Everson told the Senate Budget Committee, a combination of
    appropriate funding, legislative changes, new enforcement tools, tax
    simplification and auditing and taxpayer service improvements, will
    allow the IRS to collect an additional $50 billion to $100 billion.\14\
    The $705 million in additional funding recommended by Board to help in
    this effort is dwarfed in comparison to this estimate of new revenues
    collected.
    ---------------------------------------------------------------------------
        \14\ Tax Notes, ``Everson Says IRS Could Collect Up To $100 Billion
    More Per Year'', February 16, 2006.
    ---------------------------------------------------------------------------
         COMPARING THE PRESIDENT'S AND BOARD'S FISCAL YEAR 2007 BUDGET
                                RECOMMENDATIONS

        The size of the tax gap should be a clarion call for our Nation to
    examine the tax administration system and invest time, energy, and
    resources to making it better.
        This is not the time to stand still but to move forward in a
    comprehensive and unified way to build on what has already been
    accomplished and give America's taxpayers a better, more efficient and
    fair system in return--what the President's tax reform panel suggested.
    The Oversight Board's fiscal year 2007 budget recommendations focus on
    the IRS resources needed to move forward in fiscal year 2007, but much
    more needs to be done.
        To this end, the Board recommends additional investments in better
    service, enforcement, infrastructure and management, and BSM in the
    following amounts:
      --Taxpayer Service--$43,637.
      --Enforcement--$367,768.
      --Infrastructure and Management--$104,715.
      --BSM--$188,600.
        Additionally, the Oversight Board has identified two areas of
    significant risk in the IRS's fiscal year 2007 budget request. First,
    the IRS budget justification includes $84.1 million in savings coming
    from program efficiencies. The Board is concerned that the IRS may not
    be able to achieve these efficiencies without decreasing performance.
        Second, the proposed IRS budget for fiscal year 2007 in direct
    appropriations is supplemented by $135 million in increased user fees.
    The IRS announced last December that it would charge taxpayers for
    receiving advance assurance from the IRS about the tax consequences of
    certain transactions. For example, the fee for IRS Chief Counsel
    private letter rulings will increase from $7,000 to $10,000.\15\
    ---------------------------------------------------------------------------
        \15\ IRS Press Release, ``IRS to Raise Some User Fees in 2006,''
    IR-2005-144, December 19, 2005.
    ---------------------------------------------------------------------------
        The Oversight Board believes that there is risk in assuming that
    this revenue stream will be available without a proven record of
    collecting fees at this level, especially since the IRS could not
    present the Board with fiscal year 2006 data to confirm the realism of
    the proposed fiscal year 2007 revenue stream. The Board recommends that
    Congress evaluate actual fiscal year 2006 fee collection data to
    evaluate the validity of the proposed fiscal year 2007 revenue expected
    from increased fees.
        The Board is also concerned about the negative impact these fees
    might have on taxpayer compliance. Testifying at the Board's annual
    public meeting, the AICPA was also apprehensive that these increases
    will result in a substantial reduction in general taxpayer use of
    critical IRS programs:

        ``These programs for the most part encourage taxpayers to seek
    advance assurance from the IRS that the tax consequences of their
    proposed actions will be treated consistently by both the taxpayer and
    the IRS. Actions by the IRS that discourage use of programs, such as
    private letter ruling requests, could result in greater compliance
    costs for taxpayers and enforcement costs for the IRS.'' \16\
    ---------------------------------------------------------------------------
        \16\ AICPA, Statement Presented to the IRS Oversight Board,
    ``Meeting the Customer Service Needs of Taxpayers and the Importance of
    Measures'', February 8, 2006.

    Customer Service: What Is ``Good Enough?''
        Good customer service leads to fully informed and satisfied
    taxpayers who understand their tax obligations and experience few
    problems in interacting with the IRS. Clearly, there is a linkage
    between customer service and compliance. Speaking at the Board's 2006
    open meeting, Diana Leyden, Associate Clinical Professor of Law,
    University of Connecticut School of Law Tax Clinic said:

        ``Customer service at the Internal Revenue Service has a direct
    impact on voluntary compliance and ultimately on the tax gap. For
    example: (1) making it easier for taxpayers to get their returns
    prepared free of charge and quickly encourages taxpayers to become
    compliant; (2) providing face-to-face interaction with IRS employees
    helps taxpayers get advice in `real time' and usually reduces the time
    for resolution of problems.'' \17\
    ---------------------------------------------------------------------------
        \17\ Statement of Diana Leyden, Associate Clinical Professor of
    Law, University of Connecticut School of Law Tax Clinic Before the IRS
    Oversight Board, February 8, 2006.

        At the April 14, 2005 Senate Finance Committee hearing on closing
    ---------------------------------------------------------------------------
    the tax gap, Ranking Member Max Baucus similarly observed:

        ``The IRS cannot close the tax gap simply by increasing
    enforcement. Issuing more liens. Conducting more seizures. Levying more
    bank accounts. We do need targeted, appropriate enforcement. If,
    however, the IRS lets taxpayer service slide--if the IRS diminishes the
    access and accuracy of taxpayer service--including the essential need
    for face-to-face taxpayer service--then we fail to help taxpayers
    comply with the law on the front end. Ensuring up front quality is more
    efficient than back end enforcement.'' \18\
    ---------------------------------------------------------------------------
        \18\ Senator Max Baucus, Opening Statement, Senate Finance
    Committee, Hearing, April 14, 2005.

        However, efforts to provide quality customer service are hindered
    by the fact that there is no consensus among the tax administration
    community on desired customer service standards of performance, which
    makes informed decision-making about desired levels of service very
    difficult. Achieving such a consensus among the executive and
    legislative branches and external stakeholder organizations would allow
    customer service requirements to influence budget decisions rather than
    having budget decisions set service levels.
        The drive for improved customer service is further aggravated by
    the lack of data on the impact that service levels have on taxpayer
    compliance. Such data could be used to make a stronger case to policy
    makers about the importance of customer services. We should not retreat
    from the high customer service levels previously achieved during fiscal
    year 2003/2004. Two initiatives contained in the Board's budget are
    designed to prevent such a reduction.
        First, although significant progress has been made during the past
    5 years, toll-free telephone level of service is slightly down from
    fiscal year 2004 and call wait-time on hold has increased. To restore
    the level of service, the Oversight Board proposes an initiative to
    restore the toll-free telephone service to fiscal year 2003/2004
    levels. Although the cost is $35 million, the Board believes that this
    level of service should be provided to taxpayers. The potential impact
    of lower service is that taxpayers will not get the assistance they
    need, hurting compliance, and creating a need for additional
    enforcement. As Senator Baucus rightly observed, preventing problems is
    more cost-effective than the price of future corrections, such as
    collection.
        Second, the Board also recommends an $8.7 million investment in
    telephone infrastructure to expand services to callers and provide
    telephone representatives with a more state-of-the-art call center
    environment. The IRS predicts this investment would result in lower
    queue times across the enterprise for all applications and would
    counter a negative trend in telephone service. (Wait time on hold for
    taxpayers has been increasing in the last 3 years. It has gone from 158
    seconds in fiscal year 2004 to 258 seconds in fiscal year 2005, and the
    fiscal year 2006 target is 300 seconds.)
    Enforcement Must Continue to Improve; More Research Needed
        As noted earlier in this report, the IRS has boosted its
    enforcement activity, and enforcement revenue has increased during the
    last 2 years. The IRS is working smarter and it needs to continue to
    improve and build on this important trend.
        However, it should be noted that despite these positive results, it
    is difficult to evaluate the impact that increased enforcement activity
    has had on overall taxpayer compliance.
        Absent this information, the Oversight Board still believes that
    one important element of the campaign to reduce the tax gap should be
    increasing IRS enforcement resources, especially since the application
    of additional resources has a positive return on investment. The Board
    recommends a modest increase in enforcement resources in virtually all
    IRS enforcement activities, including:
      --1. Combat Egregious Non-Compliance and Prevent Tax Gap Growth
            (+$136 million).--Add 748 FTEs to enhance coverage of high-risk
            compliance areas and address the tax gap associated with small
            business and self-employed taxpayers.
      --2. Intensify Tax Enforcement (+$28 million).--Add 86 FTEs to
            curtail non-compliance in abusive schemes, corporate fraud,
            non-filers, employment tax and Bank Secrecy Act.
      --3. Attack Fraudulent Payments (+$27 million).--Add 62 FTEs to
            address fraudulent payments made through the EITC program.
        The IRS must also do a better job of identifying where non-
    compliance is occurring. For example, IRS data indicates impressive
    results on abusive, high-profile tax shelters, such as Son-of-BOSS.
    However, the most recent research indicates that a majority of the tax
    gap is the result of underreporting of income in areas where there is
    little third-party reporting.
        According to the IRS's National Research Program, half ($109
    billion) of the individual underreporting gap came from understated net
    business income (unreported receipts and overstated expenses).
    Approximately 28 percent ($56 billion) came from underreported non-
    business income, such as wages, tips, interest, dividends, and capital
    gains. The remaining $32 billion came from overstated subtractions from
    income (i.e. statutory adjustments, deductions, and exemptions), and
    from overstated tax credits.
        Given this situation, the Oversight Board believes that special
    attention should be placed on the National Research Program and
    additional research be conducted on customer service and its relation
    to compliance. Indeed, the National Taxpayer Advocate ``recommends that
    the IRS undertake a research-driven needs-assessment, from the
    taxpayers' perspective, to help identify what services taxpayers need
    and want and how best to deliver them.'' \19\ These efforts are
    necessary to improve tax administration to the point where the effects
    of IRS activities on taxpayer compliance can be better understood. To
    this end, the Board proposes two research initiatives: (1) Improve Tax
    Gap Estimates (+$46 million); and (2) Additional Customer Service
    Research (+$15 million).
    ---------------------------------------------------------------------------
        \19\ The National Taxpayer Advocate, 2005 Annual Report to
    Congress, Executive Summary, p. I-1.
    ---------------------------------------------------------------------------
        The first of these two initiatives, Improve Tax Gap Estimates, will
    establish permanent staffing for the NRP program and put the IRS on a
    path to conducting research annually. The Oversight Board recommends
    that the NRP be made a permanent program. The NRP is now reporting
    estimates of the tax gap based on 2001 tax returns. Prior estimates
    were based on extrapolations of 1988 data. It is time to progress from
    ``catching up'' to making current research the normal and preferred way
    of doing business.
        The Board also proposes that the IRS consider developing a long-
    range strategic plan for research that goes beyond the current 2009 end
    date for the IRS Strategic Plan, and covers approximately a decade. In
    such a plan, the IRS should describe how it will bring its research on
    all taxpayer segments up to date, and perform a limited sample every
    year so that its research on all segments will be as current as
    possible.
        The Board believes the availability of up-to-date research data
    will allow the IRS to more effectively focus its service and
    enforcement programs on areas that have the greatest impact on taxpayer
    compliance, and use the changes in taxpayer compliance rates as
    feedback to evaluate the effectiveness of IRS's service and enforcement
    program on actual taxpayer compliance. Achieving such a capability will
    be a vast improvement over the current situation in which the lack of
    data makes it virtually impossible to evaluate the effectiveness of IRS
    activity on taxpayer compliance and make informed decisions.
        The second research initiative recommended by the Board is to add
    $15 million to begin research on the impact of customer service on
    voluntary compliance and the service needs of taxpayers. The need for
    such research is also consistent with recommendations made by Treasury
    Inspector General for Tax Administration and the National Taxpayer
    Advocate in testimony last year to the Senate Appropriations Committee
    on the closing of a number of Taxpayer Assistance Centers. (The
    committee has also requested TIGTA to evaluate the connection between
    service and compliance in its study of TAC closings, but TIGTA was
    unable to find much existing research.)
        However, the IRS has told the Oversight Board that it could extend
    and update research efforts in two major areas: evaluating the service
    needs of taxpayers and estimating the effect of customer service on
    taxpayer compliance. Additional resources in fiscal year 2007 would be
    used to further evaluate the service needs of taxpayers and to scope
    and design the data gathering and analysis capability to estimate the
    effect of customer service on taxpayer compliance.
        A modest initial effort should include identifying promising areas
    of research and determining data needs. If the initial efforts are
    promising, this could be expanded in future years. Due to the long-term
    nature of these studies, resources should be provided on a multi-year
    basis.
    Modernizing Infrastructure and Management
        The Oversight Board is pleased that the IRS is developing an IRS
    Infrastructure Roadmap. It is a detailed plan for replacing the
    agency's aging IT equipment in an orderly and cost-effective manner.
    Rather than replacing outdated equipment on a one-for-one basis, the
    roadmap will identify and prioritize opportunities to consolidate
    equipment, retire redundant and low-demand infrastructure components,
    and replace old equipment with new technology that is cheaper to
    maintain and use. Because the IRS fully anticipates that the
    Infrastructure Roadmap will identify new strategies for IT
    infrastructure delivery that will mitigate the cost of replacing old IT
    equipment while assuring a sound IRS IT infrastructure, the Board is
    deferring any recommendations on modernizing IT infrastructure until
    fiscal year 2008.
        The Oversight Board does recommend funding infrastructure and
    management initiatives that will assist the IRS to cope with unfunded
    mandates, implement BSM projects, and restore its capacity for
    leadership development training to fiscal year 2003 levels:
      --1. Fund Business Unit IT Solutions (Non-Major Investments);
      --2. Implement e-Travel;
      --3. Fund HR Connect;
      --4. Consolidate Philadelphia Campus (included in the President's
            budget); and,
      --5. Restoration of Leadership Development Training to fiscal year
            2003 levels (Board-initiated).
        The Board notes that a lack of leadership training capacity at the
    IRS is especially critical during a period in which approximately 50
    percent of IRS managers are eligible for retirement. The Board
    recommends a consistent budget base to allow planning for these
    anticipated leadership development training needs.
        The requested funds would enable the IRS to: (1) eliminate the
    backlog of untrained leaders at all levels by the end of fiscal year
    2007; (2) ensure enough capacity to train new managers upon selection
    in all Business Units; (3) improve and expand readiness programs to
    provide a cadre of manager candidates to step up to management
    positions; (4) revise the management curriculum to incorporate more e-
    learning and promote continuous learning; and (5) evaluate the
    effectiveness and impact of the leadership development training
    program.
        Funding Leadership Development Training at fiscal year 2003 levels
    will also assist in meeting the objectives of the President's
    Management Agenda, which in turn will improve performance and the IRS's
    objectives of enhanced employee engagement, employee satisfaction and
    customer satisfaction.
    Business Systems Modernization
        The Board is pleased that the IRS's once-troubled BSM program
    experienced better performance in fiscal year 2005. In a recent report
    submitted to Congress on the BSM fiscal year 2006 expenditure plan, the
    Government Accountability Office offered these positive comments:

        ``IRS has made further progress in implementing BSM . . . Future
    BSM project deliveries face significant risks and issues which IRS is
    addressing . . . IRS has made additional progress in addressing high-
    priority BSM program improvement initiatives. [They] appear to be an
    effective means of assessing, prioritizing, and addressing BSM issues
    and challenges . . . In response to our prior recommendations, IRS
    reports having efforts under way to develop a new Modernization Vision
    and Strategy to address a new modernization roadmap.\20\
    ---------------------------------------------------------------------------
        \20\ General Accountability Office, Report to Congress, ``Business
    Systems Modernization: Internal Revenue Service's fiscal year 2006
    Expenditure Plan,'' February 2006, GAO-06-360, pp. 2-3.

        GAO also had some criticism of the IRS and BSM, but improved
    management focus over the past few years has helped the BSM program
    deliver within cost and budget targets important technology projects
    that will generate greater efficiencies throughout the agency and real
    world benefits for taxpayers.
        The first taxpayers have already been moved to a modernized data
    base known as the Customer Account Data Engine (CADE) and corporate
    taxpayers are now able to file their income tax returns with the IRS
    electronically using the Modernized e-File system. Indeed, CADE will
    process more than 30 million returns in 2007 and will process 70
    million by 2009. Daily updates by CADE will allow taxpayers to receive
    their refund in just a few days.
        Future BSM deliverables are also critical to improved customer
    service and enforcement. The IRS does not yet offer products and
    services familiar to customers of many financial institutions, such as
    daily updating of accounts, electronic access by customers to account
    records, and a full range of electronic transactions. However, with the
    help of modern technology, the IRS can close this gap.
        If the IRS can continue to demonstrate improvement, it would seem
    desirable and logical to increase BSM's pace and program funding in
    fiscal year 2007, especially as BSM funding levels were severely
    reduced in the last several years: from $388 million in fiscal year
    2004 to $203 million in fiscal year 2005, and a requested $199 million
    in fiscal year 2006. In addition to the base, the Board would fund:
      --1. Web-based Self-service (+$24 million);
      --2. Filing and Payment Compliance (+$30 million);
      --3. Modernized e-Filing (+$70 million);
      --4. Customer Account Date Engine (+$25 million);
      --5. Core Infrastructure (+$18 million);
      --6. Architecture, Integration, and Management (+$13 million); and,
      --7. Management Reserve (+$9 million).
        Therefore, the Board recommends that the BSM program move forward
    at an accelerated pace. Not only will this allow the IRS to operate
    more efficiently and effectively, it will strengthen the agency's
    efforts to enforce the tax law and improve customer service. Despite
    productivity improvements in recent years, the IRS is still hampered in
    its efforts to modernize because of its reliance on a 40-year-old
    information system for its central recording-keeping functions, which
    limit the IRS to weekly updates of its central taxpayer records. No
    modern financial institution in the private sector could survive under
    these conditions, and eliminating these limitations is key to making
    the IRS an efficient and effective modern financial institution.
        We would like to make one last point on modernization. Both GAO and
    TIGTA have reported on the cost overruns and delays the BSM program has
    experienced. However, one cost you will not hear about is the
    significant cost to the taxpayers of delaying the benefits of a
    modernized IRS.
        Professor Joel Slemrod of the University of Michigan testified to
    the President's Advisory Panel on Federal Tax Reform that individual
    taxpayers spend approximately $85 billion a year complying with the tax
    code.\21\ If a modernized IRS makes taxpayers only 5 percent more
    efficient, that would still save taxpayers over $4 billion a year.
    ---------------------------------------------------------------------------
        \21\ Statement of Professor Joel Slemrod, University of Michigan
    Ross School of Business, before the President's Advisory Panel on
    Federal Tax Reform, March 3, 2005.
    ---------------------------------------------------------------------------
                                   CONCLUSION

        The IRS Oversight Board believes that it has constructed a fiscally
    responsible and realistic budget for the IRS that meets national needs
    and priorities. It would help shrink the tax gap while providing
    taxpayers with a level of service they rightly deserve and need. It
    would speed the modernization of the IRS's antiquated technology and
    give it the research tools to better understand current and developing
    trends. Most importantly, it would maintain that delicate but critical
    balance between enforcement and customer service that America's
    taxpayers have said time and again they want. The IRS is now solidly on
    the right track and is making progress but we must give it the
    resources to do its job. It is an investment we must make for this and
    future generations of taxpayers.
        Appendices.--(1) Comparison of the Administration's IRS Fiscal Year
    2007 Budget Request and IRS Oversight Board Recommendation; (2)
    Recommended Fiscal Year 2007 Program Increases: Enforcement; (3)
    Recommended Fiscal Year 2007 Program Increases: Taxpayer Service; (4)
    Recommended Fiscal Year 2007 Program Increases: Infrastructure and
    Management Modernization; (5) Recommended Fiscal Year 2007 Program
    Increases: Business Systems Modernization; (6) Explanation for
    Difference in IRS Oversight Board Budget in the Administration's Fiscal
    Year 2007 Budget Request and This Recommendation.

                                   APPENDIX 1

      COMPARISON OF THE ADMINISTRATION'S IRS FISCAL YEAR 2007 BUDGET REQUEST AND IRS OVERSIGHT BOARD RECOMMENDATION
                                                 [Dollars in thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                                                       President's
                          Final Board Budget                         Board's Budget       Budget        Difference
    ----------------------------------------------------------------------------------------------------------------
    Fiscal Year 2006 Enacted Budget (with 1 percent rescission)...     $10,573,706      $10,573,706   ..............
    Fiscal Year 2007 Maintaining Current Levels (MCLs) Adjustments
     (includes HITCA):
        Labor Annualization.......................................         $61,994          $61,994   ..............
        Labor MCL (2.7 percent)...................................        $149,819         $149,819   ..............
        Non-Labor MCL (1.5 percent)...............................         $60,418          $60,418   ..............
                                                                   -------------------------------------------------
          Total MCL Adjustments...................................        $272,231         $272,231   ..............
                                                                   =================================================
    Base Reinvestment:
        Increase Returns processing efficiencies..................         $12,237          $12,237   ..............
    Program Cost Savings:
        E-file savings............................................         ($6,760)         ($6,760)  ..............
        Improvement project savings...............................         ($8,215)         ($8,215)  ..............
        Competitive sourcing savings..............................        ($17,000)        ($17,000)  ..............
        Program efficiencies......................................        ($84,121)        ($84,121)  ..............
        HITCA program efficiency..................................         ($5,500)         ($5,500)  ..............
                                                                   -------------------------------------------------
          Total Savings and Reinvestments.........................       ($121,596)       ($121,596)  ..............
                                                                   =================================================
    Transfer Out to TIGTA.........................................           ($941)           ($941)  ..............
                                                                   -------------------------------------------------
          Total, Fiscal Year 2007 Current Service Level...........     $10,735,637      $10,735,637   ..............
                                                                   =================================================
    Program Increases:
        Tax Administration Operations:
            Taxpayer Service......................................         $43,637   ...............         $43,637
            Enforcement...........................................        $367,768   ...............        $367,768
            Infrastructure and Mgt Modernization..................        $104,715          $20,900          $83,815
        Business Systems Modernization............................        $188,600         ($29,700)        $218,300
                                                                   -------------------------------------------------
          Total, Program Increases Above Fiscal Year 2006 Current         $704,720          ($8,800)        $713,520
           Service Level..........................................
                                                                   =================================================
          Total, Fiscal Year 2007 Operating Level.................     $11,440,357      $10,726,837         $713,520
                                                                   =================================================
    Fee Adjustment................................................       ($135,000)       ($135,000)  ..............
    Fiscal Year 2007 Budget Appropriation Request.................     $11,305,357      $10,591,837         $713,520
    Growth Over Fiscal Year 2006 Enacted Budget...................        $731,651          $18,131         $713,520
    Percent Growth................................................             6.9              0.2   ..............
    ----------------------------------------------------------------------------------------------------------------

                                   appendix 2

                               RECOMMENDED FISCAL YEAR 2007 PROGRAM INCREASES: ENFORCEMENT
                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                                       Enforcement-      Service-
                      Enforcement Program Increases                        Total          Related         Related
    ----------------------------------------------------------------------------------------------------------------
    Combat Egregious Non-Compliance and Prevent Tax Gap Growth.--            135,518         132,696           2,822
     This initiative provides an increase of 748 FTE and $135.5
     million to enhance coverage of high-risk compliance areas as
     well as address the tax gap associated with small business and
     self-employed taxpayers........................................
    Increase Individual Taxpayer Filing and Payment Compliance.--The           7,773           6,968             805
     initiative provides 84 FTE (87 positions) and $8 million to
     support the IRS's enforcement presence through contracts with
     Private Collection Agencies (PCAs) for Qualified Tax Collection
     Contracts......................................................
    Detect and Deter Non-Compliant Enterprise Structures.--This               37,008          37,008  ..............
     initiative provides an increase of 200 FTE (400 positions) and
     $37 million to increase the coverage of the flow-through
     population, including examination of controlling enterprise
     entities, that are posing significant compliance risks.........
    Increase Individual Taxpayer Reporting Compliance.--This                  10,821           8,808           2,013
     initiative provides an increase of 100 FTE (125 positions) and
     $10.8 million to enable the Automated Underreporter (AUR)
     program to address reporting compliance in a program that is
     effective, efficient, less labor intensive and less costly.....
    Enhance Enforcement in the Tax-Exempt and Governmental Sectors.--         12,941          12,941  ..............
     This initiative requests an additional 69 FTE (138 positions)
     and $12,940,668 to improve detection of compliance risks,
     accelerate enforcement actions, and balance the pursuit of
     critical enforcement initiatives while maintaining adequate
     coverage of the exempt  community..............................
    Intensify Tax Enforcement.--This initiative requests an increase          27,570          27,570  ..............
     of 86 FTE (172 positions) and $27.6 million to curtail non-
     compliance in the following areas: abusive schemes, corporate
     fraud, non-filers, employment tax and Bank Secrecy Act (BSA)...
    Attack Fraudulent Payments.--This initiative, which provides an           26,998          26,837             161
     increase of 62 FTE (123 positions) and $27 million, relates
     directly to the President's Management Agenda Program
     Initiative ``Eliminating Improper Payments,'' and also supports
     the IRS's strategies for addressing erroneous payments and non-
     compliance involving Earned Income Tax Credits (EITC)..........
    Improve Compliance With the Bank Secrecy and PATRIOT Acts.--This          25,858          25,858  ..............
     initiative provides an increase of 124 FTE (248 positions) and
     $25.9 million to improve the Bank Secrecy Act (BSA) compliance
     program........................................................
    Strengthen Regulatory Compliance.--This initiative provides an             6,616           6,376             241
     increase of 38 FTE (76 positions) and $6.6 million to
     strengthen regulatory compliance activities to deter fraud,
     abuse, and terrorist financing in the tax exempt and
     governmental entities community................................
    Improve Enforcement of Circular 230.--This initiative provides             4,104           4,104  ..............
     an increase of 8 FTE (16 positions) and $4.1 million to detect
     and address tax practitioner misconduct. The IRS, Treasury, and
     Congress are placing increased emphasis on practitioner
     misconduct by providing new statutory and regulatory tools to
     address abusive behavior.......................................
    Improve Tax Gap Estimates, Measurement and Detection of Non-              45,942          45,942  ..............
     Compliance.--Supports 268 FTE (536 positions) and $45.9 million
     to fund and support ongoing Reporting Compliance Studies
     through the National Research Program..........................
    Study EITC Compliance.--This initiative provides an increase of            6,822           6,822  ..............
     49 FTE (65 positions) and $6.8 million to develop estimates of
     Earned Income Tax Credit compliance............................
    Improve Compliance Through Data-Driven Workload Identification.--          4,796  ..............           4,796
     This initiative provides an increase of 67.5 FTE (90 positions)
     and $4.8 million to develop and test decision analytical tools
     and models for improved identification of high-risk filers.....
    Customer Service Research.--Begin research on the impact of               15,000          15,000  ..............
     customer service on voluntary compliance and the service needs
     of taxpayers...................................................
                                                                     -----------------------------------------------
          Subtotal Enforcement......................................         367,768         356,931          10,837
    ----------------------------------------------------------------------------------------------------------------

                                   APPENDIX 3

                            RECOMMENDED FISCAL YEAR 2007 PROGRAM INCREASES: TAXPAYER SERVICE
                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                                       Enforcement-      Service-
                   Taxpayer Service Program Increases                      Total          Related         Related
    ----------------------------------------------------------------------------------------------------------------
    Increase Accounts Management Efficiencies.--Provides funding to            8,657  ..............           8,657
     improve the telephone infrastructure, e.g., Compliance Services
     and Accounts Management call centers, by expanding services to
     customers and providing telephone representatives with a more
     state-of-the-art center environment and providing taxpayers
     with improved service through multiple access channels.
     Enterprise queuing will eliminate the queuing of calls at the
     local level and be queued at the enterprise level, reducing
     taxpayer wait times............................................
    Restore Customer Service to Fiscal Year 2004 Levels.--Supports            34,980  ..............          34,980
     450 FTE from W&I to restore telephone level of service back to
     87.3 percent achieved in fiscal year 2004 rather than the
     current 82 percent target. Improves TE/GE service measures for
     EP and EO determination timeliness, CAS toll-free level of
     service, correspondence timeliness measures to fiscal year 2004
     levels.........................................................
                                                                     -----------------------------------------------
          Subtotal: Taxpayer Service................................          43,647  ..............          43,647
    ----------------------------------------------------------------------------------------------------------------

                                   APPENDIX 4

               RECOMMENDED FISCAL YEAR 2007 PROGRAM INCREASES: INFRASTRUCTURE AND MANAGEMENT MODERNIZATION
                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                                       Enforcement-      Service-
         Infrastructure and Mgt Modernization Program Increases            Total          Related         Related
    ----------------------------------------------------------------------------------------------------------------
    Expand IT Security--Personal Identity Verification.--This                 20,000          12,576           7,424
     initiative requests an increase of $20 million to ensure IRS's
     compliance with Homeland Security Policy Directive-12 (HSPD-12)
     and Federal Information Processing Standards-201 (FIPS-201)....
    Close Financial Management Material Weaknesses--Custodial Detail           4,743           2,982           1,761
     Data Base.--This initiative provides $4.7 million to develop
     the CFO Custodial Detail Data Base (CDDB) which will establish
     the foundation for building an IRS-modernized custodial
     financial management system....................................
    Fund Modernization Information Systems (Major Investments) O&M.--         15,000           9,432           5,568
     This initiative will result in modernized information systems
     to improve enforcement activities..............................
    Fund Business Unit IT Solutions (Non-Major Investments) O&M.--             9,972           7,121           2,851
     This initiative provides an increase of $15 million for the
     successful transition of Business Systems Modernization (BSM)
     projects to the Current Production Environment (CPE), funding
     their operations and maintenance as they move to full
     production.....................................................
    Implement e-Travel.--Treasury has mandated that IRS must                  10,000           6,288           3,712
     implement e-Travel by October 1, 2006..........................
    Fund HR Connect.--The initiative requests $11.9 million in                11,900           7,482           4,418
     fiscal year 2007 to fully fund the additional Operations and
     Maintenance cost associated with the HR Connect system that the
     IRS has implemented and is billed through the Treasury's
     Working Capital Fund...........................................
    Consolidate Philadelphia Campus.................................          20,900          14,215           6,685
    Restoration of Leadership Training to Fiscal Year 2003 Levels.--          12,200           7,564           4,636
     The requested funds would enable the IRS to: (1) eliminate the
     backlog of untrained leaders at all levels by the end of fiscal
     year 2007; (2) ensure enough capacity to train new managers
     upon selection in all Business Units; (3) improve and expand
     readiness programs to provide a cadre of manager candidates to
     step in to management positions; (4) revise the management
     curriculum to incorporate more e-learning and promote
     continuous learning; and (5) evaluate the effectiveness and
     impact of the leadership training program......................
                                                                     -----------------------------------------------
          Subtotal Modernization....................................         104,715          67,660          37,055
    ----------------------------------------------------------------------------------------------------------------

                                   APPENDIX 5

        RECOMMENDED FISCAL YEAR 2007 PROGRAM INCREASES: BUSINESS SYSTEMS
                                  MODERNIZATION
                            [In thousands of dollars]
    ------------------------------------------------------------------------
        Business Systems Modernization Program Increases           Total
    ------------------------------------------------------------------------
    Web-based Self Service.--Identify and design initial set          24,200
     of internet self-service applications..................
    Filing & Payment Compliance (F&PC).--Completes delivery           30,000
     of full capability needed to support Private Collection
     Agencies...............................................
    Modernized e-file (MeF).--Funds development, testing and          70,200
     deployment of modernized electronic filing for Form
     1040...................................................
    Customer Account Data Engine (CADE).--Process 33 million          25,000
     returns for the fiscal year 2007 filing season.........
    Core Infrastructure Projects.--Improve the facilities             17,900
     which allow pre-deployment testing and integration of
     modernized systems, which help ensure modernized
     systems will operate as needed when they are deployed..
    Architecture, Integration & Management.--Ongoing support          12,800
     and improvements to BSM's program with planning,
     engineering, and management activities.................
    Management Reserve......................................           8,500
                                                             ---------------
          Subtotal BSM......................................         188,600
    ------------------------------------------------------------------------

                                   APPENDIX 6
        EXPLANATION FOR DIFFERENCE IN IRS OVERSIGHT BOARD BUDGET IN THE
           ADMINISTRATION'S FISCAL YEAR 2007 BUDGET REQUEST AND THIS
                                 RECOMMENDATION

        After the Board-approved budget is submitted to the Department of
    Treasury, it is reviewed and modified by both the Treasury Department
    and the Office of Management and Budget (OMB) before being incorporated
    into the President's budget. During the first several years of IRS
    Oversight Board operation, the Treasury Department would inform the
    Oversight Board of changes as the IRS budget progressed through the
    formulation process. However, for the past 2 years, the Treasury
    Department has taken the position that although RRA98 provides the
    Oversight Board with the responsibility of reviewing and approving the
    budget request prepared by the Commissioner and submitted to the
    Department of the Treasury, this authority does not include
    participating in subsequent budget decision adjustments and formulation
    of the President's Budget.
        Consequently, changes in IRS requirements that occur after the
    Board approves the IRS budget are not provided to the Board, and can
    only be considered by the Board when the President's budget is made
    available to the public. The Board adjusted its previously approved
    budget to account for the following circumstances:
      --The Board's initial fiscal year 2007 budget was based on the fiscal
            year 2006 President's request, not the enacted appropriation,
            and is adjusted to use the fiscal year 2005 enacted level as
            the base.
      --The inflation factors for labor and non-pay inflation were not
            known to the Board when it first approved the IRS budget, and
            are adjusted to reflect the lower base as well as changes in
            rates.
      --The IRS budget submitted to the Board identified approximately $15
            million in savings, which the Board approved. During subsequent
            reviews with the Treasury Department and OMB, the IRS
            identified an additional $106 million in savings, for a total
            savings of $121 million. The Board's budget is adjusted to
            reflect these additional savings, despite the Board's
            assessment that they may represent some risk.
      --The IRS budget submitted to the Board did not identify any fee
            offsets, which were not yet authorized by Congress. The Board's
            budget is adjusted to reflect these offsets.
      --The budget is adjusted to reflect the development of an IRS
            Infrastructure Blueprint to define a cost-effective approach to
            meeting IRS infrastructure needs and the elimination of the
            need to fund Kansas City growth in fiscal year 2007.

                         STATEMENT OF J. RUSSELL GEORGE

        Senator Bond. Thank you very much, Chairman Wagner.
        Now we turn to Treasury Inspector General for Tax
    Administration, or TIGTA, Mr. Russell George.
        Mr. George. Thank you, Mr. Chairman.
        Mr. Chairman, Ranking Member Murray, thank you for the
    opportunity to testify today regarding the 2007 appropriations
    for the Internal Revenue Service. Just over a year ago, I
    testified before you on the IRS's 2006 appropriations.
    Unfortunately, many of the challenges I discussed last year
    remain today.
        At the outset, I am pleased to report that our reviews thus
    far have shown that the IRS has done a very good job responding
    to taxpayers affected by Hurricanes Katrina and Rita. Still, I
    remain concerned about the potential for fraudulent claims
    resulting from the response to those disasters. TIGTA will
    continue to monitor this effort.
        I agree with the Commissioner's motto for customer service
    plus enforcement resulting in greater taxpayer compliance.
    Given its limited resources, the IRS is attempting to find the
    proper balance between these two important goals. The IRS
    proposed curtailing some levels of service, including closing
    68 of its 400 taxpayer assistance service centers and reducing
    the hours of its toll-free telephone service from 15 hours a
    day to 12.
        TIGTA is required to review these plans before they are
    implemented. We have examined the proposed TAC closures and
    concluded that the IRS did not have sufficient or reliable data
    to determine the effects of the proposed closures on taxpayers.
    One of our concerns about closures is that more taxpayers need
    to rely on the IRS's volunteer income tax assistance programs,
    which has significant problems in providing taxpayers with
    accurate answers. During the 2006 filing season, TIGTA made
    anonymous visits to both TACs and VITA sites to determine if
    taxpayers are receiving accurate assistance preparing their tax
    returns. We found that VITA volunteers accurately prepared tax
    returns at only 39 percent of the scenarios TIGTA presented to
    them, which was a slight improvement over last year's accuracy
    rate of 34 percent.
        TIGTA also visited 50 Taxpayer Assistance Centers and posed
    200 questions to determine if taxpayers received correct
    answers to their questions. TAC assisters correctly answered 73
    percent of the questions we presented compared to 66 percent
    during the 2005 filing season. We visited another 20 TACs and
    posed 80 tax law questions specifically related to the Katrina
    Emergency Tax Relief Act. Assisters answered 75 percent of
    those questions correctly.
        We are currently assessing the IRS's plans to reduce the
    operating hours of its toll-free telephone service. Thus far,
    we have found that the average speed of answering calls to this
    line is about 60 percent of the time that had been planned by
    the IRS.
        Commendably, the IRS has seen a steady growth in the
    electronic filing of income tax run returns over the last 3
    years. While the IRS may not meet its mandated goal of having
    80 percent of all tax returns E-filed by 2007, it has done a
    laudable job of providing helpful information on the internet
    and is anticipating that 54 percent of filed returns will be
    filed electronically this year; however, I am concerned that
    more taxpayers are not using the E-file services offered by the
    IRS. This year, the number of taxpayers E-filing from their
    home computers rose by just over 16 percent at the same time
    the number of taxpayers taking advantage of free online filing
    has fallen by 22 percent.
        This drop may be the result of a change in the ``Free
    File'' agreement between the IRS and the Free File Alliance, a
    consortium of private sector companies that provide preparation
    software and transmit tax returns pursuant to the agreement.
    Although the intent of the program was to provide a free method
    of E-filing to taxpayers, the IRS and the Alliance amended the
    agreement. This year, the agreement allowed only taxpayers with
    adjusted gross incomes of $55,000 or less to use the service.
        In addition, the IRS eliminated its telefile program for
    individual taxpayers in August 2005. This program allowed
    taxpayers the simplest tax returns, such as Form 1040EZ, to
    file by telephone. The alternative filing methods for these
    taxpayers included using Taxpayer Assistance Centers and VITA
    sites. They could also use a free-file program if they
    qualified, among other options. It appears, however, that many
    taxpayers who previously used the telefile system reverted to
    using paper tax returns.
        We have also found that the IRS is attempting to address
    its major challenges; however, much more is required on its
    part. For example, while the IRS is making progress with the
    Business Systems Modernization program, BSM remains behind
    schedule, overbudget, and is not delivering all of the
    functionalities that were promised. In TIGTA's initial review
    of the IRS's plan to use private debt collectors, we found that
    the IRS has taken positive steps to implement certain aspects
    of the program. TIGTA is working closely with the IRS to
    address security concerns, the protection of taxpayers' rights
    and privacy, and the development of integrity and fraud
    awareness training for contract employees.
        The last issue I will address is the tax gap, which the IRS
    has estimated at approximately $345 million. TIGTA has
    evaluated the reliability of the IRS-developed tax gap figure,
    and in a report released just on Tuesday, we think concluded
    that the IRS still does not have sufficient information to
    accurately assess the overall tax gap and voluntary compliance
    rate. The IRS has significant challenges in attaining complete
    and timely data and in developing the methods for interpreting
    that data. We urge the Commissioner to continue this effort and
    have provided recommendations toward obtaining a more accurate
    assessment of this important measurement.

                               PREPARED STATEMENT

        Mr. Chairman, Ranking Member Murray, Senator Durbin, I hope
    my discussion of the 2006 filing season and some of the
    significant challenges facing the IRS will assist you with your
    consideration of the budget, appropriations rather. Mr.
    Chairman and the subcommittee, thank you for allowing me to
    share my views. I will accept your questions at the appropriate
    time.
        [The statement follows:]

                    Prepared Statement of J. Russell George

                                  INTRODUCTION

        Chairman Bond, Ranking Member Murray, and members of the
    subcommittee, I thank you for the opportunity to testify as you
    consider the fiscal year 2007 appropriations for the Internal Revenue
    Service (IRS). It was just over 1 year ago that I appeared before you
    to testify on the IRS's fiscal year 2006 appropriations. Since my prior
    testimony, significant events have affected tax administration
    including Hurricanes Katrina and Rita, which impacted thousands of
    taxpayers and required rapid responses from many departments and
    agencies, including the IRS.
        When I testified before the subcommittee last year, I had only
    served as the Treasury Inspector General for Tax Administration (TIGTA)
    for a few short months. As I testify before the subcommittee today, I
    have been the TIGTA for 17 months. My four priorities as the TIGTA are
    to maintain our focus on IRS efforts to modernize its technology,
    enhance our ability to protect tax administration from corruption,
    assist the IRS with improving tax compliance initiatives, and monitor
    the IRS's use of private debt collection agencies. As the TIGTA, my
    observations are primarily based on the body of work my organization
    has developed through audits and investigations of the IRS. To assist
    you in your consideration of the IRS's fiscal year 2007 budget, I will
    focus on the 2006 Filing Season, electronic filing, the tax gap,
    customer service, the IRS's Private Debt Collection initiative and
    other major challenges facing the IRS.

                             THE 2006 FILING SEASON

    Preparing for the Filing Season
        Planning for the 2006 Filing Season was difficult for the IRS
    because of many tax law changes enacted late last year in response to
    unprecedented natural disasters. Disaster relief provisions were
    enacted into law for taxpayers affected by Hurricanes Katrina, Rita,
    and Wilma, and were intended to provide relief to over 11 million
    taxpayers who lived in the affected areas of the Gulf Coast, as well as
    to others who may have been adversely impacted by these storms.
        This year, TIGTA reviewed 28 new tax law provisions and is also
    closely monitoring the implemented changes that are intended to assist
    taxpayers adversely affected by the 2005 hurricanes. New tax law
    provisions were included in the Katrina Emergency Tax Relief Act of
    2005,\1\ the Gulf Opportunity Zone Act of 2005,\2\ and also in the
    Working Families Tax Relief Act of 2004 \3\ and the American Jobs
    Creation Act of 2004,\4\ all of which became effective in 2005. The
    latest legislation, the Gulf Opportunity Zone Act of 2005, was signed
    into law on December 21, 2005.
    ---------------------------------------------------------------------------
        \1\ Public Law No. 109-73, 119 Stat. 2016 (to be codified in
    scattered sections of 26 U.S.C.).
        \2\ Public Law No. 109-135, 199 Stat. 2577 (2005).
        \3\ Public Law No. 108-311, 118 Stat. 1166 (2004).
        \4\ Public Law No. 108-357, 118 Stat. 1418 (2004).
    ---------------------------------------------------------------------------
        TIGTA reviewed the IRS's preparation for the 2006 Filing Season and
    determined that the IRS accurately updated its tax products and
    computer programming to incorporate the tax law changes that became
    effective in 2005. TIGTA reviewed 42 tax forms, publications, and
    instructions that required updating, and determined that they were
    accurately updated. The IRS also accurately updated its computer
    programming and returns processing programs for the new tax law
    provisions and other adjustments or changes.\5\ TIGTA is continuing to
    monitor the IRS's processing of income tax returns during the 2006
    Filing Season and will report its results later this year.
    ---------------------------------------------------------------------------
        \5\ Draft Report ``Tax Products and Computer Programs for
    Individual Income Tax Returns Were Accurately Updated for the 2006
    Filing Season'' (Audit No. 200640015, date April 24, 2006).
    ---------------------------------------------------------------------------
        While planning for the 2006 Filing Season, the IRS considered the
    impact of Hurricanes Katrina and Rita. Specifically, the IRS accounted
    for all employees affected by the hurricanes and located alternate
    office space in affected areas. All Taxpayer Assistance Centers (TAC)
    in impacted areas were open and operational for the 2006 Filing Season.
    The IRS also added services to help lessen taxpayer burden, including
    tax return preparation for taxpayers affected by the hurricanes
    regardless of the income guidelines. Additionally, the scope of tax law
    topics in which assistors are trained was expanded to provide
    assistance to taxpayers with questions about casualty losses.
    Furthermore, the IRS will treat taxpayers affected by Hurricanes
    Katrina and Rita as meeting extreme hardship criteria. That designation
    allows affected taxpayers to request and immediately receive
    transcripts of prior year tax returns instead of having to order them
    and wait for delivery.
    Processing Tax Returns
        During the 2006 Filing Season, the IRS expected to process an
    estimated 135 million individual returns. So far, TIGTA has not
    identified any significant problems with the IRS's processing of
    individual tax returns. As of April 8, 2006, the IRS has received over
    87.7 million returns. Of those, 57.7 million were filed electronically
    (an increase of 3.5 percent from this time last year), and 29.9 million
    were filed on paper (a decrease of 7.1 percent from 2005).
    Additionally, $164.5 billion in refunds have been timely issued. Of
    this amount, $124.3 billion were directly deposited to taxpayer bank
    accounts, an increase of 9.3 percent compared to last year.
    Providing Quality Customer Service
        While the IRS continues to face longstanding challenges, it
    deserves recognition for making progress in an area that will always be
    a challenge: providing quality customer service to the American
    taxpayer. Providing quality customer service is the first component of
    Commissioner Everson's principle for the IRS,
    Service+Enforcement=Compliance. Over the past few years, TIGTA audits
    have shown that the IRS has improved customer assistance in its face-
    to-face, toll-free telephone, tax return processing, and electronic
    services, including the IRS public Internet site (www.IRS.gov).
        Furthermore, it is encouraging to note that the IRS took numerous
    actions to provide broad relief to taxpayers affected by Hurricanes
    Katrina and Rita. These broad relief efforts included postponing
    deadlines for filing and payment, providing relief from interest and
    penalties, and waiving some low-income housing tax credit rules. The
    IRS also waived the usual fees and expedited requests for copies of
    previously filed tax returns for affected taxpayers that need them to
    apply for benefits or file amended tax returns to claim casualty
    losses.\6\
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        \6\ ``Planning for the 2006 Filing Season Is on Course, but
    Challenges Exist for the Toll-Free Telephone Operations'' (Reference
    No. 2006-40-053, dated February 2006).
    ---------------------------------------------------------------------------
        IRS employees also provided tax assistance at Federal Emergency
    Management Agency (FEMA) Disaster Assistance Sites in a number of
    locations. Additionally, the IRS assigned 5,000 employees to augment
    Federal Government telephone call sites and provided additional
    employees to assist in approximately 34 FEMA disaster recovery centers
    in 13 States.
                IRS.gov
        IRS.gov continues to be one of the most visited Internet sites in
    the world, especially during filing seasons. As of the week ending
    April 8, 2006, the IRS reported a 6.46 percent increase in the number
    of visits to IRS.gov over the same period during the last filing
    season. The IRS now provides practitioners with online tools to provide
    better service to their customers, such as electronic account
    resolution, transcript delivery, and disclosure authorization. As of
    the week ending April 8, 2006, the IRS also reported a 17.02 percent
    increase in taxpayers obtaining their refund information online via the
    ``Where's My Refund'' option found on the Internet site.
                Toll-Free Telephone Operations
        The 2006 Filing Season presented unique challenges for the IRS
    toll-free operations. The IRS had also planned to reduce the hours of
    its toll-free telephone operation in fiscal year 2006. The IRS had
    about 400 fewer Full-Time Equivalents \7\ for toll-free telephone
    operations than it had in fiscal year 2005 because of plans to reduce
    operating hours from 15 to 12 per day. Congress, the Taxpayer Advocate
    and the National Treasury Employees Union expressed concerns about the
    IRS reducing operating hours for the toll-free telephone lines. A new
    law enacted in November 2005 requires the IRS to consult with
    stakeholder organizations, including TIGTA, regarding any proposed or
    planned efforts to terminate or significantly reduce any taxpayer
    service activity.\8\ Congress recently further defined a reduction of
    taxpayer service to include limiting available hours of telephone
    taxpayer assistance on a daily, weekly, and monthly basis below the
    levels in existence during the month of October 2005. TIGTA is
    currently assessing the IRS's plans to reduce operating hours and will
    report its results later this year.
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        \7\ A measure of labor hours in which 1 Full-Time Equivalent is
    equal to 8 hours multiplied by the number of compensable days in a
    particular fiscal year. For fiscal year 2005, 1 Full-Time Equivalent
    was equal to 2,088 hours.
        \8\ The Transportation, Treasury, Housing and Urban Development,
    the Judiciary, the District of Columbia, and Independent Agencies
    Appropriations Act, Public Law No. 109-115, 119 Stat. 2396 (2006).
    ---------------------------------------------------------------------------
        As of April 8, 2006, assistor level of service had not been
    negatively impacted, with an IRS-reported level of service rate of 83.8
    percent.\9\ In addition, about 6.49 percent fewer assistor calls were
    answered, but the number of taxpayers who hung up prior to reaching an
    IRS assistor was up 10.9 percent. The average speed of answer was about
    66 percent of the time planned, so those taxpayers who called and spoke
    with an assistor did not experience longer wait times.
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        \9\ Level of Service is the primary measure of providing service to
    taxpayers. It is the relative success rate of taxpayers that call for
    services on the IRS's toll-free telephone lines.
    ---------------------------------------------------------------------------
        In planning for fiscal year 2006, IRS management expected fewer
    calls program-wide, even after taking into consideration taxpayers
    affected by Hurricanes Katrina and Rita. IRS management believed that
    most taxpayers needing disaster relief assistance obtained it during
    the latter part of 2005. Prior to the start of the filing season, TIGTA
    brought to IRS management's attention our concern that more taxpayers
    than expected could call the help line with questions due to the
    effects of Hurricanes Katrina and Rita.
        After we shared this concern, IRS management raised the estimated
    volume of services to these telephone lines by about 78,000 services,
    from approximately 27,000 to about 105,000. The estimate is for
    services from January through June 2006, a 365.1 percent increase over
    the total fiscal year 2005 services provided on those telephone
    lines.\10\ For the 2006 Filing Season it appears that the calls to
    these telephone lines were higher than anticipated. For example, the
    IRS had planned 77,235 services for one of its applications devoted to
    assisting disaster victims; however, through April 8, 2006, the IRS has
    already provided 136,552 services.
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        \10\ A service is defined when a call is answered by an assistor.
    When the assistor answers the caller's question, a service is provided.
    If the same caller has an additional question or issue and is
    transferred to another area or assistor, an additional service is
    provided.
    ---------------------------------------------------------------------------
                Taxpayer Assistance Centers
                    2006 Filing Season Services
        The TACs are walk-in sites where taxpayers can receive answers to
    both account and tax law questions, as well as receive assistance
    preparing their returns. The IRS acknowledged that staffing would be a
    challenge during the 2006 Filing Season since not all TACs would be
    fully staffed and not all TACs would provide standard services or
    standard hours of operation (from 8:30 a.m. to 4:30 p.m., Monday
    through Friday). As of December 1, 2005, the IRS identified 47 TACs
    with critical staffing shortages (a critical vacancy is one that must
    be filled to ensure that a TAC remains open).
        The IRS took actions to minimize the impact of the staffing
    shortages. As of January 31, 2006, the IRS had hired additional
    frontline technical employees, recalled intermittent employees back to
    work, detailed former TAC employees from their current positions in
    other IRS functions back to the TACs, and made plans to have some
    employees travel between TACs to ensure that all TACs remained open
    daily. The IRS's decision to focus more resources on compliance
    activities, however, further limited resources available for the TAC
    Program. As a result, the IRS limited some assistance services and not
    all TACs were open during standard operating hours. As of the week
    ending April 8, 2006, the IRS reported a 12.5 percent reduction in TAC
    contacts with taxpayers.
        Although the IRS publicized when TAC operating hours were limited,
    it did not publicize when TACs would only provide limited services.
    When notified by TIGTA, the IRS implemented changes and standardized
    the list of services offered at each TAC. Furthermore, the IRS modified
    its Internet site, IRS.gov, to indicate when TACs would provide limited
    services.
        TIGTA made anonymous visits to 50 TACs and asked 200 questions to
    determine if taxpayers received quality service, including correct
    answers to their questions. Assistors correctly answered 73 percent of
    the questions compared to 66 percent during the 2005 Filing Season.
    TIGTA visited an additional 20 TACs and asked 80 tax law questions
    specifically related to the Katrina Emergency Tax Relief Act of 2005.
    Assistors answered 75 percent of those questions correctly. IRS
    assistors should have been trained to answer these questions. TIGTA's
    observations were that assistors sometimes inappropriately referred
    taxpayers to publications to conduct their own research, or responded
    to tax law questions without following required procedures, such as
    using the publication method guide that requires them to ask probing
    questions.
                    Closure
        Over the past few years, customer service at TACs has shown
    improvement. In May 2005, the IRS announced plans to close 68 of its
    TACs nationwide. Closing the 68 TACs was expected to yield staffing and
    facilities cost savings of $45 million to $55 million. After the IRS's
    closure announcement, Congress enacted legislation to delay the closure
    of any TACs.\11\ The IRS is prohibited from using funds provided in the
    fiscal year 2006 budget appropriation to reduce any taxpayer service
    function or program until TIGTA completes a study detailing the effect
    of the IRS's plans to reduce services relating to taxpayer compliance
    and taxpayer assistance. TIGTA completed its study in March.
    ---------------------------------------------------------------------------
        \11\ Transportation, Treasury, Housing and Urban Development, the
    Judiciary, the District of Columbia, and Independent Agencies
    Appropriations Act, 2006, Public Law No. 109-115, 119 Stat. 2396
    (2005).
    ---------------------------------------------------------------------------
        TIGTA reviewed \12\ the IRS's TAC Closure Model and data used to
    select the 68 centers scheduled for closure and identified that
    although the structure of the Model was sound, not all data used were
    accurate or the most current available, and some of the data were based
    on estimates and projections instead of actual available data. Data
    discrepancies affected the scores the Model calculated for each TAC
    and, ultimately, the ranking and overall selection of centers for
    closure. In addition, data discrepancies affected the IRS's ability to
    accurately determine cost savings. The IRS should ensure that data used
    in any decision-making tool are accurate and reliable before using
    them. For the TAC Program, the IRS should include data to identify
    customer characteristics and capture customer input to effectively
    measure the impact any changes might have on taxpayer service or
    compliance.
    ---------------------------------------------------------------------------
        \12\ ``The Taxpayer Assistance Center Closure Plan Was Based on
    Inaccurate Data'' (Reference Number 2006-40-061, dated March 2006).
    ---------------------------------------------------------------------------
        I am concerned that the IRS does not sufficiently ensure that it
    uses adequate and reliable data for making decisions that impact
    customer service operations. The decision to close TACs was based
    primarily on input from IRS functional areas and considered other
    factors that included internal priorities, resource demands, and shifts
    in the IRS's customer service perspective. However, data were not
    obtained from taxpayers who use these services to determine the impact
    of removing or reducing them.
                Volunteer Income Tax Assistance (VITA) Program
        The VITA Program plays an increasingly important role in IRS's
    efforts to improve taxpayer service and facilitate participation in the
    tax system. The VITA Program provides no-cost Federal tax return
    preparation and electronic filing to underserved taxpayer segments,
    including low income, elderly, disabled, and limited-English-proficient
    taxpayers. These taxpayers are frequently involved in complex family
    situations that make it difficult to correctly understand and apply tax
    law.
        TIGTA visited VITA sites to determine if taxpayers received quality
    service, including the accurate preparation of their individual income
    tax returns. TIGTA developed scenarios designed to present volunteers
    with a wide range of tax law topics that taxpayers may have needed
    assistance with when preparing their tax returns. These scenarios
    included the characteristics (e.g., income level, credits claimed,
    etc.) of tax returns typically prepared by the VITA Program volunteers
    based on an analysis of the Tax Year 2004 VITA-prepared tax returns.
    TIGTA had 36 tax returns prepared with a 39 percent accuracy rate,
    comparable to the 34 percent accuracy rate reported for the 2005 Filing
    Season. TIGTA's observations were that volunteers did not always use
    the tools and information available when preparing returns. TIGTA will
    report its final results later this year.
                The Tax Gap
        In an April 2004 U.S. Senate Committee on Finance news release,
    Senator Max Baucus called for 90 percent voluntary tax compliance by
    2010. Senator Baucus stated, in part, that ``Today, I'm calling on the
    IRS to achieve a 90 percent voluntary compliance rate by the end of the
    decade, which would raise at least an additional $100 billion each year
    without raising taxes.'' Perhaps the greatest challenge facing the IRS
    is finding ways to improve the voluntary compliance rate.
        Using different terms, Senator Baucus challenged the IRS to reduce
    what is commonly known as the tax gap. The IRS defines the gross tax
    gap as the difference between the estimated amount taxpayers owe and
    the amount they voluntarily and timely pay for a tax year. In February
    2006, the IRS estimated the gross tax gap at $345 billion for Tax Year
    2001.
        TIGTA evaluated the reliability of the IRS-developed tax gap
    figures and concluded that the IRS still does not have sufficient
    information to completely and accurately assess the overall tax gap and
    voluntary compliance.\13\ The IRS has significant challenges in both
    obtaining complete and timely data and developing the methods for
    interpreting the data.
    ---------------------------------------------------------------------------
        \13\ ``Some Concerns Remain About the Overall Confidence That Can
    Be Placed in Internal Revenue Service Tax Gap Projections'' (Reference
    Number 2006-50-077, dated April 2006).
    ---------------------------------------------------------------------------
        A reliable estimate of the overall tax gap and its components is
    important to tax administration and tax policy decision-makers. Without
    a reliable estimate, inappropriate decisions may be made on how to
    address the tax gap. If we assume that the total tax liability in Tax
    Year 2010 is the same as it was in Tax Year 2001, noncompliant
    taxpayers would have to pay timely and voluntarily an additional $134
    billion to achieve Senator Baucus' challenge to reach a 90 percent
    voluntary compliance rate by 2010.
        Despite the significant efforts undertaken in conducting the
    individual taxpayer National Research Program (NRP) \14\ for
    underreporting, the IRS still does not have sufficient information to
    completely and accurately assess the overall tax gap and the voluntary
    compliance rate. TIGTA's primary concerns are described in the
    following areas of nonfiling, reporting compliance, and payments
    collected.
    ---------------------------------------------------------------------------
        \14\ The NRP was a study designed to accurately measure reporting
    compliance of individual taxpayers while minimizing the burden on
    taxpayers during the process.
    ---------------------------------------------------------------------------
                Nonfiling
        Prior to the NRP, the IRS's estimate of the nonfiling gap was $30.1
    billion, consisting of $28.1 billion for individual income taxes and $2
    billion for estate taxes. In February 2006, the IRS updated this
    estimate to $25 billion for individuals. Supplementary data, however,
    suggest that substantial amounts are not included in the estimates
    provided in the tax gap projections. The IRS describes the nonfiling
    estimate as reasonable despite the missing segments of corporate
    income, employment, and excise taxes. These facts suggest the nonfiler
    estimate is incomplete and likely inaccurate.\15\
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        \15\ There are no plans to update the estate tax segment or to
    estimate the corporate, employment, and excise tax nonfiler segment.
    ---------------------------------------------------------------------------
                Reporting Compliance
        At an estimated $285 billion, underreporting is by far the largest
    identified portion of the tax gap. Yet, this estimate may not be
    complete since there are at least four areas that suggest substantial
    amounts are not included in the tax gap estimates.
      --The effect that the current NRP on Subchapter S corporations will
            have on individual taxpayer compliance estimates could be
            substantial, as well as the effect on employment tax
            estimates.\16\
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        \16\ This study is expected to take 2 years to 3 years to complete
    from its inception in October 2005.
    ---------------------------------------------------------------------------
      --The $5 billion underreporting estimate for small corporations and
            the $25 billion estimate for large corporations date back to
            the 1980's and, according to the IRS, are considered weak.
      --The estimate for estate taxes was not updated during the current
            NRP, and no estimate has been made for excise taxes.
      --The dated estimate for the Federal Insurance Contributions Act
            taxes and unemployment taxes are considered weak by the IRS.
                Payments Collected
        The IRS estimates that it recovers about $55 billion of the annual
    tax gap through enforced collections and other late payments.\17\ This
    figure does not represent an actual amount but is an estimate based on
    formulas devised from historical analyses. The actual basis of these
    formulas seems to be very limited, as well as dated. Furthermore, these
    collections have two basic parts--voluntary payments received by the
    IRS and payments that result from some type of IRS intervention.\18\
    The IRS does not currently correlate either type of payment to the
    applicable tax year and thus does not determine actual collections.
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        \17\ According to one IRS representative, these collections can
    take up to 10 years because of appeals and court decisions.
        \18\ Voluntary late payments are generally those remittances
    received after their due dates but before collection notices were sent
    or other collection actions were taken.
    ---------------------------------------------------------------------------
                Measuring Noncompliance
        TIGTA attempted to determine whether the IRS's tax gap estimates
    coincide with estimates developed by independent sources. Although some
    independent studies exist, none provided sufficient information to
    allow close comparisons. One possible source of comparison was the
    annual Bureau of Economic Analysis estimate of the difference between
    its personal income figures and the IRS's measure of Adjusted Gross
    Income to derive what is called an Adjusted Gross Income Gap. IRS
    Office of Research officials suggested that this is a narrow definition
    of tax noncompliance based, in part, on IRS estimates. For Tax Year
    2001, the Bureau of Economic Analysis reported an Adjusted Gross Income
    Gap of $834.4 billion.\19\
    ---------------------------------------------------------------------------
        \19\ This number is an income gap rather than a tax gap. Thus, it
    would have to be multiplied by a tax rate to determine the associated
    tax gap. Similarly, the $35 billion stated in the following paragraph
    could be significantly smaller, depending on whether some of these
    workers have actual filing obligations. Neither the BEA nor the IRS
    assumes a tax rate to calculate a tax gap estimate based on this income
    gap.
    ---------------------------------------------------------------------------
        The private sector has also developed some estimates of the tax
    gap. For example, in January 2005, financial analysts calculated the
    number of illegal immigrants in the United States at more than double
    the United States Census Bureau's estimated 9 million. These
    undocumented workers may hold as many as 15 million jobs, with perhaps
    5 million collecting untaxed cash wages, costing the Federal Government
    an estimated $35 billion yearly.\20\
    ---------------------------------------------------------------------------
        \20\ Bear Stearns, ``The Underground Labor Force Is Rising To The
    Surface''.
    ---------------------------------------------------------------------------
        Performing a compliance measurement program is expensive and time
    consuming. The estimated cost for performing the Tax Year 2001
    individual taxpayer NRP was approximately $150 million. The IRS Office
    of Research staff explained that resource constraints are a major
    driver in NRP studies and will affect how often the NRP is updated.
    From fiscal years 1995 through 2004, the revenue agent workforce
    declined by nearly 30 percent while the number of returns filed grew by
    over 9 percent. Additionally, operational priorities must be balanced
    against research needs. This shortfall in examiner resources makes
    conducting large-scale research studies problematic.
        The IRS's budget submission to the Department of the Treasury
    (Treasury) for fiscal year 2007 requests funding to support ongoing NRP
    reporting compliance studies. It requests funding for 268 Full-Time
    Equivalents and $45.9 million that will include 26 analytical and
    technical positions to estimate reporting compliance for new segments
    of taxpayers (such as S corporations, partnerships, and other business
    entities) and to update estimates of reporting compliance for other
    segments. It also requests 510 additional revenue agents to conduct
    reporting compliance research examinations. The initiative seeks to
    provide a foundation for conducting compliance studies and to limit the
    diversion of resources to research audits from operational priorities.
    The IRS Oversight Board supports ongoing dedicated funding for
    compliance research. Unfortunately, funding for those resources in
    previous fiscal years did not materialize. Without a resource
    commitment to continually update the studies, the information will
    continue to be stale and less useful in improving voluntary compliance.
        TIGTA's review of the tax gap concluded that a determination cannot
    be made about the IRS's ability to meet Senator Baucus' challenge of 90
    percent voluntary compliance by 2010 with the information currently
    available. Regardless of whether a 90 percent voluntary compliance rate
    can be achieved, the IRS faces formidable challenges in completely and
    accurately estimating the tax gap and finding effective ways to
    increase voluntary compliance.

                               ELECTRONIC FILING

        The IRS has seen a steady growth in electronic filing (e-file) of
    income tax returns over the past several years. In Calendar Year 2002,
    35.9 percent of the 130.3 million individual income tax returns
    received by the IRS were e-filed. Last year, the percentage of e-filed
    returns increased to 51.7 percent of the total individual income tax
    returns received. The number of e-filed returns increased 46.2 percent
    over the 3-year span. While the IRS will not meet its goal of having 80
    percent of all tax returns e-filed by 2007, it does expect to see
    continued growth in electronic filing, although at a somewhat
    diminished growth rate from year to year. For example, the IRS expects
    the e-file percentage to reach 54.1 percent this year, 57.7 percent in
    2007, and 60.6 percent in 2008.
        Although e-filing continues to increase overall, TIGTA found some
    indications that taxpayers are shifting between the various types of e-
    filed returns, and some segments of e-filed returns are starting to
    show a decrease in the numbers filed. E-filed returns are generated
    from three basic sources--paid preparers who transmit their clients'
    tax returns, taxpayers who purchase tax-preparation software and file
    their own returns via the Internet from their personal computers, and
    taxpayers who take advantage of free e-filing options, such as the Free
    File Program, or in previous years via the TeleFile Program.
        Overall, as of April 8, 2006, e-filing has increased 3.5 percent
    compared to the same period in 2005, which is significantly less than
    the 6 percent increase the IRS expected. While the number of taxpayers
    e-filing from their home computers is up 16.6 percent this Filing
    Season, the number of taxpayers taking advantage of free online filing
    is down 22 percent below last year. I am concerned that more taxpayers
    are not using the free e-filing services offered by the IRS.
    Free File Program
                Background
        The IRS Restructuring and Reform Act of 1998 (RRA 98)\21\
    established a goal for the IRS to have 80 percent of Federal tax and
    information returns filed electronically by 2007. It also required the
    IRS to work with private industry to increase electronic filing.
    ---------------------------------------------------------------------------
        \21\ Public Law No. 105-206, 112 Stat. 685 (codified as amended in
    scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22
    U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).
    ---------------------------------------------------------------------------
        In February 2002, President Bush established the President's
    Management Agenda to improve the overall management of the Federal
    Government. One of the five initiatives in the President's Agenda is E-
    Government. The goal of this initiative is to make it easier for
    citizens and businesses to interact with the government, save taxpayer
    dollars and streamline citizen-to-government transactions. In response
    to the President's E-Government initiative, the Office of Management
    and Budget (OMB) developed the EZ Tax Filing Initiative. EZ Tax Filing
    was intended to make it easier for citizens to file taxes in an
    Internet-enabled environment. Citizens would no longer have to pay for
    basic, automated tax preparation. The goal of this initiative was to
    increase the number of citizens who filed their tax returns
    electronically.
        In response to this requirement and the statutory requirement of
    RRA 98, in 2003 the Treasury, the OMB and the IRS launched the Free
    File Program featuring private-sector partners that allow qualifying
    taxpayers to prepare and file their taxes online for free. The
    Treasury, OMB and IRS made this possible through a public-private
    partnership with a consortium of tax software companies, the Free File
    Alliance, LLC (Alliance).
        The Free File Program provides taxpayers with access to free online
    tax preparation and e-filing services made possible through a
    partnership agreement between the IRS and the tax software industry.
    Eligible taxpayers may prepare and e-file their Federal income tax
    returns using commercial online software provided by Alliance members.
    After the IRS and Alliance entered into a Free File Agreement, the Free
    File Program debuted in January 2003. According to statistics provided
    by the Alliance, more than 2.79 million taxpayers used the program in
    its first year. In subsequent years, use of the Free File Program
    increased significantly to about 3.51 million taxpayers in 2004 and
    5.12 million taxpayers in 2005.
                The Amended Free File Alliance Agreement and Its Potential
                        Impact on Electronic Filing
        After the 2005 Filing Season, the IRS and the Alliance amended
    their agreement to continue the Free File Program through October 2009.
    With the amended agreement, the overall focus of the Free File Program
    changed significantly. While the amended agreement still contributes to
    the original goal of increasing the number of citizens who
    electronically file their tax returns, new limits effectively changed
    the intent of the Free File Program. The original intent of the program
    was to provide free tax preparation and electronic filing services to
    all taxpayers. The revised intent is to assist lower income and
    underserved taxpayers.
        The original 2002 agreement between the IRS and the Alliance
    established a minimum number of taxpayers who should be served by the
    Free File Program and was more in line with the intent of the EZ Tax
    Filing Initiative. There is, however, some support in Congress for the
    shift in the program's focus to lower income and underserved taxpayers.
    For example, according to the House Appropriations Committee Report
    accompanying the IRS's fiscal year 2005 Budget Appropriations, the
    committee reaffirmed its position that the Alliance is first and
    foremost intended to provide electronic Federal tax return preparation
    and e-filing services at no cost to the working poor and other
    disadvantaged and underserved taxpayers.
        As part of the amended agreement, new limits were set for
    participation in the Free File Program. The new limits stem, in part,
    from the differing objectives of the IRS and the Alliance members. One
    of the IRS's principal purposes for establishing the program was to add
    another avenue for electronic filing with the intent of increasing
    electronic filing overall. However, Alliance members are businesses
    that incur a cost to provide free services. According to
    representatives of Alliance member companies who TIGTA interviewed,
    their primary goal is to keep the Federal Government from entering the
    tax preparation business.\22\ A secondary benefit of their
    participation in the program is the opportunity to market their other
    products for free. Taxpayers opting to use these services provide
    additional revenues to Alliance members.
    ---------------------------------------------------------------------------
        \22\ TIGTA interviewed a sample of 6 of the 20 Alliance member
    companies.
    ---------------------------------------------------------------------------
        Per the initial agreement, a minimum of 60 percent of all taxpayers
    (approximately 78 million) were eligible for the Free File Program.
    Last year, the Alliance opened the program up to almost 130 million
    taxpayers. However, only 5.12 million taxpayers took advantage of it.
    The amended agreement now limits the program's availability to 70
    percent of taxpayers (approximately 93 million). For Tax Year 2005,
    this limitation equates to an Adjusted Gross Income (AGI) of $50,000 or
    less. The maximum AGI to achieve the 70 percent limit, however, may
    vary from year to year. The net impact of this new limit is that during
    the 2006 Filing Season approximately 40 million taxpayers were no
    longer offered free filing services through the program.
        As mentioned earlier, online filing on home computers is up 16.6
    percent this Filing Season. This increase, however, appears to be the
    result of an increase in the number of taxpayers who paid for online
    filing services. As of April 8, 2006, paid online filing is up 33.7
    percent while free online filing is down 22 percent. Two possible
    explanations for the growth in online filing from home computers and
    the decline in free online filing are: (1) taxpayers who filed
    electronically through a practitioner last year may have decided to
    purchase software and file online this year; and (2) taxpayers who
    filed through the program last year do not qualify this year and
    therefore purchased software to file online.
        Another factor that appears to have contributed to the decline in
    free online filing is elimination of the IRS's TeleFile Program. The
    IRS and the Alliance had hoped that many of the 3.3 million taxpayers
    who used TeleFile in 2005 would migrate to the Free File Program.
    However, current Filing Season statistics indicate that many former
    TeleFilers are no longer filing electronically and instead are filing
    their returns on paper.
    Positive Provisions of the New Free File Alliance Agreement
        Although the changes in the amended Free File Agreement limit the
    number of taxpayers offered free tax return preparation and filing
    services, several other changes enhance the quality of the program.
    Under the amended agreement, Alliance members must adhere to more
    stringent disclosure of the nature, costs, and alternative methods of
    receiving refunds faster. In addition, not all taxpayers will be
    offered a Refund Anticipation Loan (RAL). There is some controversy
    over RALs because of the high fees and rates sometimes associated with
    those loans. Starting in 2006, the agreement guarantees that some
    taxpayers using the Free File Program will have the option to prepare
    and file their tax return without being offered a RAL. The decision of
    whether or not to accept an RAL lies with the taxpayer; however, these
    new provisions make the choice more clear. If taxpayers choose to apply
    for an RAL, all terms of the loans must be fully disclosed.
        The amended agreement also increased security requirements and
    added performance measures for the individual Alliance members.
    Alliance members must have third-party security assessments to ensure
    that taxpayer information is adequately protected. Also, performance
    standards require a 60 percent acceptance rate \23\ for providers who
    e-file returns through the program. This acceptance rate will be
    gradually increased in future years.
    ---------------------------------------------------------------------------
        \23\ The percentage of returns an individual provider must transmit
    to the IRS error free.
    ---------------------------------------------------------------------------
        Under the amended agreement, Alliance members also agreed for the
    first time to provide the IRS with an indicator that identifies those
    taxpayers who use the Free File Program. Prior to the amendment, the
    IRS had no way to independently determine how many taxpayers
    participated in the program, or which taxpayers were using it.
    Previously, individual Alliance members reported data on participation
    in the program, and the IRS lacked a method to monitor participation.
    This significantly hampered the IRS's ability to evaluate the program's
    success or the effects of changes to the program.
    Difficulties Using the Free File Program
        Although the Free File Program offers some taxpayers the option to
    prepare and file their tax return for free, the program may not be
    accessible to all who are eligible for it, and it is not necessarily
    easy to use. The Free File Internet site readily allows taxpayers to
    determine whether they qualify for the program, but finding the best
    software provider for their needs is time consuming and may be
    difficult for less savvy computer users.
        Taxpayers must access the Free File Program through the IRS's
    Internet site at IRS.gov. The Internet site clearly identifies the
    basic requirements for participation in the program and provides a tool
    that guides taxpayers to free filing providers. This tool presents
    taxpayers with a number of providers from which to choose based on some
    basic information that taxpayers provide. Although this tool guides
    taxpayers to the providers they qualify to use, the tool does not
    assist taxpayers in determining which of those providers best meets
    their needs.
        Taxpayers must access each provider's Internet site to determine
    the services offered and must then compare the services offered and
    select the provider that is the best for them. Additionally, each
    Alliance member company sets taxpayer eligibility requirements for its
    own program. These requirements may differ from company to company.
    Generally, eligibility is based on such factors such as age, adjusted
    gross income, State residency, military status or eligibility for the
    Earned Income Tax Credit.
        Although the Free File Program is currently focused on low-income
    taxpayers, many of these taxpayers do not have access to the tools to
    use it. For example, taxpayers who speak limited English have not been
    provided access to all of the filing options offered. Only two
    providers offer services in Spanish and neither of them offer free
    electronic filing of Form 4868, Automatic Extension of Time to File.
        The Free File Program also requires taxpayers to have access to a
    computer and the Internet. Taxpayers who have access to the necessary
    technology must also be savvy enough to navigate the IRS's and the
    Alliance members' Internet sites. The focus of the program on lower-
    income taxpayers may be at odds with their ability to participate in
    it. In her 2004 Report to the Congress, the National Taxpayer Advocate
    wrote that in 2001 approximately 50 percent of low-income families \24\
    used a computer and only 38 percent had access to the Internet.
    Furthermore, access to a computer or the Internet does not necessarily
    indicate that a person has the ability to navigate the Internet or use
    tax preparation software.\25\
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        \24\ Income of less than $25,000.
        \25\ ``National Taxpayer Advocate 2004 Annual Report to the
    Congress, Volume 1'', December 2004.
    ---------------------------------------------------------------------------
        The IRS offers free assistance to taxpayers with tax preparation
    and filing through its Taxpayer Assistance Centers, Voluntary Income
    Tax Assistance, and Tax-Aide Programs as well as through the Free File
    Program. Similar to the Free File Program, taxpayers must meet certain
    requirements in order to receive assistance from those other programs.
    The Free File Program, however, is the only free filing option that
    taxpayers may use from their homes. Taxpayers must bring their tax
    documentation to an assistance site to take advantage of the other free
    tax return preparation and filing services.
        The addition of the RAL provisions, increased security, and added
    performance measures to the agreement are important provisions to
    further promote public confidence in the Free File Program. Adding the
    electronic indicator to returns filed through the program will provide
    the IRS with information to measure the program's success. However,
    limiting the scope of the program to 70 percent of taxpayers has
    impacted the use of the program. Based on the statistics Alliance
    members provided in previous years, the new limits in the amended
    agreement appear to be substantially reducing participation in the
    program. Furthermore, the AGI limit also keeps the program from
    achieving the full intent of the EZ Tax Filing Initiative, which never
    specified any such limits for access to free, basic, automated tax
    return preparation and electronic filing. Not yet known, however, is
    whether the IRS's ability to better understand who is using and who is
    not using the program could help the IRS better market the program and
    expand its usage despite the new limits. The answer to that question
    may ultimately have a significant effect on the overall growth rate of
    electronic filing.
    Elimination of the TeleFile Program
        As mentioned earlier in my statement, one factor that appears to
    have negatively impacted the Free File Program is the elimination of
    the TeleFile Program. The IRS discontinued this program for individual
    taxpayers in August 2005. The TeleFile Program allowed taxpayers with
    the simplest tax returns \26\ to file their returns by telephone. The
    pilot TeleFile Program was launched on a limited basis in 1992, and the
    program became available nationally in 1997. The RRA 98 included the
    expectation that the IRS would continue to offer and improve TeleFile
    and make a similar program available on the Internet.
    ---------------------------------------------------------------------------
        \26\ Forms 1040EZ.
    ---------------------------------------------------------------------------
        Despite its initial success, use of the TeleFile Program began to
    decrease in 1999. According to IRS electronic filing statistics as of
    April 17, 2005, approximately 3.3 million filers used TeleFile in 2005,
    a 12.7 percent decline from the previous year. Until the IRS eliminated
    the TeleFile Program last year, participation in the program had
    declined every year since 1999 when 5.2 million filers used it.
        Declining use was one factor the IRS considered when deciding
    whether or not to end the TeleFile Program. Other contributing factors
    included the increasing cost of maintaining an aging TeleFile system,
    declining and discontinued State TeleFile programs, and the growing use
    of other electronic filing alternatives, such as the Free File Program.
        According to the IRS, taxpayers who previously used TeleFile may
    continue to file electronically using one of the following five
    methods:
      --1. Tax preparers;
      --2. Personal computers with Internet access and tax preparation
            software;
      --3. IRS's Free File Program;
      --4. Free tax assistance sites, such as the Voluntary Income Tax
            Assistance and Tax-Aide Programs; and
      --5. IRS Taxpayer Assistance Centers.
        However, two of the five alternatives require the taxpayer to pay
    for tax preparation and filing services that were previously free, and
    two other options require taxpayers to have access to computers and the
    Internet. Consequently, in many cases, the most cost-effective avenue
    for the taxpayer is to file a paper tax return. According to initial
    IRS statistics, a significant number of former TeleFile users are
    reverting to filing paper returns this year. As of April 8, 2006, the
    number of paper Form 1040EZ returns filed has increased 19.2 percent
    compared to this time last year (5.9 million in 2006 compared to 4.9
    million in 2005), and there has been a corresponding decrease in
    electronically filed Forms 1040EZ (6.7 million in 2006 vs. 8.4 million
    in 2005).
        TIGTA will further evaluate the impact of the elimination of the
    TeleFile Program on taxpayers and the IRS's efforts to increase
    electronic filing, and will report the results later this year.

                            PRIVATE DEBT COLLECTION

        As of September 2005, the gross accounts receivable to the IRS was
    $258 billion. On October 22, 2004, the President signed the American
    Jobs Creation Act of 2004 \27\ that included a provision allowing the
    IRS to use Private Collection Agencies (PCA) to help collect Federal
    Government tax debts. The law allows PCAs to locate, contact, and
    request full payment from taxpayers specified by the IRS. The law also
    allows the IRS to retain and use an amount not in excess of 25 percent
    of the amount collected by the PCAs to pay for the cost of PCA
    services, and an amount not in excess of 25 percent collected for
    collection enforcement activities of the IRS. According to the IRS, the
    initiative to use PCAs will help reduce the significant and growing
    amount of tax liability deemed uncollectible because of IRS resource
    priorities, will help maintain confidence in the tax system, and will
    enable the IRS to focus its existing collection and enforcement
    resources on more difficult cases.
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        \27\ Public Law No. 108-357, 118 Stat. 1418 (2004).
    ---------------------------------------------------------------------------
        The provisions of the Fair Debt Collection Practices Act \28\ apply
    to PCAs. PCAs are prohibited from committing any act or omission that
    employees of the IRS are prohibited from committing in the performance
    of similar services. The IRS requires that PCAs adhere to all taxpayer
    protections. PCAs are also 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. The PCAs must also
    adhere to all security and privacy regulations for systems, data,
    personnel, physical security, and taxpayer rights protections. To
    ensure compliance with these requirements, the IRS is responsible for
    providing oversight of PCA actions.
    ---------------------------------------------------------------------------
        \28\ 15 U.S.C.  1601 note, 1692-1920 (2000).
    ---------------------------------------------------------------------------
        The IRS issued a detailed Request For Quotation \29\ (RFQ) for
    solicitation of debt collection services in support of the Private Debt
    Collection program on April 25, 2005. However, this RFQ was canceled
    after the United States Court of Federal Claims filed an order on July
    25, 2005, informing the IRS it intended to enjoin the solicitation. The
    order ruled that the IRS's restriction of the solicitation only to
    vendors with current Federal Government debt collection task orders was
    arbitrary and capricious. The IRS subsequently revised the RFQ and
    reissued it on October 14, 2005.
    ---------------------------------------------------------------------------
        \29\ An RFQ is issued by the IRS's Office of Procurement and
    describes the requirements that prospective contractors should provide
    in support of needed products or services. TIGTA reviewed the RFQ dated
    April 25, 2005. The Private Debt Collection Request for Quotation
    Outlines Adequate Procedures and Controls (Reference Number 2005-10-
    156, dated September 2005). TIGTA will soon report on its review of the
    revised RFQ dated October 14, 2005.
    ---------------------------------------------------------------------------
        TIGTA reviewed the revised RFQ and determined that it adequately
    addressed the deficiencies cited by the United States Court of Federal
    Claims. The IRS deleted the requirement that PCAs must have a current
    Federal Government debt collection task order to be eligible for the
    solicitation. TIGTA did not identify any other restrictions in the RFQ
    which would have unnecessarily limited the procurement process.
    Further, the revised RFQ was reviewed by the IRS's Office of
    Procurement Policy Quality Assurance Branch and General Legal Services
    as required by IRS procurement procedures.
        On March 9, 2006, the IRS announced that it awarded contracts to
    three firms to participate in the first phase of its private debt-
    collection initiative. The IRS has developed its own guidelines for the
    private firms, including background checks on all private-firm
    personnel associated with the projects as well as a mandatory, IRS-
    directed training program for company personnel. The IRS planned to
    begin delivering delinquent tax account cases to the selected PCAs by
    July 2006. However, on March 23, 2006, the IRS announced that it had
    issued stop-work orders to the three PCAs after two unsuccessful
    bidders filed bid protests with the Government Accountability Office
    (GAO).
        In the second phase of the private debt-collection initiative,
    scheduled for 2008, the IRS intends to contract with up to 10 firms.
    Over the course of 10 years, the IRS expects that the private firms
    will help it collect an additional $1.4 billion in outstanding taxes.
        While the use of private collection agencies could result in
    significant recoveries of unpaid taxes, the potential for abuse exists.
    Experience at the State level demonstrates that the use of PCAs should
    be closely monitored. In December 2005, the State of New Jersey
    Commission of Investigation reported that what began as an effort to
    privatize the collection of tax debt 12 years ago evolved into a
    corrupt association between high- and mid-level managers in the
    Divisions of Taxation and Revenue and the PCAs.\30\ The State of New
    Jersey may have been over-billed by more than $1 million for a 5-year
    period.
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        \30\ State of New Jersey Commission of Investigation, ``The Gifting
    of New Jersey Tax Officials'' (December 2005).
    ---------------------------------------------------------------------------
        The Commission reported that a lack of oversight and a lack of
    audits and quality controls directly contributed to the undetected
    over-billing. Additionally, the PCAs repeatedly ignored contract
    requirements and Taxation and Revenue officials failed to enforce them.
    While the Commission's report did not address this particular issue,
    TIGTA is also concerned about the quality of taxpayer service from PCAs
    during their attempts to collect outstanding taxes. Poor taxpayer
    service by PCAs could potentially have a negative impact on voluntary
    compliance.
        Since the IRS is just now embarking on this initiative, TIGTA has
    not yet seen indications of problems with the IRS's private debt-
    collection initiative similar to those in New Jersey. However, a recent
    news story reported that a former official of one of the IRS's three
    selected PCAs for the first phase of this initiative was indicted for
    bribery of public officials to win a contract to collect unpaid fines
    and fees. According to the story, the official pleaded guilty to one
    count of conspiracy to commit bribery and one count of bank fraud in
    2005, and was sentenced to 30 months in prison and a $1 million fine.
    This particular case and the State of New Jersey experience clearly
    illustrate the need for proper oversight of this important initiative.
    According to the IRS, it has established an oversight unit responsible
    for ensuring that PCAs adhere to established procedures and that a
    tremendous amount of rigorous oversight will be applied to the PCAs.
        Overseeing the IRS's private debt-collection initiative is a top
    priority for TIGTA. TIGTA has coordinated with the IRS during the
    initial phases of implementation of this initiative by addressing
    security concerns with the contracts and protection of taxpayer rights
    and privacy, and by developing integrity and fraud awareness training
    for the contract employees. TIGTA plans to provide a presentation to
    IRS trainers for PCAs about TIGTA's role in the private debt-collection
    initiative.
        TIGTA has also developed a three-phase audit strategy to monitor
    this initiative and provide independent oversight. In the first phase,
    TIGTA is reviewing the IRS's planning and initial implementation of the
    program. As mentioned previously, our limited scope reviews of the
    original and revised RFQs did not identify any material omissions that
    would adversely affect the IRS's ability to manage this initiative
    effectively. Additionally, TIGTA recently reported that overall, the
    IRS has taken positive steps to effectively plan and implement certain
    aspects of the Private Debt Collection program. For example, the IRS
    has developed a draft letter and a related publication with pertinent
    information to notify taxpayers when their accounts are transferred to
    PCAs.
        While the IRS has taken positive steps to implement the Private
    Debt Collection program, TIGTA noted that approximately 72 percent of
    the IRS's original inventory of cases available for placement in the
    program had balances due \31\ that were over 2 years old. The IRS is
    now considering a revision to its case selection criteria that will
    increase the balance-due age even further. IRS management indicated
    that there is a long-term strategy in place to include more current
    cases in the program. However, the new Filing and Payment Compliance
    project \32\ currently limits their ability to accomplish this
    strategy.
    ---------------------------------------------------------------------------
        \31\ A balance due represents an unpaid assessment for which a
    taxpayer owes the IRS.
        \32\ The Filing and Payment Compliance project was initiated to
    address the inventory of delinquent tax debt that is not actively being
    collected by the IRS due to limited resources.
    ---------------------------------------------------------------------------
        For the initial phase of the program, the IRS plans to place
    simpler cases with PCAs, such as those in which the taxpayer has filed
    all tax returns due. TIGTA determined, however, that contrary to IRS
    intentions, the case selection criteria the IRS had established would
    have allowed certain nonfiler cases to be assigned to the PCAs. The IRS
    subsequently agreed to review nonfiler conditions and determine whether
    the nonfiler cases should be excluded from inventory.
        In the second phase, TIGTA will review the initiative after full
    implementation, which may not occur until fiscal year 2007. In the
    third phase, TIGTA will review the effectiveness of the program. The
    goal of this audit strategy is to ensure that the IRS effectively
    exercises its new authority to use private debt collectors, while also
    ensuring that taxpayers' due process and privacy rights are protected.

                     OTHER MAJOR CHALLENGES FACING THE IRS

        Despite the overall progress in customer service and the broad
    relief provided to Hurricane victims, improvements need to be made in
    customer service and other areas in which the IRS faces significant
    challenges in accomplishing its mission. TIGTA has identified the
    following additional management and performance challenges that
    confront the IRS:
      --Modernization of the IRS;
      --Security of the IRS;
      --Complexity of the Tax Law;
      --Using Performance and Financial Information for Program and Budget
            Decisions;
      --Erroneous and Improper Payments;
      --Taxpayer Protection and Rights;
      --Managing Human Capital.
        Each of the above presents its own unique challenges, which I will
    address individually in the remaining portion of my testimony.
    Modernization of the IRS
        Modernizing the IRS's computer systems has been a challenge for
    many years and will likely remain a challenge for the foreseeable
    future. The latest effort to modernize the IRS's systems, the Business
    Systems Modernization (BSM) program, began in fiscal year 1999, and is
    a complex effort to modernize the IRS's technology and related business
    processes. According to the IRS, this effort involves integrating
    thousands of hardware and software components. Through February 2006,
    the IRS has received appropriations of approximately $2 billion to
    support the BSM program, and the President has requested an additional
    $167 million for fiscal year 2007.
        Succeeding in the modernization effort is critical--not only
    because of the amount of time and money at stake but also to improve
    the level of service provided to taxpayers. To accomplish the
    modernization effort, the IRS hired the Computer Sciences Corporation
    (CSC) as the PRIME \33\ to design, develop, and integrate the
    modernized computer systems. However, in January 2005, the IRS began
    taking over the role of systems integrator from the PRIME due to
    reductions in funding for the BSM program and concerns about the
    PRIME's performance.
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        \33\ The PRIME is an acronym for Prime Systems Integration Services
    Contractor.
    ---------------------------------------------------------------------------
        The BSM program has shown progress. The IRS and its contractors
    have been focusing on defining and delivering smaller, incremental
    releases of projects.\34\ For example, the IRS recently issued the
    fourth incremental release of the Modernized e-File project. The
    Modernized e-File project has provided the capability for corporations,
    exempt organizations, governmental entities, private foundations, and
    trusts to file 106 tax forms electronically. In January 2006, the IRS
    released the fourth incremental release of the Customer Account Data
    Engine (CADE) project which will eventually replace the IRS's existing
    Master File.\35\
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        \34\ A release is a specific edition of software.
        \35\ The Master File is the IRS database for storing taxpayer
    account information on individuals, businesses, employee retirement
    plans, and exempt organizations. The CADE will include applications for
    daily posting, settlement, maintenance, refund processing, and issue
    detection for taxpayer account and return data. In conjunction with
    other applications, the CADE will allow employees to post transactions
    and update taxpayer account and return data online from their desks.
    Updates will be immediately available to any IRS employee who accesses
    the data and will provide a complete, timely, and accurate account of
    the taxpayer's information. In contrast, the current Master File
    processing system can take up to 2 weeks to update taxpayer accounts,
    and IRS employees may need to access several computer systems to gather
    all relevant information related to a taxpayer's account.
    ---------------------------------------------------------------------------
        Although progress is being made, the modernization program is
    behind schedule, over budget, and is delivering less functionality than
    originally planned. TIGTA has identified four primary challenges that
    the IRS must overcome for modernization to be successful:
      --(1) The IRS must implement planned improvements in key management
            processes and commit necessary resources to succeed;
      --(2) The IRS must manage the increasing complexity and risks of the
            modernization program;
      --(3) The IRS must maintain continuity of strategic direction with
            experienced leadership; and
      --(4) The IRS must ensure contractors' performance and accountability
            are effectively managed.
        In response to modernization challenges and reduced funding, the
    IRS began making dramatic changes to significant areas within the BSM
    program over the last year. For example, the GAO recommended and the
    House and Senate Appropriations Committees directed the IRS to develop
    a new version of the Modernization Vision and Strategy. In addition,
    the IRS's prior modernization approach involved a huge development
    effort aimed at replacing all current systems. The IRS is now focusing
    on using current systems to accomplish modernization. I believe these
    extensive changes signal the beginning of a different design and
    structure for the entire modernization effort.
        As risks and issues are identified within the BSM program, frequent
    changes are often required. However, the IRS's recent and planned
    changes do not eliminate the four challenges we have identified. Due to
    the criticality of the BSM program, the IRS must confront identified
    challenges and proactively address them in order to come closer to
    realizing expectations in this new phase of the BSM program.
    Security of the IRS
        Millions of taxpayers entrust the IRS with sensitive financial and
    personal data, which are stored and processed by IRS computer systems.
    The risk of sensitive data being compromised has increased over the
    last few years because of the increased threat of identity theft.
    According to the Social Security Administration, identity theft is one
    of the fastest growing crimes in the United States. The Department of
    Commerce estimates that more than 50 million identities were
    compromised in 2005. The sensitivity of taxpayers' information stored
    by the IRS and the IRS's use of the Social Security Number as a
    taxpayer identifier on its computer systems add to the risks the IRS
    must address.
        As the Nation's primary revenue collector, the IRS may also be a
    prime target for attacks on its computer systems by anti-government
    protestors, international terrorists, and disgruntled employees. In
    addition to identity theft concerns, computer attacks can cause the
    loss of revenue and productivity by disrupting computer operations.
    Although many steps have been taken to limit risks, IRS systems and
    taxpayer information remain susceptible to threats that could impact
    the confidentiality, integrity, and availability of data and
    information systems.
        The IRS has focused on technical solutions to protect its computer
    systems and data, and has established reasonable technical controls to
    prevent intruders from entering the IRS network. However, managerial
    and operational controls have not been adequately emphasized, leading
    TIGTA to conclude that systems and data remain vulnerable. In the past,
    the IRS relied mainly upon the Chief Information Officer and Chief,
    Mission Assurance and Security Services, to provide security controls.
    The IRS has recently increased business unit involvement to ensure
    adequate security and has added security responsibilities to
    executives' position descriptions. These changes are critical but will
    take time to improve the security posture of the IRS.
        The IRS has improved its processes and devoted additional resources
    for certifying and accrediting its systems; however, only 35 percent of
    its systems had been certified and accredited as of September 2005.
    Annual testing had not been conducted on a majority of its systems. In
    addition, only 300 of its 2,737 employees with key security
    responsibilities had received any specialized training in the last
    fiscal year. We have attributed several security weaknesses in the past
    to the lack of training for these employees and expect these weaknesses
    will persist until specialized training is given more emphasis. In
    addition, contractors and States who use taxpayer information to
    administer their States' tax laws have not been given sufficient
    oversight.
        Hurricanes Katrina and Rita affected 25 IRS offices. By adequately
    planning and taking aggressive actions after the hurricanes hit, the
    IRS was able to locate its employees and restore its computer
    operations to continue tax administration activities in the Gulf Coast
    area. However, disaster recovery plans for the IRS's large computing
    centers and campuses require additional development, testing, or
    personnel training to ensure that the IRS can quickly recover in the
    event of a disaster.
        For the IRS to make the largest strides in improving computer
    security at a relatively low cost, managers and employees must be aware
    of the security risks inherent in their positions and consider security
    implications in their day-to-day activities. IRS business unit managers
    should be held accountable for the security of their systems and key
    security employees should be adequately trained to carry out their
    responsibilities. It is also vital that the IRS continues to refine its
    plans and capabilities to manage emergency situations in a manner that
    protects employees and allows restoration of business operations in a
    timely manner.
    Complexity of the Tax Law
        The scope and complexity of the United States tax code make it
    virtually certain that taxpayers will face procedural, technical, and
    bureaucratic obstacles before meeting their tax obligations. The IRS
    has consistently sought to ease the process for all taxpayers. But each
    tax season brings new challenges, and old problems sometimes resist
    solution.
        According to the November 2005 Report of the President's Advisory
    Panel on Tax Reform, last year Americans spent more than 3.5 billion
    hours doing their taxes, the equivalent of hiring almost 2 million new
    IRS employees--more than 20 times the IRS's current workforce. About
    $140 billion is spent annually on tax preparation and compliance--about
    $1,000 per family.
        The Joint Committee on Taxation conducted a study in 2001 that
    demonstrates the vastness of the tax code. The study found that, in
    2001, the tax code consisted of nearly 1.4 million words. There were
    693 sections of the code applicable to individuals, 1,501 sections
    applicable to businesses, and 445 sections applicable to tax exempt
    organizations, employee plans, and governments.\36\
    ---------------------------------------------------------------------------
        \36\ ``Study of the Overall State of the Federal Tax System and
    Recommendations for Simplification, Pursuant to Section 8022(3)(B) of
    the Internal Revenue Code of 1986'', Staff of the Joint Committee on
    Taxation, JCS-3-01 (Apr. 2001).
    ---------------------------------------------------------------------------
        The complexity of the code hampers the ability of the IRS to
    administer the Nation's tax system and confuses most taxpayers. The IRS
    has attempted to provide assistance to taxpayers with questions about
    the tax code through toll-free telephone lines, TACs, kiosks, and the
    IRS Internet site. TIGTA has performed numerous audits of the accuracy
    of IRS responses to taxpayer questions submitted via these methods and
    found that even some IRS employees cannot apply the tax code correctly.
        Tax law complexity contributes to the IRS's challenges in reaching
    accuracy goals to tax law questions, as well as to taxpayer frustration
    with attempting to decipher the tax code. For example, assistors are
    trained and expected to be knowledgeable in 318 tax law topics with 395
    subtopics. Additionally, they are expected to be able to respond to
    taxpayer issues for the current and prior tax years.
        In part because of the tax law complexity, taxpayers are continuing
    to receive inaccurate answers to their tax law questions. TIGTA's
    results for the 2006 Filing Season show that assistors provided
    accurate answers to 73 percent of the tax law questions asked at the
    TACs. Although this is an improvement from the accuracy rate of 66
    percent TIGTA reported for the 2005 Filing Season,\37\ taxpayers are
    still receiving incorrect answers to 27 percent of their questions
    asked at the TACs. Using its own methodology to calculate the accuracy
    rate, however, the IRS did meet its accuracy rate goal of 80 percent
    for the 2006 Filing Season.
    ---------------------------------------------------------------------------
        \37\ ``Customer Accuracy at Taxpayer Assistance Centers Showed
    Little Improvement During the 2005 Filing Season'' (Reference Number
    2005-40-146, date September 2005).
    ---------------------------------------------------------------------------
        As well as adding to the burden on the taxpayer and the IRS, tax
    law complexity also may inadvertently contribute to the tax gap.
    Complexity has given rise to the latest generation of abusive tax
    avoidance transactions, with taxpayers attempting to take advantage of
    the tax code's length and complexity by devising intricate schemes to
    illegally shelter income from taxation. The Son of Boss (Bond and
    Option Sales Strategies) is one such abusive tax shelter.\38\ Other
    than generating tax benefits, the IRS determined it lacked a business
    purpose.
    ---------------------------------------------------------------------------
        \38\ IRS Notice 99-59 issued in December 1999 described Boss
    transactions as certain losses involving partnerships and foreign
    corporations that would not be allowed for tax purposes.
    ---------------------------------------------------------------------------
        Overall, the IRS estimated the Son of Boss abusive tax shelter
    understated tax liabilities in excess of $6 billion. The IRS describes
    the Son of Boss abusive tax shelter as a highly sophisticated,
    technically complex, no-risk scheme designed to generate tax losses
    without corresponding economic risks, which was promoted by some
    prominent firms in the financial services industry to investors seeking
    to shelter large gains from the sale of a business or capital asset.
        The scheme used flow-through entities, such as partnerships, and
    various financial products \39\ to add steps and complexity to
    transactions that had little or no relationship to the investor's
    business or the asset sale creating the sheltered gain. Additionally,
    the losses generated from the transactions were often reported among
    other ``legitimate'' items in several parts of the income tax return.
    Some losses from the Son of Boss abusive tax shelter, for example, were
    reported as a reduction to gross sales, cost of goods sold, or capital
    gains.
    ---------------------------------------------------------------------------
        \39\ The IRS defines financial products as instruments used in the
    global marketplace and include, among others, stocks, bonds, foreign
    currencies, mortgages, commodities, and derivatives.
    ---------------------------------------------------------------------------
        Taken together, these characteristics, especially the use of flow-
    through entities, made it very difficult for the IRS to detect the Son
    of Boss abusive tax shelter through its traditional process of
    screening returns individually for questionable items.\40\
    Administering such a complex tax code makes the job of pursuing abusive
    tax avoidance schemes, such as the Son of Boss, challenging and costly
    to the IRS.
    ---------------------------------------------------------------------------
        \40\ ``The Settlement Initiative for Investors in a Variety of Bond
    and Option Sales Strategies Was Successful and Surfaced Possible Next
    Steps for Curtailing Abusive Tax Shelters'' (Reference Number 2006-30-
    065, dated March 2006).
    ---------------------------------------------------------------------------
        As part of its goal to improve service to taxpayers, the IRS
    includes simplifying the tax process as an objective in its Strategic
    Plan. Simplification could incorporate a range of actions from
    developing legislative recommendations to clarifying tax instructions
    or forms. Changing tax laws, however, can be a lengthy process since
    the IRS only administers the tax code that is passed by Congress. Thus,
    the IRS must work extensively with its stakeholders, as well as the
    Department of the Treasury, to identify and develop legislative
    recommendations that would reduce tax law complexity and taxpayer
    burden.
    Using Performance and Financial Information for Program and Budget
            Decisions
        The President's Management Agenda aims to place a greater focus on
    performance by formally integrating it with budget decisions. In
    addition, without accurate and timely financial information, it is not
    possible to accomplish the President's agenda to secure the best
    performance and highest measure of accountability for the American
    people. The IRS has made some progress. However, integrating
    performance and financial management remains a major challenge.
        The IRS has achieved mixed success in establishing long-term goals
    to integrate performance and financial management. During the fiscal
    year 2005 budget formulation process, the IRS took the important step
    of aligning performance and resources requested. The IRS also modified
    its budget and performance plans to include more customer-focused and
    ``end result'' measures. However, TIGTA believes that the IRS must
    continue to integrate performance into its decision-making and resource
    allocation processes to completely achieve an integrated performance
    budget.
        The IRS also continues to analyze the critical data needed to
    develop long-term enforcement outcome measures. For example, the IRS
    released the first results from its NRP, which provided fresh data on
    taxpayer voluntary compliance levels--the first in more than a decade.
    Such data are essential to establishing enforcement measures and
    effectively allocating resources to related activities. The IRS,
    however, needs to develop a more strategic approach to the entire tax
    administration system. Such an effort would better identify the
    characteristics of an effective and efficient tax administration
    system, would help pinpoint desired outcomes, and would create a road
    map for the next decade that would complement the IRS's strategic,
    budget, and annual performance plans.
        This past year TIGTA reported on two circumstances that highlight
    the need for more integration of performance and budget data. The
    Federal Workforce Flexibility Act of 2004 \41\ requires agencies to
    regularly assess their training efforts to determine whether their
    training is contributing to the successful completion of the agencies'
    missions. However, the IRS was not able to assess how effectively the
    approximately $100 million spent on training enhanced its ability to
    fulfill its mission.\42\ Additionally, the IRS could better manage its
    facilities and office space. TIGTA determined that the lack of
    appropriate performance data prevents the IRS from cataloging office
    space freed up by employees who regularly participate in the IRS's
    telecommuting program. This lack of performance data prevented the IRS
    from freeing up underutilized space with an estimated annual cost of
    $18 million.\43\
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        \41\ Public Law 108-411 [S. 129] (2004).
        \42\ ``The Internal Revenue Service Does Not Adequately Assess the
    Effectiveness of Its Training'' (Reference Number 2005-10-149, dated
    September 2005).
        \43\ ``The Internal Revenue Service Faces Significant Challenges to
    Reduce Underused Office Space Costing $84 Million Annually'' (Reference
    Number 2004-10-182, dated September 2004).
    ---------------------------------------------------------------------------
        The IRS has reported a yield of more than $4 in direct revenue from
    IRS enforcement efforts for every $1 invested in the IRS's total
    budget. However, we do not believe there is an adequate basis to use
    the total IRS budget to determine a return on investment for
    enforcement activities. Enforcement is only one component of the IRS
    that collects revenue. Enforcement revenue ($43.1 billion in fiscal
    year 2004) compared to the enforcement costs ($6.1 billion in fiscal
    year 2004) actually equates to an overall return on investment for
    enforcement activities of 7 to 1. The IRS also provided estimates that
    it would eventually achieve approximately $1.17 billion in additional
    revenues for its proposed fiscal year 2006 enforcement initiatives.
    This would equate to a 4.4 to 1 return on investment. However, our
    analysis indicates the revenue estimate may be too high. Furthermore,
    the IRS currently does not have a methodology to measure the revenue
    resulting from any initiatives that it implements.\44\
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        \44\ ``A Better Model is Needed to Project the Return on Additional
    Investments in Tax Enforcement'' (Reference Number 2005-10-159, dated
    September 2005).
    ---------------------------------------------------------------------------
        The IRS's financial statements and related activities also continue
    to be of concern to IRS stakeholders. The GAO audits the IRS's
    financial statements annually. The audit determines whether the IRS:
    (1) prepared reliable financial statements, (2) maintained effective
    internal controls, and (3) complied with selected provisions of
    significant laws and regulations, including compliance of its financial
    systems with the Federal Financial Management Improvement Act of
    1996.\45\
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        \45\ Public Law No. 104-208, 110 Stat. 3009.
    ---------------------------------------------------------------------------
        In audits of the IRS's financial statements, the GAO has concluded
    that the statements were fairly presented in all material respects.\46\
    The GAO, however, identified some continuing serious deficiencies in
    the IRS's financial systems, including control weaknesses and system
    deficiencies affecting financial reporting, unpaid tax assessments, tax
    revenue and refunds, and computer security. Also, the IRS again had to
    rely extensively on resource-intensive compensating processes to
    prepare its financial statements. Without a financial management system
    that can produce timely, accurate, and useful information needed for
    day-to-day decisions, the IRS's financial stewardship responsibilities
    continue to be one of the largest challenges facing IRS management.
    ---------------------------------------------------------------------------
        \46\ ``Financial Audit: IRS's fiscal years 2005 and 2004 Financial
    Statement'' (GAO-06-137, dated November 2005).
    ---------------------------------------------------------------------------
        During fiscal year 2004, the IRS collected over $2 trillion in
    Federal tax revenue, which constituted approximately 95 percent of all
    Federal revenue. However, as reported by the GAO for the last several
    years, the systems used to account for these revenues do not meet
    current Federal financial management guidelines. For example, the IRS's
    Federal tax revenue financial management systems lack adequate audit
    trails, cannot readily produce reliable information regarding unpaid
    assessments at interim periods, and cannot readily generate custodial
    financial information needed for year-end reporting.
        To address these weaknesses, the IRS is developing the Custodial
    Detail Database (the Database). The purpose of the Database is to
    provide sub-ledgers for the custodial financial activities of the IRS.
    The IRS also plans to use the Database to track unpaid assessments
    throughout the year and to help support the lengthy extraction,
    reconciliation, and summarization process needed to produce the IRS's
    annual financial custodial statements. TIGTA's preliminary assessment
    indicates that the IRS faces a number of significant challenges in
    meeting these objectives, especially the development of a system that
    would support the production of current and reliable information
    regarding tax receivables throughout the year.
        To provide useful information on tax receivables at interim
    periods, the Database will also need to address collectibility issues,
    and accurately account for and eliminate duplicate assessments.
    Furthermore, the IRS continues to be unable to determine the specific
    amount of revenue it actually collects for three of the Federal
    Government's four largest revenue sources, primarily because the
    accounting information needed to validate and record payments to the
    proper trust fund is provided on the tax return, which is received
    months after the payment is submitted. The IRS has to use statistical
    methods to estimate the amounts of these taxes.\47\
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        \47\ The three revenue sources cited are Social Security, hospital
    insurance, and individual income taxes. ``The Custodial Detail Database
    Should Help Improve Accountability; However, Significant Financial
    Management Issues Still Need to Be Addressed'' (Reference Number 2006-
    10-029, dated December 2005).
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    Preventing Erroneous and Improper Payments
        One of the goals of The President's Management Agenda is to reduce
    erroneous payments.\48\ Further, the Improper Payments Information Act
    of 2002 \49\ greatly expanded the administration's efforts to identify
    and reduce erroneous and improper payments in government programs and
    activities. While the administration has pushed to prevent erroneous
    and improper payments, stewardship over public funds remains a major
    challenge for IRS management.
    ---------------------------------------------------------------------------
        \48\ ``The President's Management Agenda'', announced in the summer
    of 2001, is the President's aggressive strategy for improving the
    management of the Federal Government. It focuses on five areas of
    management weakness across the Government where improvements should be
    made.
        \49\ Public Law No. 107-300, 116 Stat. 2350.
    ---------------------------------------------------------------------------
        Improper and erroneous payments include inadvertent errors,
    payments for unsupported or inadequately supported claims, payments for
    services not rendered, payments to ineligible beneficiaries, and
    payments resulting from outright fraud and abuse by program
    participants or Federal employees. For the IRS, improper and erroneous
    payments generally involve improperly paid refunds, tax return filing
    fraud, or overpayments to vendors or contractors.
        Some tax credits, such as the Earned Income Tax Credit (EITC),
    provide opportunities for taxpayer abuse. The EITC is a refundable
    credit available to taxpayers who do not exceed a certain amount of
    income per year. The EITC was intended to provide significant benefits
    to the working poor, but some taxpayers have abused the credit, which
    has resulted in a significant loss of revenue. The IRS has estimated
    that approximately 30 percent of all EITC claims should not have been
    paid, which was approximately $9 billion of the $31 billion in EITC
    claimed for Tax Year 1999.\50\ The IRS has been developing an EITC
    initiative to combat the problems of fraudulent EITC claims. The
    initiative is focused on three concepts: certification of qualifying
    child residency requirements, verification of filing status, and
    verification of reported income. In October 2005, the IRS reported that
    as a result of these efforts, it had identified and prevented the
    payment of over $275 million in erroneous EITC claims. TIGTA has
    conducted an ongoing assessment of this initiative as the three
    concepts have been tested.\51\
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        \50\ IRS report, ``Compliance Estimates for Earned Income Tax
    Credit on 1999 Returns'' (dated February 2002).
        \51\ Audit reports previously issued: ``The Earned Income Tax
    Credit Income Verification Test Was Properly Conducted'' (Reference
    Number 2005-40-093, dated May 2005); ``The Earned Income Credit
    Recertification Program Continues to Experience Problems'' (Reference
    Number 2005-40-039, dated March 2005); ``Initial Results of the Fiscal
    Year 2004 Earned Income Tax Credit Concept Tests Provide Insight on
    Ways Taxpayer Burden Can Be Reduced in Future Tests'' (Reference Number
    2005-40-006, dated October 2004); and ``Management Controls Over the
    Proof of Concept Test of Earned Income Tax Credit Certification Need to
    Be Improved'' (Reference Number: 2004-40-032, dated December 2003).
    ---------------------------------------------------------------------------
        The Criminal Investigation function of the IRS is responsible for
    detecting and combating tax refund fraud, through its Questionable
    Refund Program (QRP). TIGTA has repeatedly reported over the last 6
    years that additional controls and procedures were necessary to not
    only identify additional instances of potential fraud, but also to
    properly and timely release refunds that are later determined not to be
    fraudulent. This latter issue recently has been the subject of much
    debate, coming on the heels of the National Taxpayer Advocate's 2005
    Annual Report to the Congress in which the Taxpayer Advocate criticized
    the IRS for unnecessarily stopping refunds owed to legitimate
    taxpayers.
        TIGTA previously reported in March 2003 that there were unnecessary
    delays issuing legitimate, non-fraudulent refunds.\52\ That same audit,
    however, identified expired statutory periods for making civil
    assessments of tax, thereby preventing recovery of erroneously refunded
    monies through an examination of income or expense items on the tax
    returns.
    ---------------------------------------------------------------------------
        \52\ ``Improvements Are Needed in the Monitoring of Criminal
    Investigation Controls Placed on Taxpayers' Accounts When Refund Fraud
    Is Suspected'' (Reference Number 2003-10-094, dated March 2003).
    ---------------------------------------------------------------------------
        TIGTA is extremely concerned about this issue, believing that a
    necessary balance must be struck between protecting the revenue by not
    allowing refund fraud to go unchecked, and ensuring that legitimate
    taxpayers receive their refunds timely or, if challenged by the IRS,
    are afforded due process and notification. TIGTA is continuing its
    review of the IRS QRP and will report on its audit work later in the
    year.\53\
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        \53\ Audit reports previously issued: ``The Internal Revenue
    Service Can Improve the Effectiveness of Questionable Refund Detection
    Team Activities'' (Reference Number 2000-40-018, dated December 1999);
    ``Revised Questionable Refund Program Procedures Were Not Consistently
    Implemented'' (Reference Number 2001-40-025, dated January 2001);
    ``Improvements Are Needed in the Monitoring of Criminal Investigation
    Controls Placed on Taxpayers' Accounts When Refund Fraud Is Suspected''
    (Reference Number 2003-10-094, dated March 2003); and ``The Internal
    Revenue Service Needs to Do More to Stop the Millions of Dollars in
    Fraudulent Refunds Paid to Prisoners'' (Reference Number 2005-10-164,
    dated September 2005).
    ---------------------------------------------------------------------------
        Additionally, at the request of the House Committee on Ways and
    Means, TIGTA initiated an audit of the Electronic Fraud Detection
    System (EFDS). EFDS was designed to identify potentially fraudulent tax
    returns. We plan to report our results later in the year.
        In addition to erroneous payments of credits, contract expenditures
    represent a significant outlay of IRS funds and are also susceptible to
    mistakes or abuse. As of October 2005, the IRS was responsible for
    administering 553 contracts with a total systems life value of $28.2
    billion. TIGTA continues to perform audits of select contracts to
    ensure payments on selected vouchers are appropriate and in accordance
    with contract terms and conditions. TIGTA also provided the IRS with a
    summary report highlighting several system deficiencies identified by
    the Defense Contract Audit Agency (DCAA) in the past 5 years for a
    major IRS contractor. These deficiencies could lead to overstated and
    unsupported labor and other costs. Although the contractor is making
    progress in addressing previously reported system inadequacies, TIGTA
    believes significant risk still remains for the IRS on this contract.
    Taxpayer Protection and Rights
        Congress realized the importance of protecting taxpayers and
    taxpayer rights when it passed the RRA 98. This legislation required
    the IRS to devote significant attention and resources to protecting
    taxpayer rights. The RRA 98 and other legislation require TIGTA to
    review IRS compliance with taxpayer rights provisions. Our most recent
    audit results on some of these taxpayer rights provisions are:
      --Notice of Levy.--TIGTA reports have recognized that the IRS has
            implemented tighter controls over the issuance of systemically
            generated levies, and TIGTA testing of these controls indicated
            that they continue to function effectively. In addition,
            revenue officers who manually issued levies properly notified
            taxpayers of their appeal rights.\54\
    ---------------------------------------------------------------------------
        \54\ ``Taxpayer Rights Are Being Protected When Levies Are Issued''
    (Reference Number 2004-30-072, dated June 2005).
    ---------------------------------------------------------------------------
      --Restrictions on the Use of Enforcement Statistics to Evaluate
            Employees.--The IRS is complying with the law. A sample review
            of employee performance and related supervisory documentation
            revealed no instances of tax enforcement results, production
            quotas, or goals being used to evaluate employee
            performance.\55\
    ---------------------------------------------------------------------------
        \55\ ``Fiscal year 2005 Statutory Audit of Compliance With Legal
    Guidelines Restricting the Use of Records of Tax Enforcement Results''
    (Reference Number 2005-40-157, dated September 2005).
    ---------------------------------------------------------------------------
      --Notice of Lien.--The IRS did not completely comply with the law.
            For example, the IRS did not always timely mail lien notices.
            In other cases, the IRS could not provide proof of mailing. In
            addition, the IRS did not always follow its guidelines for
            notifying taxpayer representatives and resending notices when
            they are returned as undeliverable.\56\
    ---------------------------------------------------------------------------
        \56\ ``Fiscal Year 2004 Statutory Review of Compliance With Lien
    Due Process Procedures'' (Reference Number 2005-30-095, dated June
    2005).
    ---------------------------------------------------------------------------
      --Seizures.--The IRS did not comply with all legal and internal
            guidelines when conducting seizures. TIGTA's review did not
            identify any instances in which taxpayers were adversely
            affected, but not following legal and internal guidelines could
            result in abuses of taxpayer rights.\57\
    ---------------------------------------------------------------------------
        \57\ ``Fiscal Year 2005 Review of Compliance With Legal Guidelines
    When Conducting Seizures of Taxpayers' Property'' (Reference Number
    2005-30-091, dated June 2005).
    ---------------------------------------------------------------------------
      --Illegal Tax Protestor Designations.--The IRS is prohibited by law
            from designating taxpayers as ``illegal tax protestors'' but
            may refer to taxpayers as ``nonfilers.'' TIGTA has reviewed the
            Master File \58\ for illegal tax protestor designations. We
            found that the IRS has not reintroduced such designations on
            the Master File and formally coded illegal tax protestor
            accounts have not been assigned similar Master File
            designations. In addition, the IRS does not have any current
            publications with illegal tax protestor references and has
            initiated actions to remove references from various forms of
            the Internal Revenue Manual. However, a few illegal tax
            protestor references still exist in isolated case files.\59\
    ---------------------------------------------------------------------------
        \58\ The IRS database that stores various types of taxpayer account
    information. This database includes individual, business, and employee
    plans and exempt organizations data.
        \59\ ``Fiscal year 2005 Statutory Audit of Compliance With Legal
    Guidelines Prohibiting the Use of Illegal Tax Protester and Similar
    Designations'' (Reference Number 2005-40-104, dated July 2005).
    ---------------------------------------------------------------------------
      --Denials of Requests for Information.--The IRS improperly withheld
            information from requesters in 7.1 percent of the Freedom of
            Information Act and Privacy Act of 1974 requests, and 3.1
            percent of the 26 U.S.C.  6103 requests reviewed.\60\
    ---------------------------------------------------------------------------
        \60\ ``Some Improvements Have Been Made to Better Comply With the
    Freedom of Information Act Requirements'' (Reference Number 2005-10-
    089, dated May 2005).
    ---------------------------------------------------------------------------
      --Collection Due Process.--A significant portion of the Appeals
            Collection Due Process and Equivalent Hearings closed case
            files requested could not be located or did not contain
            sufficient documentation. As a result, TIGTA could not
            determine if the IRS complied with legal guidelines and
            required procedures to protect taxpayer rights. Moreover, some
            Appeals determination letters did not contain clear and
            detailed explanations of the basis for the hearing officers'
            decisions and did not adequately communicate the results of the
            hearings to taxpayers. Some determination letters did not
            address the specific issues raised or tax periods discussed by
            the taxpayers in their hearing requests.\61\
    ---------------------------------------------------------------------------
        \61\ ``The Office of Appeals Should Strengthen and Reinforce
    Procedures for Collection Due Process Cases'' (Reference Number 2005-
    10-138, dated September 2005).
    ---------------------------------------------------------------------------
        Neither TIGTA nor the IRS could evaluate the IRS's compliance with
    three RRA 98 provisions since IRS information systems do not track
    specific cases. These three provisions relate to: restrictions on
    directly contacting taxpayers instead of authorized representatives,
    taxpayer complaints, and separated or divorced joint filer requests.
    Human Capital
        Like much of the Federal Government, managing the extensive human
    capital resources at the IRS remains a serious concern. Workforce
    issues, ranging from recruiting to training and retaining employees,
    have challenged Federal agencies for years. The GAO, the OMB, and the
    Office of Personnel Management have all made the strategic management
    of human capital a top priority. Specifically for the IRS, recent
    reorganization and modernization efforts, such as the focus on e-
    filing, have made many jobs dealing with processing paper tax returns
    redundant.
        The IRS also faces personnel shortages in certain functions. The
    Wage and Investment Division is experiencing critical staffing
    shortages in its TAC program. The IRS's decision to focus more
    resources on compliance activities has limited available resources and
    the IRS's Field Assistance Office does not have the resources to offer
    unlimited services. Additionally, the uncertainty around the TAC
    closures created critical vacancies as TAC employees left for other
    jobs in the IRS. As of December 1, 2005, the Field Assistance Office
    Headquarters had identified 47 TACs with critical staffing shortages.
    Five vacancies are in TACs located in areas impacted by Hurricanes
    Katrina and Rita--three in Louisiana and two in Texas. These shortages
    come at a time when taxpayer visits in these areas may increase and the
    Field Assistance Office is adding services to help reduce the burden on
    taxpayers affected by the hurricanes. As noted earlier, the IRS has
    reported fewer taxpayers are seeking assistance at the TACs.\62\
    ---------------------------------------------------------------------------
        \62\ ``The Field Assistance Office Has Taken Appropriate Actions to
    Plan for the 2006 Filing Season, but Challenges Remain for the Taxpayer
    Assistance Center Program'' (Reference Number 2005-40-037, dated March
    31, 2006).
    ---------------------------------------------------------------------------
        The Large and Mid-Size Business Division reported in its fiscal
    year 2006 strategic assessment that it will continue to lose
    substantial experience in the revenue agent position through attrition.
    Similarly, in the Small Business/Self-Employed Division, the human
    capital crisis continues to intensify as employees in key occupations
    increasingly become eligible for retirement, are lost through
    attrition, or migrate to other areas. Stagnant funding allocations have
    impacted the IRS's ability to attract new hires and retain existing
    employees. Thus, potential losses in critical occupational groups,
    coupled with concerns regarding grade and competency gaps, further
    emphasize the need to strategically manage human capital. The IRS must
    devote significant attention to managing human capital to overcome the
    10 challenges discussed in this testimony.

                                  CONCLUSIONS

        While the 2006 Filing Season appears to have been successful based
    on TIGTA's preliminary results, I am concerned about some of the
    challenges the IRS faces. In particular, it appears that changes in the
    Free File Agreement as well as the elimination of the TeleFile Program
    may have contributed to a significant slowing of the growth in
    electronic filing this year. This slowed growth comes at a time when
    the IRS is still far from reaching Congress's goal of 80 percent
    electronic filing by 2007. This slower growth will defer the efficiency
    gains for the IRS that result from electronic filing.
        Also, without reliable estimates of the tax gap, IRS's compliance
    and customer service efforts may not be as effective as necessary to
    improve the voluntary compliance rate and reduce the tax gap.
    Additionally, reductions in customer services, such as TAC closures,
    the elimination of the TeleFile Program, and a reduction in toll-free
    telephone hours of operation, to gain resource efficiencies must be
    carefully considered before any further decisions are made. TIGTA
    continues to be concerned that the IRS does not ensure that it has
    adequate and reliable data prior to making decisions that impact
    customer service operations. Before proceeding with these efforts, the
    IRS needs to better understand the impact of such changes on taxpayers
    as well as taxpayers' abilities to obtain these services through
    alternative means.
        I hope my discussion of the 2006 Filing Season and some of the
    significant challenges facing the IRS will assist you with your
    consideration of the IRS's fiscal year 2007 appropriations. Mr.
    Chairman and members of the subcommittee, thank you for allowing me to
    share my views. I would be pleased to answer any questions you may
    have.

        Senator Bond. Thank you very much, Mr. George, and we trust
    you will continue to monitor the Katrina emergency filing to
    make sure that people who deserve refunds are getting them and
    only those who deserve them. I think this is a concern that all
    of us share.

    STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE,
                TAXPAYER ADVOCATE SERVICE
        Senator Bond. Now we turn to Ms. Nina Olson, the National
    Taxpayer Advocate. Ms. Olson, welcome.
        Ms. Olson. Thank you, Mr. Chairman, Senator Murray, and
    Senator Durbin.
        The overriding objective of the IRS should be to maximize
    voluntary compliance with the tax laws. The IRS recently
    estimated that the voluntary compliance rate was 83.7 percent
    in 2001, and it has established a goal of raising the voluntary
    compliance rate to 85 percent by 2009. That is an appropriate
    goal. Compared with 10 years ago, there is little doubt that
    the IRS has become a more responsive and effective
    organization.
        On the customer service side, the IRS Restructuring and
    Reform Act of 1998 and the IRS response has brought about
    fairly dramatic improvements. On the enforcement side, the IRS
    has been stepping up its enforcement of the tax laws over the
    past 5 years, particularly with regard to corporate tax
    shelters and high income individuals, but we can't just rest on
    our recent improvements and say that we are doing good enough.
    The IRS's central responsibility is to ensure that taxpayers
    comply with the tax laws. In fulfilling that responsibility, I
    believe job No. 1 is to provide high-quality outreach,
    education, and taxpayer assistance to enable taxpayers to meet
    their tax obligations voluntarily.
        In most cases, that will be sufficient, but where taxpayers
    are unwilling to comply with the laws, job No. 2 for the IRS
    must be to detect noncompliance where it exists and address it
    through appropriate enforcement action for the IRS getting the
    biggest bang for the buck places a premium on superior research
    and strategic planning. Direct revenue gains resulting from an
    IRS action are easy to measure, but it is the combination of
    direct and indirect revenue gains resulting from IRS actions
    that determine how much progress we are making in reducing the
    tax gap. Not all service and enforcement actions generate the
    same return on investment.
        Will the IRS ultimately bring in more revenue if it spends
    its next dollar on services or enforcement and more
    specifically on which services and on which enforcement
    activities? The truth is we don't know, and we, therefore, have
    limited information on which to base strategic decisions.
    Research is not cheap, but the IRS needs to devote more
    resources to understanding the causes of noncompliance and the
    relative returns of alternative compliance strategies in order
    to do its job more efficiently.
        On the service side, the recently released report on phase
    one of the Taxpayer Assistance Blueprint, or the TAB, is the
    first step toward establishing a long-term strategy for
    delivering needed taxpayer services within existing resource
    limitations. In the next phase of the TAB, we must focus on a
    number of areas that could have significant impact on
    congressional or IRS decisions about service delivery to
    taxpayers. In phase two, we must develop a baseline of
    services. We cannot assume that the current level of services
    reflects taxpayer preferences. The status quo is not
    necessarily what taxpayers want. It is merely what the IRS is
    currently willing or able to deliver.
        We must identify what we are doing now, what we still don't
    know about taxpayer needs, and what services we need to provide
    to meet those needs. We also must identify the best method to
    deliver those needed services, and we must keep in mind that
    there are taxpayers who cannot or will not use self-service
    options.
        To identify which services it should provide, the IRS must
    measure the impact of taxpayer service on compliance. The TAB
    notes that it is difficult to measure this impact. I believe
    the IRS does have the capability to develop useful estimates,
    and in my written testimony, I suggest a general framework for
    conducting this research. For example, we could identify a
    group of taxpayers who receive a particular service and an
    otherwise comparable group who do not receive that service. We
    could then measure the subsequent compliance of both groups by
    applying the three measures the IRS now uses to estimate the
    tax gap: payment compliance, filing compliance, and reporting
    compliance.
        The IRS can also do a better job of estimating the full
    costs of its programs, including what I call the downstream
    consequences of its actions. For example, what are the
    downstream consequences of a lien or a levy, including the
    resources that TAS, the Taxpayer Advocate Service, Appeals
    Council and the courts may ultimately devote to resolving a
    taxpayer challenge? Failure to incorporate these downstream
    costs can provide an extremely inaccurate portrait of a
    program's return on investment. Downstream consequences
    analysis not only tells us the true cost of IRS actions, but it
    also gives us clues as to how to improve our processes from an
    IRS and a taxpayer perspective.

                               PREPARED STATEMENT

        In conclusion, I believe that the IRS has taken major
    strides forward, but it can still do more to deliver its core
    mission more efficiently and effectively. To increase voluntary
    compliance, the IRS should incorporate an ongoing taxpayer-
    centric assessment of taxpayer service needs into its strategic
    plans. It should conduct research into the causes of
    noncompliance and apply the resulting knowledge to service and
    enforcement strategies, including those pertaining to the cash
    economy; and, finally, it must have sufficient resources to
    move forward with its technological improvements on both a
    short-term and a long-term basis.
        Thank you.
        [The statement follows:]

                      Prepared Statement of Nina E. Olson

        Mr. Chairman, Ranking Member Murray, and distinguished members of
    the subcommittee, thank you for inviting me to testify today regarding
    the proposed budget of the Internal Revenue Service for fiscal year
    2007.\1\
    ---------------------------------------------------------------------------
        \1\ The views expressed herein are solely those of the National
    Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
    Secretary of the Treasury and reports to the Commissioner of Internal
    Revenue. The statute establishing the position directs the National
    Taxpayer Advocate to present an independent taxpayer perspective that
    does not necessarily reflect the position of the IRS, the Treasury
    Department, or the Office of Management and Budget. Accordingly,
    Congressional testimony requested from the National Taxpayer Advocate
    is not submitted to the IRS, the Treasury Department, or the Office of
    Management and Budget for prior approval. However, we have provided
    courtesy copies of this statement to both the IRS and the Treasury
    Department in advance of this hearing.
    ---------------------------------------------------------------------------
        The overriding objective of the Internal Revenue Service should be
    to maximize voluntary compliance with the tax laws. In general, the IRS
    seeks to achieve compliance through two main types of activity. First,
    it seeks to enable taxpayers to comply with their tax obligations
    voluntarily. In most cases, outreach, education, and taxpayer
    assistance are sufficient to produce complete or substantial
    compliance. Second, it targets its enforcement resources at taxpayers
    who are unwilling to comply with the tax laws.
        While a variety of measures can be applied to measure the IRS's
    performance, one of the best measures is the percentage of taxes that
    taxpayers pay voluntarily. The IRS's most recent estimate of the gross
    tax gap (i.e., the amount of tax unpaid before accounting for late
    payments and collection activity) was $345 billion in tax year 2001,
    which implies a compliance rate of 83.7 percent.\2\ The IRS recently
    established a long-term performance goal of increasing the compliance
    rate to 85 percent by 2009.\3\ In my view, this is a laudable goal.
    ---------------------------------------------------------------------------
        \2\ See IRS News Release IR-2006-28, ``IRS Updates Tax Gap
    Estimates'' (Feb. 14, 2006).
        \3\ Office of Management and Budget, Proposed Budget of the United
    States Government for Fiscal Year 2007, at 232.
    ---------------------------------------------------------------------------
        What steps is the IRS currently taking to maximize voluntary
    compliance? What additional steps should it take? Can the IRS do more
    to reduce the tax gap without intruding unduly on fundamental taxpayer
    rights? These are the key questions I would ask in determining whether
    the IRS is making optimal use of its resources.
        In many respects, the IRS is doing a better job of performing its
    core mission than it did in years past. By the IRS's current objective
    measures, it is providing customer service at a much higher level than
    it did a decade ago. On the enforcement side, it is performing more
    audits and aggressively pursuing corporate tax shelters and
    noncompliance by high-income individuals. However, the IRS's existing
    measures do not adequately capture costs associated with the
    ``downstream consequences'' of its programs and planning.\4\
    ---------------------------------------------------------------------------
        \4\ By ``downstream consequences,'' I mean the cost of additional
    work that IRS or taxpayers must perform to correct problems or mistakes
    that result from an IRS action or failure to take an action. For
    example, inadequate taxpayer service may lead to inadvertent taxpayer
    noncompliance, limitations of IRS computer systems may lead to IRS
    rework and direct harm to taxpayers, and inadequate communication with
    taxpayers during the audit process may result in rework via audit
    reconsideration or work performed in Appeals or the Taxpayer Advocate
    Service.
    ---------------------------------------------------------------------------
        To improve, the IRS must conduct an analysis of downstream
    consequences, including their impact on taxpayer service, and
    incorporate the results of that analysis into its strategic plans.
    Without adequate analysis of the downstream consequences of its
    options, the IRS cannot make informed strategic decisions about how to
    allocate resources between taxpayer service and enforcement activities
    and cannot tell its appropriators that it is using its limited
    resources wisely. Moreover, problems with IRS technology create
    additional downstream consequences. The IRS must be funded sufficiently
    to correct problems now with its existing technology--while it
    simultaneously strives to modernize its computer systems.
        In the balance of my testimony, I will identify key issues I
    believe the IRS should address to get the biggest compliance bang for
    its buck.

     THE IRS COULD DO A BETTER JOB OF ALLOCATING ITS RESOURCES PROPERLY IN
                      ORDER TO INCREASE OVERALL COMPLIANCE

        Over the last 3 years, in hearings before the Senate Finance,
    Budget, and Homeland Security and Governmental Affairs committees, I
    have testified about ways to close the tax gap, both by reducing
    opportunities for noncompliance and by enhancing traditional
    enforcement actions.\5\ In the National Taxpayer Advocate's 2005 Annual
    Report to Congress, I discussed in detail what the IRS can do
    administratively and what Congress can do legislatively to address the
    ``cash economy,'' which is the largest component of the tax gap.\6\
    ---------------------------------------------------------------------------
        \5\ See Written Statement of Nina E. Olson, National Taxpayer
    Advocate, Before United States Senate Committee on the Budget on The
    Causes of and Solutions to the Federal Tax Gap (Feb. 15, 2006); Written
    Statement of Nina E. Olson, National Taxpayer Advocate, Before the
    United States Senate Committee on Homeland Security and Governmental
    Affairs Subcommittee on Federal Financial Management, Government
    Information, and International Security (Oct. 26, 2005); Statement of
    Nina E. Olson, National Taxpayer Advocate, Before the United States
    Senate Committee on Finance on the Tax Gap (April 14, 2005); Testimony
    of Nina E. Olson, National Taxpayer Advocate, Before the Senate
    Committee on Finance on The Tax Gap and Tax Shelters (July 21, 2004).
        \6\ National Taxpayer Advocate 2005 Annual Report to Congress 55-
    75, 381-396. See also National Taxpayer Advocate 2004 Annual Report to
    Congress 478-489; National Taxpayer Advocate 2003 Annual Report to
    Congress 20-25, 256-269.
    ---------------------------------------------------------------------------
        The question remains, however, whether the IRS is focusing its
    resources in the right direction to close the tax gap. The answer to
    that question depends, in part, on how we measure success. Is the IRS's
    goal merely to increase enforcement revenues? Or is the goal to
    increase compliance? Or is it to increase voluntary compliance?
        As I noted above, approximately 83.7 percent of the tax dollars
    known to be due and owing are voluntarily paid to the IRS. That figure
    is an IRS success, in and of itself. Now, what more can we do to
    achieve compliance with respect to the remaining 16.3 percent of the
    tax dollars for which taxpayers need some ``nudging'' to pay up? What
    types of ``nudging'' should the IRS apply? What resources does the IRS
    need to help these taxpayers comply or, in some instances, make them
    comply? The answers to these questions should inform the IRS's resource
    allocation decisions.
        The IRS is properly focused on increasing its traditional
    enforcement resources, since some taxpayers won't comply unless they
    are ``helped'' in that way. The IRS also needs an enforcement presence
    so that taxpayers are a bit nervous about fudging--or worse--on their
    taxes. Yet, although we may want slightly ``nervous'' taxpayers, we
    don't want them intimidated. That is, when taxpayers have a problem or
    a question, we want taxpayers to call the IRS so they will not make
    mistakes and join the ranks of noncompliant taxpayers. Every time a
    taxpayer calls the IRS or visits a taxpayer assistance center (TAC),
    the resulting interaction gives the IRS an opportunity to help that
    taxpayer comply with the tax laws. Why would we try to minimize these
    opportunities and not make positive use of them when they occur?
        In my view, then, the real challenge facing the IRS is determining
    how to allocate its resources to increase overall compliance, including
    voluntary compliance, and determining what actions it must take--
    whether service or enforcement--to increase the number of taxpayers who
    voluntarily comply. In order to answer these questions, we must start
    with an understanding of taxpayer service needs--not what the IRS is
    willing or able to provide taxpayers, but what the taxpayer needs to
    have provided or available. The IRS mantra should be ``know your
    taxpayer.''
    the irs should understand more about the impact of taxpayer service on

        COMPLIANCE AND THE WAYS IN WHICH TAXPAYERS NEED SERVICES TO BE
                                   DELIVERED

        It is true that the IRS has improved its delivery of many aspects
    of taxpayer service over the last decade. However, we cannot just rest
    on this improvement and say that we are doing ``good enough.'' The
    IRS's central responsibility is to ensure that taxpayers comply with
    the tax laws. In fulfilling that responsibility, the IRS must provide
    taxpayers with the service, assistance, and education they need to
    comply. What we must consider now is just what level of service,
    assistance, and education is necessary for compliance.
        I define taxpayer service very broadly--it includes notice clarity,
    tax law assistance, account resolution, free tax preparation, free e-
    filing, short response time, clear forms, and excellent education
    initiatives. This broad definition of taxpayer service makes clear its
    impact on compliance. Where noncompliance is attributable to complexity
    or confusion, for example, better forms, notices, and education
    initiatives can reduce the need for enforcement action.
        Acknowledging the impact taxpayer service has on compliance,
    Congress directed the IRS, its Oversight Board, and the National
    Taxpayer Advocate to develop a 5-year plan for taxpayer service that
    includes long-term goals that are strategic and quantitative and that
    balance enforcement and service.\7\ I have previously voiced my
    concerns about the IRS's need to study the trends in taxpayer service
    in order to understand the impact of taxpayer service on compliance and
    how taxpayers need services to be delivered.\8\
    ---------------------------------------------------------------------------
        \7\ S. Rep. No. 109-109, at 133-134 (2005).
        \8\ Statement of Nina E. Olson, National Taxpayer Advocate, Before
    the United States House Appropriations Subcommittee on Transportation,
    Treasury, and Housing and Urban Development, the Judiciary, District of
    Columbia, and Related Agencies (March 29, 2006); National Taxpayer
    Advocate 2005 Annual Report to Congress 2-24; Statement of Nina E.
    Olson, National Taxpayer Advocate, Before the United States Senate
    Appropriations Subcommittee on Transportation, Treasury, the Judiciary,
    Housing and Urban Development, and Related Agencies (Apr. 7, 2005).
    ---------------------------------------------------------------------------
        The IRS is facing a challenge. It has a responsibility to serve all
    taxpayers with limited resources. Thus, it must decide by taxpayer
    segment how to deliver needed services in the most effective and
    efficient manner possible, and in a way that does not negatively impact
    taxpayers' ability to comply with the tax laws. Toward this end, the
    IRS must gather data and develop criteria to make those decisions. The
    recently released report on Phase I of the Taxpayer Assistance
    Blueprint (TAB) is the first step toward developing a comprehensive 5-
    year plan for taxpayer service that will establish a long-term strategy
    for delivering needed taxpayer services within existing resource
    limitations.
        In Phase I, we gathered both primary and secondary data about
    taxpayer needs and preferences. We also collected some information
    about our current level of services offered to taxpayers. From this and
    other information, we developed five hypotheses or ``themes'' that we
    think will improve service to taxpayers. However, Phase I is only the
    beginning. Phase II of the TAB will be even more critical because the
    goal of Phase II should be to test those hypotheses. To determine
    whether any of the hypotheses is correct, we must collect more primary
    source data about taxpayer service needs. We must then identify the
    gaps between taxpayer service needs and our present service offerings
    by analyzing how well our current level and type of service is actually
    serving different taxpayer segments. We will then see whether our
    hypotheses would improve service to different taxpayer segments.
        I applaud the dedicated work of the IRS team that has labored over
    this strategic plan and gathered important information over the last 5
    months. While we embark on the next phase of the TAB, we must focus on
    a number of areas that could have significant impact on Congressional
    or IRS decisions about service delivery to taxpayers.
        We must develop a baseline of services.--This baseline should
    consist of specific numbers addressing how well the IRS is currently
    meeting customer service preferences and needs by service, taxpayer
    segment, and delivery method. Although the TAB Phase I report states
    that the current baseline of taxpayer services is one item on which the
    strategic improvement themes of the report are predicated, I do not
    believe this statement is completely accurate. Throughout the TAB Phase
    I report, we examine the current usage and volume of current IRS
    services. However, these current usage statistics do not serve as a
    proxy for taxpayer preference. We cannot assume that the current level
    of service reflects taxpayer preferences. The status quo is not
    necessarily what taxpayers want--it is merely what the IRS has been
    willing (or able) to deliver. Instead, during Phase II, we must conduct
    research to develop this baseline of services. Only after this research
    is completed will we be able to measure how effective we are in
    improving our ability to meet taxpayer needs.
        We must identify what we don't know.--Before we can move forward
    with our research in Phase II, we need to understand what we still need
    to know and what questions we need to ask in order to find the right
    answers. It is important that the TAB not rely on pre-conceived
    decisions, but instead identify what we are doing now, what we still do
    not know about taxpayer needs, and what we need to do to address those
    needs or educate taxpayers and move them to other channels.
        We must identify the best channels through which to deliver
    services to taxpayers.--While electronic and self-assistance channels
    may be growing in popularity, mere use or access to these services does
    not necessarily mean that taxpayers are able to frame questions,
    conduct complex searches, and process or use the information correctly.
    Additionally, we must always remain cognizant that there is a segment
    of the population that cannot and will not avail itself of self-service
    options. However, by providing more self-service opportunities for
    taxpayers, the IRS should be able to reserve its in-person (face-to-
    face or telephone) interaction for those issues and taxpayers that need
    such engagement.
        Thus, as part of the TAB, the IRS must commit to conduct--or at
    least to attempt to conduct--the additional research necessary to
    enable it to establish a broad baseline identifying how well taxpayer
    needs and preferences are currently being met for each of the major
    types of services by customer segment and channel--and to quantify the
    impacts associated with not meeting those needs (i.e., the downstream
    costs and taxpayer-compliance impact). Moreover, we need to understand
    why certain taxpayer segments have difficulties with our various types
    of services and why they are reluctant to use lower cost channels (if
    indeed they are). Only then can we develop effective ``migration''
    strategies to encourage and educate taxpayers about appropriate lower
    cost channels--ones that will not ultimately increase noncompliance and
    lead to greater downstream costs.
        For example, it is true that computer ownership and Internet access
    have increased over the last decade.\9\ But those numbers do not
    necessarily mean that the computer owner is computer literate and can
    conduct site searches for complex tax information, much less understand
    how to apply that information once he finds it. In fact, in the
    financial services sector, banks have reversed the trend of closing
    branches in the hope of moving taxpayers to Internet banking.\10\
    Instead, they are developing migration strategies for customers to
    complete certain types of transactions on-line or by phone, and are
    retaining their in-person services for more complicated transactions or
    for those customers who really cannot navigate the phones or Internet.
    Banks are certainly not turning those customers away, and now recognize
    that those customer segments are a relatively untapped market in need
    of services. There are lessons here for the IRS.
    ---------------------------------------------------------------------------
        \9\ Internal Revenue Service, Wage and Investment Office of
    Research, ``Taxpayer of the Future'' (June 2003), 11.
        \10\ Bruce C. Smith, ``In Age of Online Banking, Lenders Branch
    Out'', Indianapolis Star (Oct. 2, 2005), available at http://
    www.indystar.com/apps/pbcs.dll/article?AID=/20051002/BUSINESS/
    510020335.
    ---------------------------------------------------------------------------
     the irs should work with ``partners'' but not rely on them excessively
        The IRS is increasingly relying on partners to deliver core IRS
    services. Clearly, partners are very important to effective tax
    administration, and I applaud the efforts of dedicated professionals
    and volunteers in assisting taxpayers. However, this reliance raises
    several concerns. First, when the IRS relies on partners to deliver a
    message, we need to study what happens to the message in the course of
    delivery. Does the message change over distance and time? Is it less
    accurate? The worst result is a broad dispersion, through partners, of
    an incorrect or distorted message. Second, we need to measure the
    downstream consequences of this trend. What are the true costs of
    effective oversight over these partners? Who conducts such oversight
    and bears the cost? If taxpayers bear the cost, will they continue to
    comply if the cost is too great or the quality too poor? Will the IRS
    actually realize any savings or will it incur more expense through
    additional enforcement activity that could be avoided if the IRS itself
    delivered the assistance?
        On the other hand, if we begin to rely more heavily on our partners
    for the delivery of services, we must also ensure that we are providing
    our partners with adequate support and assistance. Without a sufficient
    support system in place, we cannot expect our partners to act as a
    delivery channel for services we are unable or unwilling to provide.
        Finally, we don't know what the impact on compliance or what the
    downstream cost will be if most of the IRS's direct contact with
    taxpayers is in the form of enforcement actions and most taxpayer
    assistance and service is delivered by third parties. As the IRS
    becomes more remote, except with respect to enforcement actions, will
    noncompliance increase because taxpayers feel less connection with
    their government? \11\
    ---------------------------------------------------------------------------
        \11\ See Leslie Book, ``The Poor and Tax Compliance: Once Size Does
    Not Fit All'', 51 Kan L. Rev. 1145, 1151, 1175-1176 (2003). Professor
    Book discusses various studies that note that enforcement may be more
    effective in addressing intentional noncompliance where the taxpayer
    segment is disaffected from government and society at large. On the
    other hand, ``taxpayers who felt a shared identity with authorities
    seem to be more concerned with the overall justice of the tax system
    and the fairness of their treatment, regardless of individual
    outcome.'' Id. at 1151 n. 21.
    ---------------------------------------------------------------------------
    THE IRS SHOULD NOT IMPOSE UNREASONABLE BURDENS ON VOLUNTEER INCOME TAX
                           ASSISTANCE (VITA) PROGRAMS

        As the IRS struggles with the challenge of serving all taxpayers
    with limited resources, we have already begun to reduce free tax
    preparation assistance previously provided to taxpayers. Over the past
    3 years, the IRS has reduced the number of tax returns prepared in
    Taxpayer Assistance Centers (TACs) from 665,868 tax returns in fiscal
    year 2003 to a proposed 305,000 tax returns in fiscal year 2006.\12\
    Instead, the IRS has increased its reliance on the Volunteer Income Tax
    Assistance (VITA) Program to fill the gap and provide free tax
    preparation assistance to taxpayers.\13\ As IRS service has decreased,
    the VITA Program continues to expand. However, this expansion may have
    come too fast.
    ---------------------------------------------------------------------------
        \12\ Wage and Investment, ``Business Performance Review, Wage and
    Investment Operating Division, Fiscal Year 2006''; Wage and Investment,
    ``Business Performance Review, Wage and Investment Operating Division,
    Fiscal Year 2005''; Wage and Investment, ``Business Performance Review,
    Wage and Investment Operating Division, Fiscal Year 2004''; Wage and
    Investment, ``Business Performance Review, Wage and Investment
    Operating Division, Fiscal Year 2003''.
        \13\ The VITA Program was designed to provide free tax preparation
    to individuals who are unable to afford professional assistance.
    Stakeholder Partnerships, Education and Communication, ``VITA
    Celebrates Its Thirtieth Year of Service''. VITA is a diverse program
    comprising several segments, including community-based VITA, academic
    VITA, military VITA, Tax Counseling for the Elderly (TCE), and co-
    located VITA, each serving a different taxpayer population.
    ---------------------------------------------------------------------------
        The VITA Program provides a vital service to an underserved segment
    of taxpayers, but there are limits to what volunteers and volunteer-
    staffed organizations can do. Although there are a number of successful
    volunteer organizations around the world, hallmarks of these success
    stories are that they are year-round organizations supported by a
    large, paid infrastructure dedicated to the support of the volunteers.
    The VITA Program primarily operates for 4 months during the tax season
    and receives limited resources and support from the IRS. This makes it
    hard to ensure quality and consistency in the returns prepared at VITA
    sites.
        While the service VITA provides is critical, the IRS cannot rely
    entirely on these volunteers to provide a service the IRS has deemed
    too costly or time consuming to provide itself. Instead of
    concentrating on expanding the VITA Program, the IRS should concentrate
    on developing a fundamental support structure for the program,
    including site management, training, and quality review.\14\ Once the
    IRS has developed a strong infrastructure for the VITA Program and has
    established consistent quality in the returns prepared by volunteers,
    then the IRS can work to expand the program. However, the IRS must
    remain cognizant that VITA, or any volunteer program, cannot and should
    not be expected to serve as a substitute for IRS-provided service.
    ---------------------------------------------------------------------------
        \14\ The IRS has taken a step in the right direction with the
    development of the Link & Learn training site which allows volunteers
    to receive training and become certified online. According to IRS data,
    the new training program has proven successful and the number of
    certifications issued for 2006 was 11,885, compared with 10,402
    certifications issued as of the same time last year.
    ---------------------------------------------------------------------------
    THE IRS SHOULD MAKE IT POSSIBLE FOR TAXPAYERS TO PREPARE AND FILE THEIR
                TAX RETURNS ELECTRONICALLY WITHOUT PAYING A FEE

        Electronic filing of tax returns brings benefits to both taxpayers
    and the IRS.\15\ From a taxpayer perspective, e-filing eliminates the
    risk of IRS transcription errors, pre-screens returns to ensure that
    certain common errors are fixed before the return is accepted, and
    speeds the delivery of refunds. From an IRS perspective, e-filing
    eliminates the need for data transcribers to input return data manually
    (which could allow the IRS to shift resources to other high priority
    areas), allows the IRS to easily capture return data electronically,
    and enables the IRS to process and review returns more quickly.\16\
    ---------------------------------------------------------------------------
        \15\ See S. Rep. No. 105-174, at 39-40 (1998).
        \16\ The IRS Restructuring and Reform Act of 1998 directed the IRS
    to set a goal of having 80 percent of all returns filed electronically
    by 2007. See Internal Revenue Service Restructuring and Reform Act,
    Pub. L. No. 105-206,  2001(a)(2), 112 Stat. 685 (1998). The 80 percent
    e-filing goal is probably not achievable by 2007. However, we believe
    Congress should reiterate its commitment to seeing the IRS increase the
    e-filing rate as quickly as possible.
    ---------------------------------------------------------------------------
        In my view, the IRS should place a basic, fill-in template on its
    website and allow any taxpayer who wants to self-prepare his or her
    return to do so and file it directly with the IRS for free.\17\
    ---------------------------------------------------------------------------
        \17\ See National Taxpayer Advocate 2004 Annual Report to Congress
    471-477 (Key Legislative Recommendation: Free Electronic Filing for All
    Taxpayers).
    ---------------------------------------------------------------------------
        Some representatives of the software industry have taken the
    position that such a template would place the IRS in the position of
    improperly competing with private industry or, worse, create a conflict
    of interest between the IRS's role of tax preparer and tax auditor.
        This is nonsense. Since the inception of the tax system, there have
    always been two categories of taxpayers--those who are comfortable
    enough with the rules to self-prepare their returns and those who turn
    to paid professionals for assistance. In the paper-filing world, the
    IRS has always made its forms and instructions universally available
    without charge to all taxpayers, and those taxpayers who require help
    have always been free to seek the assistance of paid preparers.
        Imagine that, shortly after the income tax was enacted, a large
    group of bricks-and-mortar tax preparers had launched a lobbying
    campaign to try to persuade Congress to prohibit the IRS from making
    forms and instructions available to the public on the ground that the
    availability of these materials improperly placed the government in the
    position of competing with private industry. Or on the ground that it
    created a conflict between the government's role as preparer and
    auditor. Congress almost certainly would have rejected such arguments
    as ludicrous. Yet those are exactly the same conceptual arguments being
    raised today by those who contend that the government's provision of a
    basic web-based, fill-in form to all taxpayers would undercut the
    private sector.
        The answer to these arguments in today's electronic environment
    should be the same answer that Congress would have provided 80 years
    ago in a paper environment. For those taxpayers who are comfortable
    preparing their returns without assistance, the government will provide
    the means to do so without charge. For those taxpayers who do not find
    a basic template sufficient and would prefer to avail themselves of the
    additional benefits of a sophisticated software program, they are free
    to purchase one.
        A brief personal anecdote. Although I prepared tax returns
    professionally for 27 years before I became the National Taxpayer
    Advocate and don't need assistance from others to prepare my return, my
    government salary places me above the income cap to qualify to use Free
    File products. To prepare my return electronically last month, I
    therefore spent $19.99 to purchase tax preparation software. When I
    completed preparing my return, the software program informed me that,
    to file electronically, I would have to pay a fee of $14.95. If I
    wanted this fee deducted from my refund rather than charged to a credit
    card, an even higher fee would apply. Although I deeply believe that e-
    filing is best for both taxpayers and the IRS for a host of reasons, I
    resented the notion that I would have to pay separate fees to prepare
    my return and to file it, so I printed out my return and mailed it in.
        I am hardly alone. IRS data shows that about 40 million returns are
    prepared using software yet are mailed in rather than submitted
    electronically.\18\ This is a shame, because the practice delays the
    length of time for processing refunds, it requires the IRS to devote
    additional resources to entering the data manually when it receives the
    return, and it creates a risk of transcription error.
    ---------------------------------------------------------------------------
        \18\ IRS Tax Year 2004 Taxpayer Usage Study (Aug. 26, 2005).
    ---------------------------------------------------------------------------
        There is no reason why taxpayers should be required to pay
    transaction fees in order to file their returns electronically. A free
    template and direct filing portal would go a long way toward addressing
    this problem and would result in a greater number of taxpayers filing
    their returns electronically. Both taxpayers and the government would
    stand to benefit.\19\
    ---------------------------------------------------------------------------
        \19\ In addition to benefiting taxpayers and the IRS, I believe
    this proposal would be good for the software industry. Under the
    existing Free File arrangement, the industry is making its Federal tax
    products available for free to tens of millions of taxpayers. By
    itself, that is hardly a recipe for business success. If industry is
    able to make a profit under this arrangement, it is only because it is
    aggressively marketing ancillary products to taxpayers and making money
    on the sale of those ancillary products. The provision of a basic
    preparation and filing option would enable taxpayers who don't want to
    pay a fee and know how to prepare their tax returns to do so, but all
    taxpayers who want the benefits of a question-and-answer format and
    checks to ensure they do not overlook any tax benefits to which they
    are entitled would have to pay to purchase the tax product. Moreover,
    the IRS would be unlikely to develop a template itself. The IRS almost
    certainly would contract with the private sector to develop it. In that
    respect, the IRS would be utilizing the innovation of the private
    sector--not competing with it.
    ---------------------------------------------------------------------------
       THE IRS CAN AND SHOULD DO A BETTER JOB OF MEASURING THE IMPACT OF
                         TAXPAYER SERVICE ON COMPLIANCE

        The Taxpayer Assistance Blueprint notes that it is difficult to
    measure the impact of taxpayer service on compliance. Of the private
    sector and government entities that the TAB team surveyed, all had
    concluded that customer service at least indirectly impacts their
    organizations, but only one had attempted to empirically measure that
    impact.
        Although little has been done in this area, I believe the IRS does
    have the capability to develop useful estimates, and am suggesting a
    general framework for conducting this research. Measuring the
    compliance impact of customer service would entail identifying a group
    of taxpayers who received a particular service (the ``treatment
    group'') and an otherwise comparable group that did not receive that
    service (the control group). Compliance of both groups could then be
    measured on returns filed subsequent to the receipt of service by the
    treatment group. The three measures used to estimate the tax gap could
    be applied: payment compliance, filing compliance, and reporting
    compliance.
        We can determine the payment compliance of survey respondents by
    simply observing whether the full tax liability was paid at the time of
    filing. We can estimate their filing compliance by determining whether
    non-filers appeared to have a filing requirement. To determine
    reporting compliance, by far the biggest component of the tax gap, we
    could use IRS developed algorithms for estimating reporting compliance.
    These algorithms have been updated based on results from the recently
    completed National Research Program (NRP) and should provide good
    preliminary estimates. The estimates could subsequently be validated
    during the next NRP by comparing actual reporting compliance against
    predicted reporting compliance based on the IRS algorithms.

                          MEASURING THE DIRECT EFFECT

        If we accept the above proposed framework as a valid means of
    estimating compliance, surveys could then be designed and administered
    to identify groups of taxpayers who did or did not receive certain
    services, such as telephone or Internet assistance with tax law
    questions, Internet or TAC assistance obtaining forms, etc. Subsequent
    compliance of those who receive the service could then be compared to
    compliance for a comparable group who do not. Taxpayer satisfaction
    with services received might also be an interesting variable to
    examine.

                           MEASURING INDIRECT EFFECTS

        It is possible that taxpayer compliance behavior may be influenced
    by knowledge and attitudes about IRS customer service offerings, even
    if the affected taxpayers have not used those services. The same basic
    proposed framework could be used to measure these indirect effects. We
    would have to determine a set of relevant attributes to identify
    taxpayer groups indirectly affected by IRS customer service offerings.
    It seems to me that such attributes would probably include use,
    awareness, access and general satisfaction level:
      --Use.--To be indirectly affected, a taxpayer could not have used the
            service in question (at least during the year being studied).
      --Awareness.--A taxpayer would have to be aware of the existence of a
            service to be influenced by it.
      --Access.--It seems likely that taxpayers who could access the
            service if they chose to are more likely to be influenced
            (e.g., those living close to a TAC).
      --Satisfaction Level.--It seems likely that taxpayers having a
            generally favorable level of satisfaction with our services are
            more likely to be positively influenced (and vice versa).
        Surveys could be administered to determine whether compliance was
    impacted based on the values for the above attributes (or others
    suspected of indirectly affecting compliance).

                               RETURN PREPARATION

        The IRS has data that enable us to estimate compliance for the
    entire population of returns by type of preparation: IRS prepared,
    VITA/TCE, commercial, taxpayer prepared. I think it would be
    interesting to compare estimated reporting compliance for IRS prepared
    returns against comparable returns (i.e., low income, especially EITC)
    prepared by the other methods. We might find that IRS-prepared returns
    are substantially more compliant--especially when EITC is claimed. If
    so, this would provide strong support for continuing and perhaps
    expanding return preparation in the TACs.

     THE IRS SHOULD INCLUDE THE COST OF THE DOWNSTREAM CONSEQUENCES OF ITS
             ACTIONS IN ITS RETURN ON INVESTMENT (ROI) CALCULATIONS

        The IRS needs to conduct more thorough and accurate analyses when
    measuring return on investment (ROI) in order to allocate future
    dollars appropriately. For example, although in the short run it may
    cost more to process and review an Offer in Compromise and it may
    appear that the government is writing off revenue, the taxpayer in the
    long run may pay more tax dollars into the system as a result of his
    promise to be fully compliant for the 5 succeeding years.\20\ Five
    years is a long enough period to enable the taxpayer to ``learn'' a new
    norm of behavior, namely, compliance. And when you compare the 16 cents
    on the dollar that IRS receives from offers \21\ to the virtually no
    cents it collects after year 3 of the 10-year collection period,\22\
    the Offer in Compromise suddenly looks like a very efficient and
    productive program.
    ---------------------------------------------------------------------------
        \20\ If a taxpayer fails to comply with all his tax obligations
    over the 5-year period following IRS acceptance of an offer, the IRS
    may rescind the offer and reinstate the tax debt. See IRS Form 656,
    Offer in Compromise.
        \21\ IRS Small Business/Self Employed Division, Offer In Compromise
    Program, ``Executive Summary Report'' (Jan. 2006).
        \22\ IRS Automated Collection System Operating Model Team,
    ``Collectibility Curve'' (August 5, 2002).
    ---------------------------------------------------------------------------
        When computing ROI, the IRS should include the costs of the
    downstream consequences of its enforcement actions. Downstream
    consequences analysis tells us not only true ROI (i.e., the true cost
    to the IRS) but also gives us clues as to how to improve our processes
    from an IRS and a taxpayer perspective. That is, downstream
    consequences analysis is a form of taxpayer service.
        The Criminal Investigation Division's Questionable Refund Program
    (QRP) is a recent example of the failure to capture an accurate return
    on investment. The QRP serves an important tax administration purpose
    by helping the IRS detect and prevent the payment of fraudulent refund
    claims.\23\ Criminal Investigation (CI) dedicates approximately 600
    Full Time Equivalents (FTEs) to this program. As we described in the
    National Taxpayer Advocate's 2005 Annual Report to Congress, the QRP
    was freezing hundreds of thousands of refunds each year without
    notifying the affected taxpayers. This failure to notify taxpayers that
    their refunds were being held generated more taxpayer calls to the IRS
    toll-free lines and to the Taxpayer Advocate Service (TAS) than CI
    could respond to in a timely fashion.
    ---------------------------------------------------------------------------
        \23\ For a detailed discussion of the Questionable Refund Program,
    see National Taxpayer Advocate 2005 Annual Report to Congress 25-54.
    ---------------------------------------------------------------------------
        In fiscal year 2005, the Taxpayer Advocate Service (TAS) received
    over 28,000 QRP cases. In TAS's office in the Atlanta campus,
    approximately 65 percent of case inventory per case advocate involves
    QRP. Moreover, during fiscal year 2005, the IRS Examination function
    reviewed 25,621 QRP cases, and some of those cases went on to the IRS
    Appeals function. This level of activity protected approximately $2.2
    billion in fiscal year 2004, of which $1.8 billion was attributable to
    just two returns that should have been discovered anyway, particularly
    since the Joint Committee on Taxation must review any refund over $2
    million. So, the maximum direct revenue protection generated by all
    that IRS activity was $400 million. In addition, my office found in a
    study of the 28,000 QRP cases that came to TAS that fully 80 percent of
    taxpayers whose refunds were frozen as potentially fraudulent
    ultimately were found to be entitled to a full or partial refund. Had
    the IRS actually tracked the downstream consequences of the QRP and
    included these costs in the program's ROI, the IRS probably would have
    figured out a way to protect the same level of revenue with fewer FTE
    or developed a better method of identifying cases with the same CI FTE
    that did not generate the need for phone, exam, Appeals, and TAS FTE--
    not to mention interest the IRS is having to pay to tens of thousands
    of taxpayers whose refunds were frozen unnecessarily.
        The QRP is a prime example of an IRS program that grew up over time
    without the benefits of true strategic planning or proper oversight.
    Despite the volume of taxpayer calls coming in on our toll-free lines
    about these refunds, the Fraud Detection Centers have limited capacity
    to make or receive phone calls. Thus, their processes are designed to
    avoid any direct or interactive contact with taxpayers or others. As
    TIGTA noted in several reports,\24\ the QRP has inadequate management
    oversight processes, including inadequate reports of inventory levels
    and case status. Further, the little taxpayer correspondence generated
    by QRP was uninformative and intimidating. Today, the IRS is scrambling
    to meet the terms of its agreement with my office as to how it will
    correct these program deficiencies. Each day we face challenges,
    primarily arising from system limitations in reprogramming.\25\
    ---------------------------------------------------------------------------
        \24\ Treasury Inspector General for Tax Administration, ``The
    Internal Revenue Service Needs to Do More to Stop the Millions of
    Dollars in Fraudulent Refunds Paid to Prisoners'' (Ref. No. 2005-10-
    164) (September 2005); Treasury Inspector General for Tax
    Administration, ``Improvements Are Needed in the Monitoring of Criminal
    Investigation Controls Placed on Taxpayers' Accounts When Refund Fraud
    Is Suspected'' (Ref. No. 2003-10-094) (March 31, 2003); Treasury
    Inspector General for Tax Administration, ``Revised Questionable Refund
    Program Procedures Were Not Consistently Implemented'' (Ref. No. 2001-
    40-025) (Jan. 2, 2001); Treasury Inspector General for Tax
    Administration, ``The Internal Revenue Service Can Improve the
    Effectiveness of Questionable Refund Detection Team Activities'' (Ref.
    No. 2000-40-018) (Dec. 22, 1999).
        \25\ The National Taxpayer Advocate believes that the QRP will only
    function properly, productively, within the norms of taxpayer rights,
    and without creating excessive downstream consequences if it is moved
    out of the sole jurisdiction of CI and into a collaborative arrangement
    between CI and either the Wage & Investment or Small Business/Self-
    Employed Operating Division. This approach reflects the current model
    for the Frivolous Filer program.
    ---------------------------------------------------------------------------
      IRS STRATEGIC PLANNING AND RESOURCE ALLOCATION DECISIONS SHOULD BE
                       BASED ON MORE AND BETTER RESEARCH

        The need for better research underlies all of these challenges. The
    IRS must conduct research, organized by taxpayer segment, to better
    understand taxpayer behavior and taxpayer response to IRS's various
    service and enforcement ``touches.'' The absence of research about
    taxpayer needs often leads the IRS to place its immediate resource
    needs over taxpayers' immediate and long-term needs.\26\ This approach
    may cause more taxpayers to become noncompliant, thereby requiring more
    expensive enforcement actions. Concern over the lack of research and
    taxpayer-centric strategic planning led Congress to enact Section 205
    of the fiscal year 2006 Appropriations Act funding the IRS and to
    direct the IRS to develop a 5-year strategic plan for taxpayer
    service.\27\
    ---------------------------------------------------------------------------
        \26\ The declining number of Taxpayer Assistance Center (TAC)
    visits is an example of IRS placing its resource needs over taxpayer
    needs. For fiscal year 2006, IRS established a goal of preparing 20
    percent fewer tax returns in TACs than in fiscal year 2005. Not
    surprisingly, TAC visits for year-to-date fiscal year 2006 have
    declined 14 percent compared with this time last year. Even though the
    decline in TAC usage appears to result from IRS-imposed limitations on
    service, the IRS is nonetheless citing this decline as a justification
    for making further reductions in service at the TACs. Wage &
    Investment, ``2006 Filing Season Data: Cumulative Statistics Report''
    (Feb. 25, 2006).
        \27\ Public Law No. 109-115,  205, 119 Stat. 2396 (2005).
    Specifically, the statute provides:
        ``None of the funds appropriated or otherwise made available in
    this or any other Act or source to the Internal Revenue Service may be
    used to reduce taxpayer services as proposed in fiscal year 2006 until
    the Treasury Inspector General for Tax Administration completes a study
    detailing the impact of such proposed reductions on taxpayer compliance
    and taxpayer services, and the Internal Revenue Service's plans for
    providing adequate alternative services, and submits such study and
    plans to the Committees on Appropriations of the House of
    Representatives and the Senate for approval: . . . Provided further,
    That the Internal Revenue Service shall consult with stakeholder
    organizations, including but not limited to, the National Taxpayer
    Advocate, the Internal Revenue Service Oversight Board, the Treasury
    Inspector General for Tax Administration, and Internal Revenue Service
    employees with respect to any proposed or planned efforts by the
    Internal Revenue Service to terminate or reduce significantly any
    taxpayer service activity.''
        The accompanying Joint Explanatory Statement of the Committee of
    Conference stated: ``The conferees direct the IRS, the IRS Oversight
    Board and the National Taxpayer Advocate to develop a 5-year plan for
    taxpayer service activities . . . The plan should include long-term
    goals that are strategic and quantitative and that balance enforcement
    and service.'' H. Rep. No. 109-307, 209 (2005).
    ---------------------------------------------------------------------------
        I have written at length elsewhere on the need to understand the
    causes of noncompliance so that the IRS doesn't adopt a one-size-fits-
    all enforcement approach.\28\ Each year, academics and other scholars
    propose many ideas that a 21st century tax administrator should be
    examining and testing. In fact, the IRS has such a vehicle for
    partnering with academics in the Intergovernmental Personnel Act (IPA)
    program. Unfortunately, this program is underutilized. The IRS must
    conduct and underwrite such applied research, just as other world-class
    tax administration systems do.
    ---------------------------------------------------------------------------
        \28\ See National Taxpayer Advocate 2004 Annual Report to Congress
    211 (Most Serious Problem: IRS Examination Strategy) and 226 (Most
    Serious Problem: IRS Collection Strategy); National Taxpayer Advocate
    2005 Annual Report to Congress 55 (Most Serious Problem: The Cash
    Economy); Written Statement of Nina E. Olson, National Taxpayer
    Advocate, Before the Subcommittee on Federal Financial Management,
    Government Information, and International Security, Committee on
    Homeland Security and Governmental Affairs, United States Senate, on
    ``The Tax Gap'' (Oct. 26, 2005); Written Statement of Nina E. Olson,
    National Taxpayer Advocate, Before the Committee on the Budget, United
    States Senate, on ``The Causes of and Solutions to the Federal Tax
    Gap'' (Feb. 15, 2006).
    ---------------------------------------------------------------------------
        Because taxpayer service and enforcement are the drivers of overall
    compliance, we need to measure taxpayer service needs concurrently with
    our efforts to measure the tax gap. Thus, the National Research Program
    should update its analysis of taxpayer service needs at the same time
    it is measuring taxpayer noncompliance for the particular taxpayer
    population it is studying. The IRS can make informed resource
    allocation decisions only if it is armed with both types of
    information.

    THE IRS SHOULD ADDRESS THE IMPACT OF IRS BUSINESS SYSTEMS MODERNIZATION
        LIMITATIONS ON BOTH TAXPAYER SERVICE AND ENFORCEMENT INITIATIVES

        When I was in private practice as an attorney representing clients
    before the IRS, I did not have a full appreciation of how significant a
    role Business Systems Modernization (BSM) plays in both creating and
    solving problems for taxpayers and the IRS. As the National Taxpayer
    Advocate, I know that on a regular basis my office identifies systemic
    problems for which the complete solution requires some sort of BSM fix.
        When Commissioner Everson began his tenure, he ordered three
    separate reviews--two external, one internal--of the state of IRS BSM
    projects. Based on these reviews, the Commissioner quickly--and, I
    believe, correctly--concluded that the IRS was spreading its internal
    BSM resources too thin. Project managers and experts charged with
    overseeing our key initiatives--such as the Integrated Financial System
    (IFS) and the Customer Account Data Engine (CADE)--were also managing
    scores of smaller projects, all more or less important but all
    detracting from our central progress on IFS and CADE.
        For the past 2 years, the IRS has focused on its primary projects
    and strictly controlled the number of other BSM projects. This approach
    makes sense because it is critical to both effective service and
    enforcement that the IRS move forward with its primary initiatives. On
    the other hand, many projects cannot be deferred too much longer
    without significantly impacting taxpayer rights, accuracy of taxpayer
    data, and effective examination and collection initiatives. Indeed,
    improvements to TAS's own Systemic Advocacy Management System, our
    database for receiving, tracking, and managing taxpayer and IRS
    employee submissions of systemic problems in tax administration, were
    requested in November 2004. Although worked on intermittently, these
    changes are not yet completed or delivered. Until recently, this
    project was ranked number 33 on a list of 33 projects in terms of
    priority.
        I will provide one illustration of the impact of the IRS's outdated
    computer systems. In the National Taxpayer Advocate's 2004 Annual
    Report to Congress, I reported that the IRS is miscalculating
    collection statute expiration dates on certain taxpayer accounts. The
    collection statute expiration date (CSED) represents the date beyond
    which the taxpayer is no longer obligated on a tax debt and the IRS
    must cease its collection efforts.\29\ Miscalculations of CSEDs can
    negatively affect a taxpayer when the CSED on a particular tax
    erroneously appears on the IRS computer systems as being within the
    statute of limitations period, resulting in continued IRS collection
    activity, when in fact the statutory period for collections has
    expired. An incorrectly calculated CSED can also negatively impact the
    IRS when the CSED is miscalculated to reflect that the statute of
    limitations period has expired when in fact the debt is still
    collectible.\30\ This problem continues today and harms tens of
    thousands of unsuspecting taxpayers. Where the IRS or the taxpayer
    identifies a case of unlawful collection, the taxpayer experiences
    delays in receiving a return of the unlawfully levied proceeds. In some
    instances, the IRS takes the position that the taxpayer will never
    receive the unlawfully levied funds because the refund is barred by the
    applicable statutory period of limitations.
    ---------------------------------------------------------------------------
        \29\ IRC  6502(a)(1).
        \30\ National Taxpayer Advocate 2004 Annual Report to Congress 180-
    192.
    ---------------------------------------------------------------------------
        In response to TAS's concerns, the IRS and TAS established a joint
    team that identified impacted taxpayers, developed additional guidance
    and training alerts, and submitted requests for systems improvements to
    eliminate the problem of incorrectly calculated CSEDs. Given the
    current demand on IRS programming personnel, the final system
    modifications are not now scheduled to occur until some time in 2007.
        Internal Revenue Code Section 7433 permits a taxpayer to file a
    civil action for damages against the United States in Federal district
    court where an IRS officer or employee disregards any provision of the
    Code or its regulations with respect to collection of tax. In general,
    damages under this provision are limited to $1 million where the breach
    is attributable to reckless or intentional disregard and $100,000 where
    it is attributable to negligence. Thus, the IRS's knowing failure to
    correct the CSED problem in a timely fashion exposes the government to
    potentially large damages.

      THE IRS'S FILING AND PAYMENT COMPLIANCE (F&PC) INITIATIVE SHOULD BE
                                MADE A PRIORITY

        Filing and Payment Compliance (F&PC) is one of the IRS's most
    important business modernization initiatives.\31\ The F&PC initiative
    was designed to offer the IRS a modernized collection system with a
    focus on applying the right collection ``touch'' to suit the
    characteristics of the case. Instead of the automatic three-stage IRS
    collection process that does not differentiate among the causes of non-
    compliance,\32\ the implementation of F&PC was going to establish four
    treatment streams for collection cases:
    ---------------------------------------------------------------------------
        \31\ Testimony of Internal Revenue Service Commissioner Mark W.
    Everson, Before the Senate Committee on Appropriations Subcommittee on
    Transportation, Treasury, the Judiciary, Housing and Urban Development
    and Related Agencies (April 7, 2005).
        \32\ In the 2004 Annual Report to Congress, we set forth a critique
    of the IRS's traditional approach to collection and identified the
    elements of a modern collection strategy, including the ability to
    identify the appropriate collection touch for the particular cause of
    noncompliance. National Taxpayer Advocate 2004 Annual Report to
    Congress 226.
    ---------------------------------------------------------------------------
      --Self-Assist/Self-Correct.--Using enhanced systems, the IRS would
            allow for electronic payment, Internet-based payment, and
            payment via telephone application. Thus, taxpayers would have
            more payment options to resolve delinquency issues.
      --Assisted Correction.--Using commercially available decision
            analytic software, the IRS would select the appropriate
            treatment for taxpayers depending on factors such as payment
            history and other actions taken by the taxpayer. Modernized
            systems would provide up-to-date taxpayer information so that
            decisions would be made on the most recent data.
      --Private Collection Agencies.--The IRS proposed using private
            collectors to locate and contact taxpayers, request that full
            payment be sent to the IRS, and in appropriate cases, request
            taxpayer financial information. While we are extremely
            concerned about the use of private collectors and about the
            structure being put in place to support the initiative,\33\ its
            use in conjunction with other appropriate treatment streams
            provided some assurance that the IRS would narrowly tailor the
            use of private collectors.\34\
    ---------------------------------------------------------------------------
        \33\ We have addressed numerous concerns about the initiative,
    including the limited training of frontline private collection
    employees on issues such as taxpayer rights. See National Taxpayer
    Advocate 2005 Annual Report to Congress 76. We are also skeptical that
    the PDC initiative will produce a positive return on investment. See
    discussion, infra.
        \34\ In testimony last month before a House Appropriations
    subcommittee, IRS Commissioner Mark Everson acknowledged that tax debts
    to be assigned to private collection agencies could be collected more
    efficiently by additional IRS collection personnel. See Dustin Stamper,
    ``Everson Admits Private Debt Collection Costs More, Defends Return
    Disclosure Regs,'' 2006 Tax Notes Today 61-1 (March 30, 2006); Rob
    Wells, ``US Rep. Rothman Calls IRS Pvt Tax Collection Pact Wasteful'',
    Dow Jones Newswires (March 29, 2006).
    ---------------------------------------------------------------------------
      --Enforcement.--For those cases that cannot be resolved through
            communication efforts with the taxpayer, traditional
            enforcement efforts would be used.\35\
    ---------------------------------------------------------------------------
        \35\ Filing and Payment Compliance Concept of Operations, Filing
    and Payment Compliance Project Office, April 18, 2005, 75-80.
    ---------------------------------------------------------------------------
        Release 1 of the F&PC initiative involves the use of private
    collectors.\36\ Release 2 will employ commercial off-the-shelf software
    to assist in case selection for the private collection effort as well
    as the development of the Self-Assist treatment. In Release 3, the case
    selection software will be augmented with additional decision analytics
    software for the development of Assisted Correction treatments.\37\
    ---------------------------------------------------------------------------
        \36\ Treasury Inspector General For Tax Administration, Ref. No.
    2006-20-026, ``The Alternatives for Designing and Developing the Filing
    and Payment Compliance Project Should be Revalidated'' (Dec. 2005); see
    also Capital Asset Plan and Business Case, Business Systems
    Modernization, Exhibit 300 (2005).
        \37\ Id.
    ---------------------------------------------------------------------------
        The F&PC initiative has not been adequately funded to ensure that
    the most useful, taxpayer-friendly, and forward-thinking treatments,
    i.e. Self-Assist and Assisted Correction, will be funded. While it
    appears that the IRS is fully committed to privatizing collection,
    having already reached Release 1,\38\ cuts to F&PC funding will
    endanger the prospects of achieving F&PC's other objectives--objectives
    that do not raise the significant taxpayer rights concerns of the
    Private Debt Collection initiative.\39\ Thus, the failure to fund F&PC
    Releases 2 and 3 ensures that the only legacy of F&PC will be private
    debt collection.
    ---------------------------------------------------------------------------
        \38\ Challenges to the procurement process have delayed
    implementation of the initiative. Dustin Stamper, ``IRS Orders Private
    Debt Collectors to Stop Work'', Tax Notes Today (March 24, 2006).
        \39\ Testimony of James R. White, Director of Tax Issues, General
    Accountability Office, Fiscal Year 2007 Budget Request, Committee on
    House Ways and Means Subcommittee on Oversight (April 6, 2006).
    ---------------------------------------------------------------------------
        We are also concerned that the lack of funding for F&PC systems not
    only deprives taxpayers of a sophisticated collection approach but also
    encourages the IRS to take actions to reduce collection cycle time
    without adequate consideration for taxpayer rights or taxpayer
    compliance.\40\
    ---------------------------------------------------------------------------
        \40\ By way of example, the IRS has undertaken several initiatives
    to hasten the issuance of taxpayers' Collection Due Process (CDP)
    notices in order to reduce collection cycle time. Pursuant to Code
    sections 6320 and 6330, taxpayers are entitled to a collection due
    process hearing after the filing of the first Notice of Federal Tax
    Lien and before the imposition of the first levy on a tax account. One
    such initiative, termed the ``Initial Contact Initiative,'' required
    revenue officers to issue CDP rights to taxpayers on initial contact
    with the taxpayers instead of when a levy was the next planned action.
    Because we believed this initiative makes CDP hearings less meaningful,
    we opposed the initiative. After discussions with the IRS, it was
    agreed that the Initial Contact Initiative would only apply to business
    taxpayers and to certain individual taxpayers who also have business
    tax delinquencies. Recently, the IRS planned to move the CDP notice up
    even further in the collection process to the second notice issued to
    business taxpayers. After discussion with my office, the IRS agreed
    that this latest initiative would not be undertaken at this time. We
    believe that the IRS has been attempting to implement broad collection
    initiatives because its current business systems do not adequately
    differentiate among taxpayers based on their compliance history.
    ---------------------------------------------------------------------------
    THE RETURN-ON-INVESTMENT OF THE PRIVATE DEBT COLLECTION INITIATIVE WILL
                        PROBABLY BE LOWER THAN EXPECTED

        The Private Debt Collection (PDC) initiative as envisioned under
    Phase I of F&PC is another example of a program that might not be
    undertaken, or would be approached differently, if its downstream
    consequences were considered. The premise of the PDC initiative is
    essentially this: ``There is a significant amount of tax debt that the
    IRS can't go after because it doesn't have the resources. If we simply
    turn those cases over to private collection agencies, they'll collect
    the debt for us and the government will get to keep 75 to 80 cent of
    every dollar the PDCs are able to collect.''
        The problem with that simple approach is that it fails to take into
    account the enormous amount of IRS resources that need to be devoted to
    creating and supporting the program. Once the program rolls out, the
    IRS estimates that only a small percentage of taxpayers--perhaps on the
    order of 15 percent--will be resolved by the PDC unit itself. The rest
    of the cases will be sent back to the IRS ``Referral Unit'' for
    additional actions that only the IRS can constitutionally take on the
    account. Keep in mind that these are cases that the IRS currently
    considers too unproductive to devote resources to. Yet ironically,
    under the PDC initiative, the IRS will end up pulling employees off
    high-priority, high-return cases to work on these low-priority, low-
    return cases.
        This approach makes little business sense, and on top of that, the
    program raises significant concerns about the adequacy of taxpayer
    rights protections and confidentiality of tax return information. In
    fact, to make the program profitable, the IRS will be under pressure to
    expand the authorized actions private collection agencies can take on a
    case so they can work higher dollar, more complex cases. This expansion
    would clearly raise constitutional concerns.\41\
    ---------------------------------------------------------------------------
        \41\ For a detailed discussion of the IRS Private Debt Collection
    initiative and its constitutional and taxpayer rights implications, see
    ``Use of Private Agencies to Improve IRS Debt Collection'',
    Subcommittee on Oversight, House Committee on Ways and Means, 108th
    Cong., 1st Sess. (statement of Nina E. Olson, National Taxpayer
    Advocate, May 13, 2003); see also National Taxpayer Advocate 2005
    Annual Report to Congress 76-93.
    ---------------------------------------------------------------------------
        Thus, the PDC initiative is a paradigm example of how looking at
    the narrow justification for a program can make it look brilliant,
    while viewing the program in its totality paints a very different
    picture.

            TRENDS IN TAXPAYER ADVOCATE SERVICE (TAS) CASE INVENTORY

        I close with a reflection on the Taxpayer Advocate Service and its
    role in identifying and mitigating the downstream consequences of IRS
    actions and programs, and improving taxpayers' attitudes toward the tax
    system. This recent March 1 marked my 5-year anniversary as the
    National Taxpayer Advocate. They have been quite remarkable years--I
    have watched my talented and dedicated employees achieve a quality
    rating of 91.6 percent through fiscal year 2005, up from 71.6 percent
    in 2001. They achieved this quality despite a 15 percent decline in
    case advocates in our statutorily mandated offices around the country,
    from 1,325 case advocates in March 2003 to 1,127 case advocates in
    February 2006. And these successes were achieved despite a slight
    increase in TAS case receipts from fiscal year 2003 to fiscal year
    2005.\42\
    ---------------------------------------------------------------------------
        \42\ In fiscal year 2005, TAS received a total of 197,679 cases. In
    fiscal year 2003, TAS received a total of 196,040 cases.
    ---------------------------------------------------------------------------
        In fact, TAS case receipts themselves provide an interesting study
    in downstream consequences. As IRS increases its enforcement activity,
    TAS compliance inventory increased to nearly 70 percent of our case
    receipts for the first quarter fiscal year 2006, up from 67 percent in
    first quarter fiscal year 2005. In fiscal year 2005, TAS cases
    involving liens and levies increased by 50 percent and 43 percent,
    respectively, over fiscal year 2004. During first quarter fiscal year
    2006, TAS continued to see an increase in lien and levy cases. Lien and
    levy cases tend to involve economic urgency to the taxpayer. TAS
    procedures require case advocates to respond immediately to the
    taxpayer's request for assistance in these cases. With the increasing
    number, complexity, and urgency of our case load, TAS risks getting
    behind on cases that involve IRS system failure as we give priority to
    cases that involve economic harm. If the balance between our staffing
    and the number of cases we handle continues to deteriorate, TAS is in
    jeopardy of becoming part of the IRS problem rather than the advocate
    for the solution, as Congress intended.
        Significantly, TAS Customer Satisfaction surveys provide some
    evidence that the quality and nature of taxpayer service has an impact
    on taxpayer attitudes toward the tax system. When a taxpayer brings an
    eligible case to TAS, he is assigned a case advocate who works with him
    throughout the pendency of the case. Taxpayers have a toll-free number
    direct to that case advocate, and each TAS office has a toll-free fax
    number. TAS employees are required to spot and address all related
    issues and to educate the taxpayer about how to avoid the problem from
    occurring again, if possible. This level and quality of service drives
    TAS's high taxpayer satisfaction scores,\43\ which have averaged about
    4.35 on a scale of 5.0 for the last two fiscal years. Most importantly,
    57 percent of taxpayers stated that they feel better about the IRS as a
    whole after coming to TAS. Even among taxpayers who did not obtain the
    result they sought, an astonishing 41 percent reported that they had a
    more positive opinion of the IRS because of their experience with TAS.
    ---------------------------------------------------------------------------
        \43\ Taxpayer Advocate Service customer satisfaction survey data
    for the period from October 2003 through September 2005, as collected
    by The Gallup Organization.
    ---------------------------------------------------------------------------
                                   CONCLUSION

        Compared with 10 years ago, the IRS today is a more responsive and
    effective organization. On the customer service side, the IRS
    Restructuring and Reform Act of 1998 and the IRS response has brought
    about fairly dramatic improvements. On the enforcement side, the IRS
    has been stepping up its enforcement of the tax laws over the past 5
    years, particularly with regard to corporate tax shelters and high-
    income individuals.
        But the IRS can, and should, do better. To increase voluntary
    compliance, it should incorporate an ongoing taxpayer-centric
    assessment of taxpayer service needs into its strategic plans. It
    should conduct research into the causes of noncompliance and apply the
    resulting knowledge to IRS enforcement strategies, including those
    pertaining to the cash economy. Finally, it must have sufficient
    resources to move forward with its technological improvements, on both
    a short-term and a long-term basis.

        Senator Bond. Thank you very much, Ms. Olson. You certainly
    shared my concerns about the funding, and I think that your
    points about research are well worth considering, because I
    think there are some opportunities here to improve it.
        Before we turn to the questions, we have been joined by
    Senator Durbin. Senator, would you like to offer an opening
    statement, either orally or in writing?
        Senator Durbin. No. Proceed, Mr. Chairman.
        Senator Bond. Okay. We will turn now to the questions.

                                    TAX GAP

        Mr. Commissioner, as I stated in my opening remarks, I
    believe the IRS needs more resources to effectively attack the
    tax gap. The budget request flat funds it. How does your budget
    request reduce the tax gap?
        Mr. Everson. Well, Mr. Chairman, as I have indicated--we
    can maybe look at the tax gap map--we have several components.
    The budget request will continue the enforcement build that
    this committee and the Senate and the House provided for last
    year. We have been hiring or are in the process of hiring those
    people now. So there will be a time of training, and then you
    will see, as they become more effective, we will continue to
    bring up the number of audits, the number of collections, the
    document-matching activities. That will have an impact.
        Beyond that, in the budget request, as I indicated, we have
    several legislative proposals that I think are terribly
    important. I would point out that they have been characterized
    by some as modest. I agree with that, but if you compare them
    to anything that has been done in 20 years, there have been no
    requests on additional third-party reporting. If we can agree
    that is required, as shown in the chart I showed a few minutes
    ago where you have the No. 1 and No. 2 noncompliance rates
    where you don't get any reporting, I think that will be an
    equally important step, sir.

                       ALLOCATION OF ADDITIONAL RESOURCES

        Senator Bond. The IRS Oversight Board recommended
    additional funding of $363 million. The Senate took the
    Oversight Board's recommendation. I know it is above the OMB
    budget request, but if you were to receive that additional
    funding, how would you propose to spend it?
        Mr. Everson. Yes. I am aware of the Budget Committee
    action, and as you say, it is about $330 million or $340
    million. We are looking at that now in the event that it should
    carry through. We would do two things. We would add bodies, of
    course, across a range of activities, but we would, and I think
    it would be permitted under the resolution, specifically add to
    the infrastructure and the systems money. At this stage, it is
    important for us to invest in technology on both the service,
    but particularly on the enforcement side of the house.
        So I don't have a specific answer yet, but we are working
    on that.
        Senator Bond. I would like to ask the others. I would like
    to ask Chairman Wagner what he would suggest and any comments
    from the others.
        Mr. Wagner. Thank you, Mr. Chairman, with the additional
    funding, of course I would agree with the Commissioner that
    adding additional FTE toward targeted areas would be warranted
    and would be contemplated by our recommendation. Certainly some
    of the additional resources would go toward the research that
    we have all talked about in order to best determine which area
    to allocate those additional resources, whether they are toward
    attacking the fraudulent payments dealing with the cash economy
    that was suggested in the Commissioner's chart, dealing with
    non-compliant enterprises and so on and so forth.
        The other thing that we would hope would come from
    additional resources would be the development of more
    productive partnerships between IRS and tax professionals, more
    emphasis on the website communicating customer service
    opportunities toward the taxpayers and, of course, improving
    customer service through issues such as telephone service and
    so on.
        Senator Bond. That is a heavy burden to put the little
    $300-plus million.
        Mr. George, any further comments?
        Mr. George. Mr. Chairman, simply to state regarding the tax
    gap, there is no question that if the complexity of the tax
    code were simplified or erased, compliance would increase
    tremendously. I realize that is not within the jurisdiction of
    this committee. Nonetheless, that would certainly help close
    the tax gap.
        As the chairman's chart showed, you have a major
    underreporting within the small business community, and I think
    if you had third-party reporting, as he noted, of those tax
    receipts or the income receipts, that would also assist in
    closing the gap.
        Senator Bond. I think everybody knows my commitment to
    small business. I want to see small business succeed, but we
    expect them to pay the taxes they owe.
        Ms. Olson, any comment on additional dollars?
        Ms. Olson. Well, I think it would be wise to invest in the
    next phases of filing and payment compliance, particularly the
    risk-based assessment system of identifying how collection
    cases should be handled, who should get the touches, and my
    other point would be that additional personnel would enable the
    IRS to focus on some current projects that are being shelved
    because of our rightful focus on our big projects, but there is
    not a day that goes by that I say to the IRS, ``Can't we solve
    this problem for this group of taxpayers?'' and I am told, ``We
    can't do that right now; we have to focus on this big
    project.''
        Senator Bond. Thank you very much, Ms. Olson.
        Now we turn to the ranking member.
        Senator Murray. Thank you very much, Mr. Chairman.

                            PRIVACY OF TAXPAYER DATA

        Mr. Everson, I wrote to you on March 22 to express my
    opposition to the proposed regulations regarding the privacy of
    taxpayer information. In some respects, the proposed
    regulations I know tighten some of the restrictions, but in
    other ways, they really loosen them--I know there is taxpayer's
    sign-off--to allow them to sell that to unidentified
    unaffiliated third parties.
        My view personally is this: taxpayers are not likely to
    want their information going to marketers at all. I would like
    you to share with this committee why you are providing any
    opportunity for tax preparers and their affiliates to use
    personal financial data to sell mortgages or mutual funds or
    IRA accounts or life insurance--don't taxpayers already have
    enumerable opportunities to shop for services like that without
    subjecting their personal tax returns to perusal by marketers?
        Mr. Everson. I appreciate the question, Senator. This is an
    important subject, and I have testified on it several times
    already. The first thing I would like to say is we are taking a
    lot of comments on this. I have gotten a lot of letters. We
    have actually had hearings on this, which we do with important
    regulatory proposals. We are going to assess all of those.
        What we are trying to do here is have a balanced approach.
    This piece of the law has been in effect for over 30 years, but
    the world has changed since that time. The regulation is
    prompted, as much as anything, by Congress in terms of
    inquiries on the outsourcing, the preparation of tax returns
    overseas in India where nobody was aware of that happening.
        So we are trying to move to make better protections here. I
    guess the basic question is: ``Whose information is it?'' Is it
    the taxpayers' information or is it the Government's
    information? We at the IRS, as you know, don't share their
    information with anybody. So it is a question of preparers, and
    I guess we don't think that under current law the IRS can say
    you as an individual don't have the right to share financial
    information with Kit Bond if you want to. That is--if I could
    just finish, I was trying to get to the dynamic here.
        So what we are trying to do is provide a really clear
    protection that in the event that that arrangement starts to
    take place, that you have a clear detailed consent, a warning
    as to what could happen, but we don't think under statute now
    we could say you aren't free to share your information with
    that preparer.
        Senator Murray. Do you think there is a critical mass of
    people in the country who want their information sold?
        Mr. Everson. I don't. What I do think, though, is that this
    gets to Senator Dorgan's remarks. Certain firms, the big firms,
    they now have integrated services and they are providing a
    range of services, like IRAs or advice, to taxpayers. Other
    smaller firms who are the trusted real financial advisor of
    somebody, once a year they sit down and they get their health
    check-up financially, if you will, and they say how are you
    doing, and they could be able to maybe advise someone to get
    the IRA on behalf of a bank or whatever else is there.
        The other thing I would point out to your staff, we are
    very concerned about the possible implication of this to the
    VITA sites. Those are programs that, as you are aware, operate
    around the country. Over 2 million returns were prepared this
    year. They are very exciting to communities because people come
    in. They file largely for the EITC. That money goes out into
    the community, but the coalitions that are out there also do
    other things. They share. They help get the people banked or
    into other benefit programs.
        You may know, in your own State, 2.8 percent of the returns
    last year in Washington came through the VITA program as
    opposed to 1.6 percent nationally. Our people are very
    concerned if we move to outright prohibition of any sharing
    that you would kill that program and that all the good things
    that are happening for those people where there is a bundling
    of services wouldn't be allowed.
        So it is a complicated issue, Senator.
        Senator Murray. Look, I am very worried about this being
    abused. You know, we know how this works. It is 4 p.m. on April
    15. You are signing the last piece of paper the tax preparer
    has put in front of you. You are signing everything as fast as
    you can, and I have heard that tax preparers actually want you
    to loosen this requirement that pertains to the way they get
    consent from taxpayers to sell their information.
        Do you think there is any chance in the world that the
    final rule is going to loosen consent procedures under your
    proposed rule?
        Mr. Everson. Loosen consent procedures? By that, you mean
    change the consent form that we propose?
        Senator Murray. Yes.
        Mr. Everson. I think that clearly the consent procedures
    are much tighter, but I don't want to say anything precise,
    because I think that would be wrong under the APA, for me to
    comment as to what the final rule will look like. I am not
    involved in that at this stage, but we are really honestly
    looking at this, and is it is a tough issue.
        Senator Murray. Well, under your proposed regulation, you
    require written consent from the taxpayer if the tax preparer
    wants to process that overseas.
        Mr. Everson. Yes.
        Senator Murray. You justified that requirement because as
    the Commissioner, you don't have any enforcement authority to
    prosecute abuses overseas. If you don't have authority to
    protect taxpayers' privacy overseas, why are you allowing this
    information to go overseas at all?
        Mr. Everson. I don't think that we have the authority to
    stop that. I think that that is something that is done by
    private parties. There is no law that says people can't
    contract out, or it is a far broader question. It is not any
    different than a company hiring a subcontractor to develop
    parts for an auto or something else.
        Senator Murray. But the law says you have to enforce
    privacy.
        Mr. Everson. Yes.
        Senator Murray. So you are telling us you can't enforce the
    law? So why are we allowing this to go overseas?
        Mr. Everson. Well, I think we are attempting to strengthen
    the control over the privacy through this proposal. The other
    thing I would indicate is we have increased our investigations
    of promoters of return preparers dramatically in the last 2
    years. A year ago, we had 125 reviews taking place. This year,
    we have over 500 reviews taking place.
        My understanding is, and perhaps this is a question for Mr.
    George, that the provisions of 7216 are actually largely
    enforced by TIGTA. So there is a shared responsibility here on
    this.
        Senator Murray. My time is up, but, Mr. Chairman, I am
    deeply concerned about this privacy issue. I think most people
    assume their taxpayer information is private that goes to the
    IRS, and I think we have to be very, very careful that it
    doesn't become some kind of marketing program.
        Senator Bond. I would agree with that, and I think I
    understand the point that the Commissioner is making. If you
    read ``The World is Flat'', you will find that there is a
    tremendous amount of, heaven forbid, legal research being done
    overseas too which threatens some of our professions as well as
    some taxpayers services being done overseas.
        I turn now to Senator Durbin.
        Mr. Everson. Mr. Chairman, could you indulge for me 1
    minute? I want to say one thing. Of course, if the Congress
    looks at this to change the law, which I guess I believe would
    be necessary to really have an outcome, we, of course, will
    work with the Congress at looking at all these issues. So it is
    not beyond the regulation.
        Senator Bond. Senator Durbin.
        Senator Durbin. Thanks, Mr. Chairman. Thank you all for
    being here today.
        I have this notion that if every member of Congress was
    required to prepare their own income tax returns personally, we
    would see simplification of the tax code overnight. We turn,
    instead, to bookkeepers, accountants, lawyers to try to guide
    us through this thicket, and we can't blame anyone other than
    others. We write the law.
        So I hope that as a result of this hearing and others, we
    will be inspired to make this a little more easily understood.
    Nobody likes to pay taxes, but if they think that they are
    being taxed fairly, they are a lot more accepting of this
    responsibility.

                            INDEPENDENT CONTRACTORS

        Speaking of paying taxes fairly and tax evasion, I recently
    had a group of bricklayers from Chicago meet with me in the
    basement of the Capitol, and they came in to complain. They
    said we understand that every contractor isn't a union
    contractor; we have to compete with non-union contractors, but
    we are concerned about another problem.
        Too many of these so-called non-union contractors don't
    have employees. They have independent contractors working for
    them. The net result is taxes are not withheld from the wages
    or income that is paid to these workers, and so ultimately
    taxes are not paid, neither State, Federal, local taxes,
    unemployment compensation, and workers' compensation.
        Mr. Wagner, you were former head of the Illinois Department
    of Revenue.
        Mr. Wagner. Yes, sir.
        Senator Durbin. In 2004 alone, misclassifying these workers
    as independent contractors when, in fact, they were employees
    was at a rate of 21 percent in the State of Illinois, 67,745
    employers statewide, 7,478 in the construction industry. The
    State of Illinois alone lost $158 million in income taxes not
    withheld from actual employees because they called themselves
    independent contractors.
        So the bricklayers said to me, Senator, what are you going
    to do about this; we don't mind competing with people who are
    paying taxes as we are, but why should we have to try to
    compete with people for evading their taxes; where is the
    Internal Revenue Service?
        So I would like to ask you where is the Internal Revenue
    Service?
        Mr. Everson. Senator, you are covering a very important
    subject. Let me make a couple of points about it. As I
    indicated, we have five legislative proposals on strengthening
    tax administration. It is the most ambitious since the Reform
    Act of 1986, which had effect of where citizens, taxpayers, had
    to list the Social Security number of their dependents, and the
    next year, 5 million dependents vanished. So we know when you
    do more reporting, you get more compliance.
        Why is this important? Take a look at this: Starting in
    1978, all individual returns, the number of returns we have
    gotten, have increased by 50 percent. The number of Schedule C
    filers--these are the folks that are organized as independent
    contractors--they have increased by 175 percent, and as I
    indicated, I think before you came in--let us go back to this
    other chart--the noncompliance rate is 50 percent in this
    category of individuals where they organize as small
    businesses, but they are unincorporated, because basically they
    are not reporting all of their income.
        There are issues on the employer side which you are talking
    about. I can assure you that the number of 1099 miscellaneous
    forms, the reporting they are supposed to do to us, that has
    not increased as rapidly as the number of Schedule C returns
    has increased.
        So this is an important area. We have said beyond the five
    proposals that we want to look at the definition of independent
    contractor. This is the manual that our people have to go
    through to assess whether somebody is an independent
    contractor. We have been precluded by statute since 1978, I
    believe was the year, from addressing what is the definition of
    an independent contractor. We are going to study that and
    hopefully make some proposals, but it is terribly important
    because the world has changed, as those charts indicated and as
    your constituents indicate.
        We do need to address this jointly.
        Senator Durbin. Let me ask you are you saying that it is a
    problem in definition or a problem in law or it is a lack of
    resources to investigate and enforce?
        Mr. Everson. It is both, sir. We have been precluded from
    changing the standards by which we look at independent
    contractors for approaching 30 years now. That is because of
    the importance, which is legitimate, of small business in this
    country and a reluctance to look at that issue, but we have
    said as an administration that we want to study it and then
    work to get a better definition and more consistency so that
    people fall on the right side of the line just as you are
    indicating, because what happens is what you are saying.
    Somebody is paid as an independent contractor, as a business
    that isn't absorbing those employment taxes that they ought to
    be, and then the individual, as we have indicated here, is not
    reporting the gross income.
        Senator Durbin. How long is this going to take?
        Mr. Everson. Well, we will be making the study over the
    course of coming months, and what is important now, I would
    suggest to you in a leadership position, it is very important
    to take a look at these five proposals that we have made right
    now on gross receipts, say for credit card issuers. That is a
    big start in this area.
        Senator Durbin. This is all well and good, and I support
    what you are doing, but let me suggest in the meantime a few
    cops on the beat wouldn't hurt. Sending some investigators out
    and starting to ask questions of contractors who are using so
    many independent contractors may put a chill on this practice
    while we are trying to come up with the modernization of the
    law and more resources for you to enforce it.
        Mr. Everson. We are increasing our audits, sir.
        Ms. Olson. If I may.
        Senator Bond. Go ahead.
        Ms. Olson. In this year's annual report to Congress, my
    annual report to Congress, I reported on this very issue. I
    reported on a program that the United Kingdom has to address
    this very issue that they have had for the last 30 years. They
    have focused on the construction industry because there is so
    much cash economy in underreporting, and they require workers
    who are independent contractors in the construction industry
    that when they are hired, they have to present to the person
    who is hiring them a compliance certificate from England
    Revenue that states that they are fully in compliance with the
    tax laws and with their payment, and if they are not in
    compliance, then the person who is hiring them has to do a
    withholding on the gross payments that they are making. They
    find that that approach has really helped with that cash
    economy and leveled the playing field between people who are
    treated as employees and independent contractors.
        Senator Durbin. Thank you.

                            PRIVACY OF TAXPAYER DATA

        Senator Bond. Ms. Olson, you may want to comment on the
    proposed rules. I know you have been involved in the
    development on the rule on privacy, and for the record, I would
    like to get your comments on that.
        Ms. Olson. Thank you, sir. The 7216 rules have two
    categories of approaches, use and disclosure, and I think there
    are concerns with each one of those applications. I find the
    proposed rules, which I worked on very closely with the IRS, to
    be a vast improvement over the current rules, which I find very
    anti-taxpayer and provide very little consumer protection.
        I want to make the distinction that ``use'' is the term
    that we use where the taxpayer is having a conversation with
    the preparer. The information doesn't go outside the room, and
    the preparer is asking for permission to use the taxpayer's
    information to peddle a product, but you are not talking with a
    third person at that point.
        ``Disclosure'' is where the information is leaving the room
    with a preparer and going out to the taxpayer. Under the
    current rules, the taxpayer isn't told the impact of that
    disclosure, isn't told what might happen if the information
    goes overseas, isn't told that that third party when you get
    that information can be disseminated and sold and reused by
    anyone for any amount of time. So the current rules really
    focus on a lot of restrictions and up-front notification.
        Now, I am the first to admit that we could do more, but I
    think that we need legislation in this area. The current rules
    only apply to preparers. So we have no rules about what happens
    to people who receive this information if we don't do an out-
    and-out ban. We have no criminal penalties against them. We
    have no civil fines against them.
        So there are a number of things that we can do to improve
    it.
        Senator Bond. Thank you, Ms. Olson.

                         BUSINESS SYSTEMS MODERNIZATION

        I would like to ask the GAO witnesses to join us at the
    table because I want to talk about the BSM. We are hearing that
    BSM is making some progress, but the budget request, the OMB
    request for BSM, looks like they are, as I said, punishing good
    performance.
        How do you see, Mr. Commissioner, the performance of BSM
    and how does it compare to the success 2 years ago?
        Mr. Everson. Mr. Chairman, as you know from following this,
    we have made modernization of the IRS one of our three
    strategic priorities, and that relates to work processes and in
    particular the systems. I think we have made a great deal of
    progress on this. We downsized the portfolio a couple of years
    ago, provided greater focus to it, and inserted more business
    people into the process that had been done largely with just
    the tech folks. That has made a lot of difference. The CADE
    project is on sounder footing now. One huge success is the
    modernized E-filing.
        It hasn't been mentioned yet, but in December 2004, we
    mandated the electronic filing of returns by corporations and
    nonprofit institutions over a certain size. We have received
    over 300,000 returns this year thus far. There was no
    technology to do that at the time that we did this. There was a
    lot of uproar from industry saying you can't do this, industry
    told us or the software people said, until you mandate it, we
    won't have the product. So it was a chicken and the egg thing.
        We mandated it. The software was developed, and now we are
    moving forward. So there are successes.
        Your point, drawing it down, I think that this is a minimal
    level for us to proceed. It is a complicated question, as you
    know, as to the overall funding levels. In those negotiations
    as we work with the administration, I spread the money to what
    I thought was the most responsible way, sir.
        Senator Bond. Mr. Powner, if you would give us your full
    name and comments on the BSM performance, better or worse.
        Mr. Powner. I am David Powner with the Government
    Accountability Office. Performance has improved consistently
    over the years. Our work for you, Mr. Chairman, in looking at
    the expenditure plans on an annual basis has shown that is
    performance perfect? No, but when you compare this to past
    performance of other programs across the Federal Government,
    this is one of the better-run programs when you look at their
    performance over the past couple of years, if you look at the
    leadership of this program. Decreasing funding on the BSM at
    this point in time clearly, as our statement indicates, will
    decrease the pace and momentum and could affect the long-term
    delivery of systems such as CADE.
        Senator Bond. I appreciate your good work, your very
    technical analysis of all of this. I have a former GAO worker,
    who can translate for me, who seems to indicate that you are
    saying we should provide more money to the BSM program. Is that
    an accurate assessment of your very good technical analysis?
        Mr. Powner. Yes. Mr. Chairman, at this point in time, if
    you inched up their budget, we are clearly in that camp given
    their past performance. I think they deserve that. I think it
    is an opportunity to keep the pace going. We are not in the
    camp with Chairman Wagner, looking at a doubling of the budget.
    There still are many risks associated with the program and
    contractor performance, we should report to you, last week, in
    looking at IRS's internal capacity to manage requirements.
        So yes. I think it would be prudent to increase the budget
    slightly, but a doubling of the budget, we are clearly not in
    that camp today.
        Senator Bond. Mr. George, do you have a comment on it?
        Mr. George. I would just note, Mr. Chairman, that there is
    no question BSM has improved over the progress in the last few
    years. At the same time, as I noted in my oral statement, it is
    still behind schedule and it is also over budget. For example,
    the CADE system, if fully implemented, would certainly have
    expedited the return of refunds to taxpayers tremendously, and
    it is not yet fully implemented. So that is a problem, and then
    the modernized E-file system that the Commissioner averted to,
    they have had three releases thus far. That too is 18 months
    behind schedule and is over $37 million over budget.
        So there is a recurring problem in that report, sir, and it
    is not limited solely to BSM. I think it is throughout the
    service. Again, progress has been made, but more needs to be
    done.
        Senator Bond. Thank you very much, Mr. George.
        Senator Murray.

                          TAXPAYER ASSISTANCE CENTERS

        Senator Murray. Mr. George, I wanted to ask you when you
    analyzed the data that the IRS used to justify their proposal
    to close the Taxpayer Assistance Centers, you found that IRS's
    data for as many as one-quarter of the TACs was found to be
    fraught with errors. You found that not all the data used was
    accurate or the most current available and some of the data was
    based on estimates and projections instead of actual data
    currently available. Those errors affected the ranking and
    overall selection of the TACs the IRS wanted to close.
        Mr. Everson, I wanted to give you an opportunity to
    respond.
        Mr. Everson. Sure. I was a little hurt by your strong
    statement earlier that this called into question anything the
    IRS ever said. I know I am exaggerating a little.
        Senator Murray. I will let you rebut.
        Mr. Everson. I don't think that is the case, and I think
    that we do our very best to be credible in any representation
    we make either to the public or, of course, to the Congress.
    Sometimes we make mistakes or information is incomplete.
        On the TACs, the IG looked at it. We had something like 35
    or 36 categories that went in to the model. The conclusion that
    was reached was that the model was a good one. It weighted
    appropriately a whole series of demographic and other cost
    factors. You are correct. There were individual data errors,
    but the model was not particularly sensitive to those
    conclusions. In something like--I can't recall the exact
    number--maybe 10 of the numbers would have changed the relative
    rankings, but it didn't take something that was No. 40 on the
    list and make it No. 380, if you will.
        This was a tool that we wanted to use to identify the best
    candidates for reduction. It was never going to be so
    incredibly precise that we had overridden the criteria, the
    strict criteria for a couple of factors. You may recall we
    didn't want to eliminate more than half the TACs, in any State.
    We said the TACs had to be in the 35 major metropolitan areas
    no matter how they came out.
        So I think perhaps that statement that the model produced
    nothing of value, I wouldn't agree with that. Can we do better?
    We always can do better on data integrity. So yes.
        The last thing I will say is this did cause a lot of
    concern last year. We stood down in our proposal well before
    this report was ever done, as you know. We stood down on that
    proposal, oh, last July, I guess it was when I suspended it.
    Closing down those 68 centers is not a part of the current
    request. Both you and the chairman have talked about our
    savings proposals. We believe that we will be able to achieve
    those savings proposals without reducing services or closing
    any of these walk-in centers.
        So I want to reassure that is not an active proposal at
    all. My concern would be the chairman is talking about adding
    money, potentially, to BSM. I want to make sure that we do
    fully fund the services piece, as is well within this budget.
    My worry would be if it was cut a little bit or, as you know, a
    lot of this is salary dollars. If the pay increase comes in
    above what is proposed, there could be pressure here.
        Senator Murray. Well, in a briefing that we had last year
    by TIGTA on these Taxpayer Assistance Centers, I learned that
    some of the TACs have as little as one or two staff and what
    TIGTA called a critical staffing storage. Now, the House and
    Senate majority and minority said no to the proposal to cut
    back TACs until the TIGTA completed a study on the impact of
    the reductions, but are you, in fact, allowing these TACs to
    eventually close by just letting the staffs dwindle?
        Mr. Everson. No, we are not. There were some employees who
    chose to move to other parts of the agency while this was
    currently before the Congress. So we had some storage shortages
    as the filing season approached, and what we did was we
    reassigned employees out of other pieces of the agency to make
    sure that we would keep the centers open.
        A year ago, I had several inquiries from members of
    Congress about----
        Senator Murray. Are you currently filling those vacancies?
        Mr. Everson. Yes. We are moving to re-hire those people,
    and we don't have any plans for closing TACs at this time and
    would not draw them down. If what you are saying is just
    somebody leaves and we don't re-fill the position, no, we are
    not doing that.
        Senator Murray. Mr. George or Ms. Olson, do either one of
    you want to comment?
        Mr. George. Just briefly, Senator Murray. There is no
    question that the model that the IRS has developed, we
    determined it was sound. Some of the data was inaccurate. Other
    parts of it were not current, but all of the ranking of the
    TACs were not accurate as a result of having inaccurate or
    outdated information.
        Ms. Olson. I believe that regardless of what the actual
    architecture of the model looked like that it was based on
    flawed assumptions. It was based on the current status quo of
    what services the IRS was offering, and as we know, over the
    last year, it has been declining as a goal, the number of tax
    returns that they have prepared within the TACs. So when you
    say, well, usage is dropping, it is because we are turning
    people away at the door.
        We never measured the number of people who were lined up
    outside the walk-in sites, and my employees in Federal
    buildings throughout the United States informed me that people
    were lined up during filing season outside the doors, blocking
    access to the Taxpayer Advocate Service doors for my employees.
        Yesterday and the day before yesterday, I was in North
    Dakota. Senator Dorgan is not here, but I was in North Dakota,
    and I held a town hall meeting with taxpayers, and one person
    informed me that they drove quite a distance to the walk-in
    site to ask a question as an agriculture taxpayer, and that is
    determined out of scope. They said, I'm sorry; we don't answer
    those questions in the TAC. And I think for States like North
    Dakota and Wyoming, that is silly.
        So these are the sorts of things that we are using as base
    measurement for the services that we are offering in the TAC,
    and then saying taxpayers aren't coming there, no surprise
    there.
        Mr. Everson. Could I make one comment?
        Senator Bond. If you will forgive me, I am going to have to
    ask one complicated question for brief answers and then turn
    the rest of the hearing over to Senator Murray, because I was
    expected for an important Intelligence Committee meeting at
    11:00, and I apologize, but I know that you can continue these
    discussions.

                                     E-FILE

        I would like to ask you, Mr. Commissioner and then Chairman
    Wagner and Ms. Olson, about the E-filing problem. Getting the
    80 percent appears out of reach. One possible reason, there was
    a media report that due to the cost of the E-filing, more than
    a quarter of a million individual filers, some 36 million,
    prepared their tax returns on computer, printed them out and
    mailed them to the IRS.
        Would you outline your current plans and what you see as
    the problem with E-filing? And also, Senator Grassley and other
    experts have suggested that the IRS develop a direct filing
    portal through the IRS website to increase E-filing, and I
    would like to hear you include that in your comments.
        Mr. Everson. Yes. You have covered a lot of ground there.
    Electronic filing continues to increase. We think it will
    continue to do so. It is true that in terms of some of the
    software providers, you buy the package and then there is a
    built-on cost at the end to file, to actually make the
    electronic filing. I don't think that the Government regulates
    the price of products from private parties. So that is a
    question of the private participants.
        The Free File Alliance, which has generated a lot of
    discussion, that was in existence for 3 years. The term of that
    agreement lapsed last year after the filing season. We then
    worked to conclude a new agreement. We had two objectives. One
    was to get more protections on these RALs, these predatory
    loans that take place, not a huge issue for the free file
    participants, but it is still is something, and also we wanted
    to have as high a participation rate.
        The consortium members were concerned because the program
    had moved toward where anybody could file. They didn't want
    that, and in the late stages of the negotiation, the number was
    around 70 percent. We wanted to get it higher as to
    eligibility. They wanted to get it lower.
        Then I do have to say the Senate had a voice vote to an
    amendment to the appropriations bill that was moving, whenever
    it was, in November of last year or October, that the IRS
    couldn't develop software, that no free file software could be
    developed without the Alliance. That had the effect of gutting
    our negotiation position with the Alliance because we can't
    force private parties to provide free file services. The reason
    they do it is because of their concern that one day there would
    be a portal or that one day there will be--the government will
    provide the software and they will be out of business. That is
    why they do this.
        So that dynamic is complicated one.
        The final point I would make, Mr. Chairman, the question of
    developing a portal, that would be a very costly and
    complicated endeavor, I am informed, for the IRS to do that.
    Right now, it is only the top 20 filers. All these returns are
    bucketed, if you will, or grouped. They do 82 percent of the
    electronic filing. If we were to do this, you would have to
    compare companies like Intuit who are spending $200 million a
    year in research. This would be a big effort. It sounds simple,
    but it would be a big effort is what I would say.
        Senator Bond. Well, we tried to make it clear that the IRS
    and Free File should come together to make an agreement. We
    only took the floor amendment because there did not appear to
    be agreement and our amendment was not intended to restrict the
    IRS. So we need to continue to work on that.
        Chairman Wagner.
        Mr. Wagner. Mr. Chairman, just a couple of points. I know
    you are in a rush. We too believe the E-filing objectives are
    very sound and very good. We are pleased that more people are
    choosing to file electronically these days and the rate is
    going up. We are troubled by the fact that it is increasing at
    a lower pace than it has in the prior years. We have concerns
    over the Free Filing Alliance and have expressed those
    concerns, in particular the caps.
        The notion of a portal is something that ought to be
    considered on behalf of the taxpayers. Certainly I can access
    Government in so many other areas by going directly on line and
    submitting my information. There are two components of paying
    your taxes: preparing the return and filing the return.
    Certainly the IRS ought to do everything it can to facilitate
    the filing of the return.
        The goal, the 80 percent goal by 2007, is not going to be
    met. We have recommended that that goal be extended to 2011,
    applying a statistical analysis to it because we do believe the
    goal is a motivator and that it does keep the IRS focused on
    the goal as well as preparers. There are additional mandates
    that might be considered by this committee, including mandated
    filing by preparers, extending the filing date for electronic-
    filed returns to perhaps April 30 to provide an additional
    incentive for consumers to file electronically and so on.
        Senator Bond. Ms. Olson.
        Ms. Olson. Well, I believe that the lack of free electronic
    filing is a major barrier to reaching our 80 percent goal. I
    think contrary to what some may suggest, taxpayers want to
    provide their financial data directly to the Government without
    any intermediaries and certainly with no add-on charges, and in
    this way a portal is like telefile, which was a very successful
    program, was simple, was easy to use, and the information went
    directly to the IRS.
        I note, as Chairman Wagner does, that on the education
    website, you can file your FASA, your Financial Aid Student
    Application, directly with the Government in a fill-in simple
    form and you push the button and it is there. I think it galls
    taxpayers who are giving over their hard earned dollars to have
    to pay to E-file, and that is why we have 40 million taxpayers
    who buy a software package and then they print out the returns.
    I am one of those 40 million taxpayers this year.
        And the last thing I would note, because I have a visually
    impaired employee, and he attempted to go on to Free File, and
    because these are private products, they are not required to be
    accessible for people who visually impaired. Federal websites
    under section 508, we have this 508 rule that says that all of
    our websites have to be accessible for visually impaired
    persons, and I think that is another really significant thing
    that we have to think about. There is a whole population out
    there.
        Senator Bond. Thank you, Ms. Olson and other witnesses, and
    now my apologies and my thanks to Senator Murray. I will turn
    the hearing over to the her.
        Senator Murray [presiding]. Thank you, Mr. Chairman.
        I just have few questions and then I will close it out.

                                  BUDGET CUTS

        Mr. Everson, the fiscal year 2007 budget doesn't make any
    reference to specific reductions in taxpayer services, as you
    shared, but your budget does refer to $84.1 million in savings
    and the elimination of more than 2,000 FTEs due to contemplated
    ``program efficiencies''. Can you share with us how much of
    these savings in FTE reductions is associated with taxpayer
    service cuts and how much is associated with enforcement cuts?
        Mr. Everson. The $84 million comes across three major
    categories. There are cuts. If you go to page 6 of my written
    statement, Senator, it sort of lays this all out. There are
    shared services, and one of the examples here is for a new
    telecommunications contract, we are going to save $24 million.
    That doesn't have an impact. Obviously, it is just a cost
    reduction. That is a shared area between enforcement and
    services.
        We have what we think will be $35 million against
    enforcement programs in terms of efficiencies, and that is a
    wide variety of categories where we are working more
    efficiently--we are a big organization. We are spending $7
    billion on enforcement. As you would expect, each year we
    reassess our processes and we go through and we make changes to
    become more efficient. So we have laid out there a whole series
    of reductions ranging from 5 FTE to, you know, over a 100.
        The services piece, if you will, is down to about $18
    million of reductions which we believe, again, we will get
    through improved performance, better use of technology,
    redesigning our processes in ways that won't have an impact on
    you as a taxpayer or anybody trying to do business with the
    IRS. These have been developed over months. We can share more
    details if the committee wants them, certainly, and we will
    continue to develop new opportunities as we go on.
        We are always looking look at--my charge to my team is
    particularly to look at the reduction of overhead. I have
    conversations with Colleen Kelly, the head of the union, who
    says: ``Look, you have got too many middle and other
    managers.'' We are working on the span of control to try and
    increase the span of control so that there are more employees
    per supervisor. That gives you the ability to hold down the
    cost and yet keep the number of employees on line who are
    either in walk-in centers or who are out there doing audits.
        Senator Murray. Bottom line, can you ensure us on the
    subcommittee that none of those so-called efficiencies will
    negatively impact taxpayer services?
        Mr. Everson. Yes, I can, again, as long as we get that
    funding level, you know, within a reasonable proximity. The
    problem you get to, Senator, as you are well aware, we come in
    with a request and it does get nicked from time to time, even
    through the rescission process, where 1 percent gets whacked.
    There is always space. If we are quite close to it, I think
    have no problems we will be able to cover this, but if
    something dramatic happens, then we have to revisit it.
        Senator Murray. Okay. Well, Chairman Wagner, your fiscal
    year 2007 special report from the IRS Oversight Board states
    your belief that the $84 million in program efficiencies may
    decrease performance. Can you tell me what specific IRS
    functions you are concerned would be eroded under this
    proposal?
        Mr. Wagner. Senator Murray, we did express in our 2007
    report, the 2006 report, as well as my testimony that I have
    submitted today that this is one of the areas of risk.
    Accumulating savings of $84 million just does seem to the board
    inherently to present a risk, and we are going the continue to
    watch it to ensure that customer services are not compromised
    and that the enforcement continues to stay on track. We are
    also concerned that it could impact the rate at which the
    systems modernization is proceeding and so on.
        But to spread $84 million across the entire organization
    could be done and hopefully will be done, as the Commissioner
    suggests, without any cut in services, any detectable
    noticeable cut in services, but on the other hand, it might
    very well cause some damage, and we will continue to monitor
    that as well.
        Senator Murray. Thank you. Mr. Everson, you have cut some
    taxpayer services conducted through telephone or face-to-face
    contact and you propose to eliminate Telefile by arguing that
    it would be cheaper for the IRS if those citizens filed
    electronically. Now that Telefile is eliminated, taxpayers who
    used Telefile are not filing electronically. Instead, a
    significant number of those taxpayers are reverting back to
    paper filing, which is, as we know, a more expensive form to
    process. How do you explain that result?
        Mr. Everson. Well, Senator, as you may be aware, the
    Congress in RRA 98 directed the IRS to have an advisory
    committee in this area. That was established, and they advised
    over a course of a couple of years that we eliminate telefile
    as a part of this overall program. So we did take that advice
    and we did it, as you indicate, largely through as a measure of
    cost savings. There may very well be, as you have indicated--I
    haven't seen the final data on this--migration into paper, but
    the Telefile piece was the most expensive way to process the
    returns. I don't have the precise figure. I certainly can get
    it to you, but we saved, I believe, something between $15
    million and $20 million through the curtailment of that
    program, which we ramped down, as you know, over the course of
    fiscal year 2005 and took effect this filing season.
        Senator Murray. I think we have to be very careful, when we
    cut back taxpayer services, of the unintended consequences.
        Mr. Everson. Yes.
        Senator Murray. Which I think we are seeing with that.
        Ms. Olson, do you have any concerns in this area?
        Ms. Olson. Well, I think that this is an example where the
    IRS said that they were going to make some savings in the short
    run and incur longer-term costs and they also missed an
    opportunity to take those taxpayers and help migrate them to
    another electronic approach, and we just walked away from that.
    I just think if that is the wave of the future, we are going to
    have a real reduction in taxpayer services.
        Senator Murray. So we need to help taxpayers find----
        Ms. Olson. Exactly. We have to help them, assist them. A
    good example is, again, from my visiting the United Kingdom,
    what they used were screeners that would greet taxpayers at the
    door, and they would say what are you needing. They would say:
    ``Well, I would like to find an answer to a question'', and
    they would say: ``Do you know that you can look this up on the
    computer?'' and they would walk them over to a computer bank
    and they would stand there just like people in the airline
    industry, stand by you as you are trying to do those confusing
    screens as you get your ticket. But they walk you through. So
    you do that two or three times, you have learned, you have
    migrated.
        Senator Murray. So we need an education process.

                           REFUND ANTICIPATION LOANS

        Let me go back to Commissioner Everson. The Taxpayer
    Advocate recently highlighted refund anticipation loans, RALs,
    as a serious problem facing taxpayers, in her 2005 report to
    Congress. More than half of those RAL customers are EITC
    recipients despite the fact that the EITC recipients constitute
    only 15 percent of all of our taxpayers. The money that is
    received by EITC recipients is also often very minimal, but the
    paperwork isn't. So many of our EITC recipients often seek out
    paid tax preparers to help them and frequently they pay for tax
    preparer services by signing up for a RAL, never realizing that
    it is a loan and not the refund itself.
        Can you share with us what you are doing to help reduce the
    number of taxpayers who fall victim to these predatory refund
    anticipation loans?
        Mr. Everson. Well, the first thing is we try to cajole and
    work with the industry. I think these are distasteful vehicles,
    and I have said that publicly. It is not a direct regulatory
    role for us in the sense of a loan. It is not something that we
    are charged with monitoring.
        At the same time, I do have real questions as to conflicts
    of interest where big preparers, they are in the tax
    preparation business, but then they are marketing other
    products. In part, it comes back to this question we started
    out with some time ago about what is the suite of services that
    are proper for a tax preparer to provide. What I find
    particularly concerning here is that some of the firms, they
    end up keeping an interest in the loan, if you will, over the
    life of the loan, and I think the banks want that because they
    want the preparer to make sure they are doing adequate fraud
    reviews and not providing the loans, if you will, to someone
    who is not going to get the money back.
        I do think it is area of continuing inquiry, maybe mostly
    for the Congress. There is a lot more concern about paid
    preparers now, including the big chains. There was reference to
    the recent GAO report. What you see is if you look at, frankly,
    the tax gap figures we showed, you see the same problems within
    the returns prepared by a preparer than you do in the overall
    population. That is hardly surprising given the fact that over
    half of returns are prepared by preparers. They obviously have
    to be a part of those problems.
        Senator Murray. I have spoken on this committee before
    about that. I am very concerned about that. I think it is a
    huge problem.
        I just want to end, Ms. Olson, if you could, just what else
    can we do?
        Ms. Olson. Well, right now, the IRS in cooperation with my
    offices is working on a report about refund anticipation loans
    and the debt indicator and identifying alternatives to RALs.
    The Treasury Department has a banking initiative and is looking
    at alternatives to RALs, ways of getting people into the
    system, and I think that some of the things that we will be
    reporting on will be very helpful to Congress.
        Senator Murray. When do you expect that?
        Ms. Olson. I think that the legislation says the conference
    report is June 30, and I think we are planning to deliver that
    on that date, and we are going out and talking to stakeholders,
    you know, the consumer groups to hear their concerns as well as
    members of the industry.
        I do have to respectfully disagree with the Commissioner
    about the IRS's role in this. We do set the rules for the
    electronic return originators who are the people who are
    offering these RALs, and our rules allow up to a 49 percent
    ownership interest in these loans. So we could change those
    rules. We also could do much more oversight. I did cover that
    in my annual report to Congress. We don't do sufficient
    oversight on these electronic return originators, in my
    opinion, and I think that we could also impose some due
    diligence requirements on the banks, that they make sure that
    the retail outlets are doing what they are required to do now
    in terms of disclosure. We don't know that.
        So I think there are some areas for improvement even in the
    current environment.
        Senator Murray. Yes.
        Mr. White. Senator, if I could just add, my name is James
    White at GAO. I think this highlights the importance of systems
    modernization at IRS. Taxpayers use RALs because they are a
    vehicle for getting their refund money faster. To the extent
    that IRS can process refunds faster, that would reduce the
    demand for RALs.
        Ms. Olson. Absolutely.
        Senator Murray. Okay.
        Mr. Wagner. Senator, that is exactly a point that I was
    about to make, that modernizing the system will allow the
    turnaround of refunds more promptly, within 2 to 3 days, and
    alleviate the need for the RALs. I might also add that I think
    the IRS has additional leverage in connection with these RALs
    in the process of the Free File Alliance and negotiating that.
        Senator Murray. Okay. Mr. Everson, why don't we just lower
    the time?
        Mr. Everson. Well, I think as the advocate indicated, we
    are actively continuing to look at all of these areas. I don't
    mean to say that we are precluded from doing anything. My
    remark was the principal regulation on the loans. So we are
    actively looking at this on a concerted basis, and we did do
    something in the Free File Alliance. We got additional
    protections in as to how people would be notified and what they
    would be told before a product like that would be offered. We
    focused on that very clearly in that negotiation. The RAL
    percentage there is not very high. I am hoping it is actually
    less than 1 percent. I am hoping that it goes away entirely
    maybe after this filing season.
        So we continue to work on it, most recently on that area.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Murray. Well, thank you very much to all of our
    witnesses today.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]

                     Questions Submitted to Mark W. Everson
               Questions Submitted by Senator Christopher S. Bond

                         TAXPAYER ASSISTANCE BLUEPRINT

        Question. As mandated by our appropriations act, the IRS recently
    issued the first phase of the Taxpayer Assistance Blueprint. I asked
    for this business plan so that the IRS and the Congress could plan
    strategically on developing future taxpayer services based on taxpayer
    needs. I also expected the plan to address demographic and geographic
    differences. Ultimately, this plan should help to improve voluntary
    compliance with the tax code. I expected the plan to focus beyond
    current IRS services and develop innovative approaches.
        Please explain how the blueprint is meeting my needs, when we will
    receive the final plan, and how it will be integrated in the
    administration's future budget requests.
        Answer. The Taxpayer Assistance Blueprint (TAB) team is conducting
    and reviewing extensive research regarding taxpayer expectations. The
    TAB Phase 1 report, delivered to Congress in April 2006, discussed
    initial findings, including an inventory of current services and
    service channels. Several new studies, including a 40,000 taxpayer
    survey, are underway to add to the knowledge base. When released, the
    TAB Phase 2 report will address differences in taxpayer demographics
    and geography based on empirical data and recommend changes in service
    delivery options. It will also include development of an implementation
    plan for its recommendations; integration of recommendations;
    integration of recommendations into the budgeting process; and
    integration of the blueprint into the IRS Strategic Plan. We anticipate
    delivery of the report to Congress in October 2006, at which time we
    will have completed integrating its findings into our strategic
    planning and ultimately assisting in improving voluntary compliance.

                            BETTER TAX GAP ESTIMATES

        Question. While the IRS has done a commendable job in updating the
    tax gap estimates, there remain significant gaps in the gap. The IRS
    and others have expressed concerns with the certainty of the overall
    tax gap estimate in part because some areas of the estimate rely on old
    data (from the 1970's and 1980's) and it has no estimates for other
    areas of the tax gap. GAO, TIGTA, the Taxpayer Advocate, and the IRS
    Oversight Board also have all recommended greater and more frequent
    data collection and studies of the tax gap. I wholeheartedly agree.
        What will it take in terms of resources to address these concerns?
    Should the IRS conduct research on how services affect compliance?
        Answer. The difference between the amount of tax for a given tax
    year paid voluntarily and timely and the corresponding estimate of the
    true tax liability for that tax year is the Tax Gap. The three
    components of the Tax Gap include underpayment, nonfiling, and
    underreporting.
        The IRS regularly tabulates the underpayment tax gap from Master
    File data for each major tax and for major groups of taxpayers. This
    component of the Tax Gap is the only one that is actually observed; the
    rest must be estimated.
        The IRS currently estimates the nonfiling gap only for the
    individual income tax and for the estate tax. We must overcome some
    conceptual and data issues before we can develop nonfiling gap
    estimates for the remaining taxes, which requires the successful
    completion of various research projects.
        The underreporting gap has been estimated for various types of
    taxes (except excise taxes) and usually has been based on operational
    audits or audits of randomly selected returns. In general, the latter
    situation is believed to generate better estimates of the extent of
    underreporting in the population. The resources required to undertake a
    sufficient number of audits of randomly selected returns can be
    substantial. Therefore, much of the data underlying the underreporting
    gap estimates, for areas other than the individual income tax, date
    from the Taxpayer Compliance Measurement Program (TCMP) which conducted
    its last audits for Tax Year 1988.
        When the IRS conducted compliance studies under the auspices of the
    TCMP in the 1970's and 1980's, it generally sought to conduct studies
    of several components of the tax gap simultaneously, and to repeat the
    reporting compliance studies as often as every 3 years. IRS examination
    resources are nowhere near the levels they were 2 or 3 decades ago, so
    a schedule along these lines is not feasible. In fact, for some groups
    of taxpayers, the IRS used to conduct a greater number of random audits
    under TCMP than the total number of operational audits conducted today
    on those taxpayer groups. This change in resource allocations has led
    the IRS currently to conduct these research audits at a measured pace,
    and to consider conducting studies over more than 1 tax year--for
    example, the IRS is currently conducting a reporting compliance study
    of S-Corporations over a 2-tax-year period, to spread out the workload.
        Fully funding the President's budget request would be a start in
    establishing a resource base for undertaking reporting compliance
    audits on a recurring basis, with different types of reporting
    compliance being studied over time. As Congress increases the resource
    level the IRS can devote to operational audits, it becomes increasingly
    possible to use some of these resources for reporting compliance
    studies. Moreover, to the extent research resources permit, we will
    investigate alternative methodologies for estimating portions of the
    Tax Gap.
        In the past, the IRS has attempted to determine the impact that our
    service activities have on compliance. However, this area is extremely
    difficult to evaluate, in part because there is no direct link between
    the level of service provided/received and the consequent level of
    taxpayer compliance. The relevant research in tax administration has
    focused much more attention on the link between enforcement activity
    and overall compliance levels (the so-called indirect effect of
    enforcement actions). The results have generally shown a positive
    effect on compliance of increased enforcement activity (such as more
    audits), but the magnitude of the effect is subject to some dispute.
        The link between service and compliance has been even harder to
    define. Taxpayers who take advantage of service opportunities (asking
    tax law questions, searching the IRS website) generally cannot be
    linked to specific compliance outcomes. The IRS has had to look for
    indirect ways to detect this relationship. In some cases, the IRS has
    designed narrow studies to see if a particular intervention had a
    detectable effect. In other cases, it has meant devising complicated
    analytical approaches to establish the relationship (if any). However,
    these studies have not been comprehensive and have barely scratched the
    surface on understanding how provision of enhanced services affects
    overall compliance (both in the short and long term).
        The Taxpayer Assistance Blueprint study (now underway) is an
    attempt to understand better the relationship between service levels
    and compliance (among other things). We expect this to be an integral
    part of laying out a future research strategy to enhance our
    understanding in this area.

                    BALANCE BETWEEN SERVICE AND ENFORCEMENT

        Question. There continues to be questions and debate on the proper
    balance between taxpayer service and enforcement. But given the data
    limitations of the tax gap and the IRS's inability to measure
    quantitatively the return on investment on service or enforcement, it
    is a difficult question to answer.
        What is known quantitatively about the impact of taxpayer service
    and enforcement on compliance? How much do IRS's service programs
    affect compliance? How much do IRS's enforcement programs affect
    compliance? What is your analytical basis for deciding on the balance
    between service and enforcement? What evidence do you have that IRS is
    striking the correct balance between its taxpayer service and
    enforcement efforts? Do you believe that one approach is more cost-
    effective than the other?
        Answer. We do not know the quantitative impact of taxpayer service
    and enforcement upon compliance. During TAB Phase 1, the IRS conducted
    interviews with private sector organizations and other governmental
    agencies to identify customer service leading practices and the impact
    of service upon business results. Most of the organizations acknowledge
    the inherent challenge in quantitatively linking customer services to
    business results. They indicate that current metrics used to measure
    business impact from customer services are predominantly how those
    organizations measure qualitative or quantitative proxies. However, we
    have eight distinct initiatives in the TAB research plan to evaluate
    whether establishing a quantitative link is possible.
        It is not clear at this time whether the limited effects on
    compliance detected so far result from the difficulty in detecting this
    relationship between service and compliance (for example, the
    difficulty of disentangling all other potential effects), the design of
    the research studies or experiments, or the existence of a fairly weak
    relationship. We must do careful research in this area in order to
    support definitive conclusions about the strength and direction of the
    effect. Two papers presented at the IRS Research conference in June
    examined the link between service levels and compliance. One study
    found some service and education interventions led to modest
    improvements in compliance for some groups of taxpayers, and no
    improvements for other groups. Another paper noted that educational
    programs can have offsetting effects on compliance--on the one hand,
    they can inform taxpayers about potential ways to inappropriately
    report their tax liability, while on the other hand they can discourage
    this inappropriate behavior. At this point, the literature exploring
    the relationship between taxpayer service levels and compliance is in
    its infancy and there are few, if any, definitive results.
        We know slightly more about how enforcement programs affect
    compliance levels. A few IRS and academic studies have addressed this
    issue (for example, Dubin, Graetz, and Wilde (1990), Plumley (1996),
    and Dubin (2004)). All these studies find that increased enforcement
    (measured, for example, by increased audit coverage) is associated with
    increased voluntary compliance levels (this is the so-called indirect
    effect). However, the magnitude of the effect estimated by these
    studies varies widely. Further research is needed to pin down the size
    of this relationship and to estimate how it varies for different types
    of taxpayers.
        Ideally, the IRS would like to be able to estimate the cost-
    effectiveness of each enforcement program and service offering, and how
    the effectiveness varies with level of effort. Cost-effectiveness in
    this context would take into account both the direct revenue effect
    (e.g., payments of back taxes from taxpayers subject to audit) and the
    indirect effect (the increased voluntary compliance levels in the
    general population resulting from the enforcement action taken or
    service provided). The costs of the activity would include all the
    costs to the IRS, including any overhead costs. If all these benefits
    and costs could be quantified, then in principle, it would be possible
    to determine the appropriate mix of services and enforcement.
        At this point, the IRS believes that a balanced program,
    maintaining service levels at those achieved in recent years while
    devoting any additional resources to enforcement activities is the best
    approach to improving voluntary compliance. However, ongoing research
    in several areas (such as the Taxpayer Assistance Blueprint project)
    will provide us with the data needed to determine if this is the
    correct balance or if we need to devote a greater or lesser proportion
    of resources to taxpayer service offerings.

                              INCREASING E-FILING

        Question. The current growth rate of e-filing will not allow the
    IRS to reach the congressionally-mandated goal of having 80 percent of
    all tax returns e-filed by 2007. One possible reason is the lack of
    financial incentive for taxpayers. There are reports that due to the
    cost of e-filing, more than a quarter of individual filers (40 million)
    prepared tax returns on a computer, printed them out, and mailed them
    to the IRS.
        What is your current plan on how and when you will achieve the 80
    percent goal? When does IRS project that electronic filing will meet or
    exceed the IRS Restructuring and Reform Act of 1998 goal of 80 percent?
    What actions and strategies are most likely to facilitate increased
    electronic filing? What can IRS do to eliminate or at least reduce the
    cost to taxpayers of electronic filing? How does your plan address the
    40 million people that prepared tax returns on a computer, printed them
    out, and mailed them to the IRS so that they will be incentivized to e-
    file instead of mailing in paper returns? As suggested by the GAO,
    should the IRS consider expanding the use of electronic filing
    mandates?
        Answer. The vision of IRS electronic tax administration is one in
    which we accomplish electronically any exchange or transaction that
    currently occurs in person, over the phone, or in writing. All
    taxpayers would have the option of conducting their transactions
    electronically. Taxpayers would have multiple choices in terms of how
    they interact with us and what value-added services (for example,
    Where's My Refund, and paying electronically via debit or credit card)
    they choose to use. Taxpayers would become e-customers.
        Our e-strategy for growth outlines our plans to reduce taxpayer
    burden and increase electronic filing. Key strategies include:
      --Making electronic filing, payment and communication so simple,
            inexpensive, and trusted that taxpayers will prefer them to
            calling and mailing.
      --Substantially increasing taxpayer access to electronic filing,
            payment, and communication products and services.
      --Aggressively protecting transaction integrity and internal
            processing accuracy.
      --Delivering the highest quality products and services as promised.
      --Partnering with States and other governmental entities to maximize
            opportunities to reduce burden for our common customer base.
      --Encouraging private sector innovation and competition.
        To achieve these strategic goals, we will continue to develop and
    implement e-file marketing strategies, expand the use of electronic
    signatures, and enhance our website services for both practitioners and
    taxpayers. Ultimately, our goal is to offer all taxpayers and their
    representatives the ability to conduct nearly all of their interactions
    with the IRS electronically.
        We have collaborated with the private sector in developing a Free
    On-Line Electronic Tax Filing Agreement. The agreement makes available
    to 70 percent of taxpayers, at no cost, the tax preparation and filing
    services of 20 participating companies. In processing year 2005, more
    than 5.1 million taxpayers took advantage of the opportunity to file
    electronically at no cost.
        Section 6011(e)(1) indicates that the Secretary may not require
    returns of any tax imposed by subtitle A on individuals, estates and
    trusts to be other than on paper forms supplied by the Secretary. The
    IRS does not support a general e-file mandate for individual taxpayers.
    There are too many individual circumstances that might make such a
    mandate a burden to some taxpayers and make it impossible to enforce.
    The IRS believes that there are approaches other than individual
    mandates that lessen the chance for burden on specific taxpayers.
    However, we strongly urge Congress to act on the administration's
    proposal to provide the IRS with additional authority to require
    electronic filing, short of blanket individual mandates. This proposal,
    on page 262 of the Analytical Perspectives, will allow the IRS to
    process more returns and payments efficiently.
        Regarding the people who prepare their returns on a computer and
    then mail them to the IRS, a group of taxpayers whom we call ``V-
    Coders,'' we have a plan, developed by our Stakeholder Partnerships,
    Education and Communications (SPEC) organization, to specifically
    target these filers and reduce these types of returns by using
    leveraged outreach through partner channels to market our full
    portfolio of electronic products and services.

                          PRIVATE COLLECTION AGENCIES

        Question. One new tool that you have mentioned that will help in
    collections and enforcement is the use of private collection agencies
    (PCAs).
        What is the status of the PCAs? What controls are you providing to
    protect taxpayer rights and privacy?
        Answer. On June 14, 2006, the Government Accountability Office
    (GAO) denied protests of the IRS contract award of March 9, 2006 to
    three Private Collection Agencies (PCAs). GAO's resolution of the
    protests lifts the 100-day Suspension of Work Order and clears the way
    for IRS plans to begin placing cases with the PCAs by early September
    2006.
        The IRS has a variety of safeguards in place to protect taxpayer
    rights and privacy as the private debt collection initiative moves
    forward. Before they can receive delinquent taxpayer account
    information, PCA employees are required to undergo background
    investigations and complete all IRS-mandated training. Individual
    privacy will be protected by the confidentiality provisions of the
    Internal Revenue Code (IRC) Section 6103 and the Privacy Act of 1974,
    as amended. Private collection agency (PCA) employees will be held to
    the same ethical standards regarding disclosure and privacy as IRS
    employees and are subject to the same penalties as IRS employees.
    Failure to adhere to these laws and regulations may subject employees
    to criminal penalties or to civil causes for action.
        Additionally, PCA firms will be monitored for compliance with all
    applicable Federal and State laws, including the Fair Debt Collection
    Practices Act. The IRS established a Private Debt Collection Oversight
    Unit (OU) and a Referral Unit (RU) to: manage PCA inventory; monitor
    security and privacy requirements; monitor quality, and; evaluate PCA
    performance and compliance with contractual requirements. Through the
    OU and the RU, the IRS will ensure that the PCAs maintain taxpayer
    confidentiality at all times through a combination of training and
    strict oversight. The IRS will conduct on-site security reviews to
    ensure PCAs implement appropriate access controls to segregated areas
    where IRS work will be performed.
        Failure to comply with the confidentiality safeguards will be
    considered a breach of contract. Contractors are not authorized to
    communicate with third parties (other than the taxpayer's designated
    representative) and are prohibited from soliciting direct receipt of
    funds from taxpayers. Unauthorized disclosure of confidential tax
    information by officers or employees of the firms will subject those
    individuals to felony charges punishable by up to $5,000 and 5 years in
    prison.

                           E-FILING FOR CORPORATIONS

        Question. Electronic filing is now required for corporations having
    assets of $50 million or more. Next year, for 2006 returns, the
    threshold drops to $10 million in assets.
        Do you believe the corporate world will be ready for this filing
    requirement? What is your basis for your response? What steps are you
    taking to assist corporations to meet the new e-filing mandate? Along
    this same requirement, will the IRS have the capacity to handle what is
    likely to be a significant increase in corporate electronic filings?
        Answer. We believe the corporate world will be ready for next
    year's e-filing requirement for several reasons. By June 18 of this
    year (which is relatively early in the corporate filing season) over 15
    percent of the corporations required to e-file (those corporations with
    assets greater than $50 million) had e-filed their 2005 tax returns. As
    has been publicly announced, General Electric (GE) successfully e-filed
    the Nation's largest tax return on May 18, 2006. On paper, GE's e-filed
    return would have been approximately 24,000 pages long. After filing,
    GE received IRS's acknowledgement of its filing in about an hour. The
    file was 237 megabytes.
        The ability of these firms to meet the electronic filing
    requirements also clearly indicates the IRS Modernized e-File system is
    fully operational and is accepting and processing large and complex
    corporate tax returns. We also believe the necessary support for the
    corporations being added to the e-file requirement next year will be
    available. A few of the corporations that have e-filed so far this year
    used their own software and/or transmitted their own returns to the
    IRS. However, the clear majority of the corporations are using
    commercial tax preparation software and/or third-party transmitters to
    e-file their returns. Corporations with assets between $10 to $50
    million will use the same software packages and return transmitters as
    are currently being used by those with assets over $50 million.
        Additionally, the vast majority of the corporations being added to
    the e-filing requirement next year generally rely on CPA's as their tax
    advisers. We are actively working with the AICPA on efforts to get
    their members knowledgeable about corporate e-filing and the related
    requirements. So far these efforts have included contacting the five
    largest CPA State Societies to work towards getting e-filing
    information and presentations as part of their 2006 CPE programs and,
    jointly developing an e-filing course to be available to all CPA CPE
    programs.
        Lastly, with regard to the system being able to handle increased
    capacity demands because of the filing requirement dropping to $10
    million, since bringing the system online we have followed a continual
    program of monitoring filing patterns, adjusting our projections
    accordingly, and then developing and executing stress tests of the
    system to ensure its ability to respond to our return projections.
    Based on this program of stress testing and projections, we make the
    necessary adjustments to ensure that we have the infrastructure in
    place to support the anticipated volume. Thus, we believe we will be
    well positioned to handle next year's increase in corporate e-filed
    returns.

                   STRATEGIC PLAN FOR ADDRESSING THE TAX GAP

        Question. As I stated at the hearing, the IRS is directed to work
    with the IRS Oversight Board, the National Taxpayer Advocate, and other
    stakeholders to develop a strategic plan for meeting the
    administration's stated goal of increasing voluntary compliance to 85
    percent by 2009. The strategic plan should identify a wide range of
    goals, objectives, and strategies, at least some of which would be
    beyond the scope of the IRS, such as implementing tax code
    simplification, and providing new tax administration tools such as
    additional reporting requirements.
        How will the IRS develop such a plan? How long will it take the IRS
    to complete such as plan?
        Answer. We recognize that the best way to address the tax gap is to
    maintain a balance between service and enforcement. The IRS will
    consult with the Oversight Board, the National Taxpayer Advocate, and
    other stakeholders to ensure that our plan for improving voluntary
    compliance maintains the proper balance. While the IRS has restored
    credibility to its compliance programs over the last 2 years,
    additional enforcement alone is not the answer. Studies show that
    voluntary compliance is higher where there is third-party reporting
    and/or tax withholding. Therefore, our plan will likely involve both
    recommendations for improving voluntary compliance and tax
    administration efficiency, such as the legislative proposals for
    improving IRS operations submitted with the fiscal year 2007 IRS
    budget. The IRS will use also the results from its recent compliance
    studies to improve audit selection models, and we will continue to
    combat abusive tax shelters by corporations and high-income individuals
    and vigorously pursue those who promote these illegal schemes.
        The IRS has already begun laying the groundwork for a strategic
    compliance plan that will improve voluntary compliance and reduce the
    tax gap. We intend to present a proposal for consideration this fall.
    Because this proposal may include administrative and legislative
    changes, we will need to coordinate the proposal with the IRS's budget
    submission.

                               LONG-TERM BSM PLAN

        Question. The GAO has informed the subcommittee that the 5-year IT
    Modernization Vision and Strategy document should be supplemented with
    an additional plan that covers the remainder of the BSM program. GAO
    further recommended that the plan be tied to a known spending level, so
    that Congress can understand the funding requirements to implement the
    plan and the impact of funding delays.
        Has the IRS begun to develop a plan for the remainder of the BSM
    program? How would you develop the plan? What information will it
    contain to give Congress the information it needs to monitor program
    execution?
        Answer. In August 2005, the IRS embarked on a lengthy,
    comprehensive, and collaborative IT modernization planning effort
    involving more than 80 IRS employees from across the Agency. The
    resulting strategy, known as the Modernization Vision and Strategy
    (MV&S), will speak to the modernization of IRS's core tax
    administration functions and include BSM projects as well as smaller-
    scale system efforts.
        Presented as a 5-year plan, MV&S will outline the projects that the
    IRS plans to carry out to meet the highest business priorities
    identified by individual business units. The plan will include all IT
    modernization investments (not just BSM) and ensure that the complete
    set of modernization initiatives is optimized and coordinated. The MV&S
    approach emphasizes enhancing existing systems in lieu of full
    replacement; full replacements are to be undertaken in those few cases
    where upgrade is impractical.
        To keep the MV&S current, the IRS is instituting a planning process
    to annually update the 5-year plan. Further, the annual BSM Expenditure
    Plan will address major project enhancements emanating from MV&S
    planning. Congress will be able to assess and monitor program
    performance against the Expenditure Plan.

                                   BSA DIRECT

        Question. During our last hearing with the Treasury, we discussed
    the problems surrounding the BSA Direct system. I understand the IRS is
    helping FinCEN in ensuring continuity of service to users and is
    looking at how to meet other BSA Direct needs.
        Please provide a status report on the IRS's work on BSA Direct in
    terms of the specific actions the IRS has taken to address the needs of
    FinCEN and how much money the IRS plans to spend on carrying out these
    actions.
        Answer. To ensure continuity of service to FinCEN users, IRS and
    FinCEN IT representatives have met weekly since April 2006 to address
    FinCEN's unique Gateway (case information) requirements and develop
    connectivity, training, and conversion plans for their users to
    WebCBRS. The IRS implemented their unique Gateway processing
    requirements in the WebCBRS on June 1, 2006. FinCEN reimbursed the IRS
    for associated programming costs of $300,000. FinCEN's internal users
    are connected and are testing WebCBRS, with plans to continue training
    and incrementally converting their Regulatory and Law Enforcement users
    to WebCBRS by September 2006.
        On June 7, 2006, the IRS and FinCEN met to discuss other BSA Direct
    needs that FinCEN is defining, including new and changed BSA forms,
    with estimated costs of $750,000. The IRS's first priority is to ensure
    FinCEN users are connected, trained and converted by September 2006.
    Once this step is accomplished, the IRS will continue to partner with
    FinCEN to address specific BSA Direct requirements, along with
    estimated costs and proposed delivery dates.

                              ESTATE AND GIFT TAX

        Question. I understand that the IRS is implementing a survey of the
    Estate and Gift (E&G) tax returns filed from 2000 to 2007.
        What is the purpose of that survey?
        Does the IRS have any plans to reduce the number of Estate and Gift
    Tax Attorneys? If so, what timeline are you considering?
        Answer. The IRS is studying the projected volume of filings of
    estate and gift returns in light of the increasing filing threshold
    amounts. Furthermore, we are reviewing the staffing levels and audit
    coverage within the estate and gift program to effectively balance
    enforcement resources.
                                     ______

                  Questions Submitted by Senator Patty Murray

      CUTTING THE IRS OFFICE RESPONSIBLE FOR SERVICE WHILE EXPECTING MORE
                            FROM VOLUNTEER PROGRAMS

        Question. Mr. Everson, the IRS's Stakeholder, Partnership,
    Education and Communication (SPEC) office has overall responsibility
    for community partnerships such as the Volunteer Income Tax Assistance
    (VITA) and Tax Counseling for the Elderly (TCE) programs. In recent
    years, this IRS office has suffered cutbacks while the number of
    taxpayers seeking help from by VITA and TCE for tax preparation
    continues to increase dramatically. Moreover, you stated recently that
    you expect to rely heavily on VITA programs to improve taxpayer
    services.
        How do you justify continuing to cut the SPEC office while giving
    it an increasing workload?
        Answer. The IRS is devoting the necessary staff to support the
    Stakeholder Partnerships, Education and Communication (SPEC) business
    model that partners with external organizations to deliver volunteer
    return preparation (VITA/TCE), outreach/education, and asset building
    services. Since the reorganization of the IRS in 2000, the SPEC
    organization has evolved from 531 SPEC on-rolls (staffing) in fiscal
    year 2001 to 565 on-rolls (staffing) in fiscal year 2006.
        We believe the community-based programs play an important role in
    improving taxpayer service and are critical in providing no-cost tax
    return filing assistance to underserved taxpayers, including low-
    income, elderly, disabled, and taxpayers with limited English
    proficiency. As such, the IRS has established partnerships with more
    than 60 national organizations representing financial institutions,
    educational institutions, tribal governments, community and volunteer
    organizations and many others. At the local level, the IRS has formed
    over 295 coalitions (up from six coalitions in fiscal year 2001),
    representing thousands of partners. As our experience, program
    knowledge, and relationships with external partners have grown and
    matured over time, our capacity to deliver more service through the
    leveraged business model has significantly increased. For example, as
    of June 17, 2006, community-based partners had prepared 2.24 million
    returns compared to 1.17 million returns for the entire fiscal year of
    2001.
        Question. Ms. Olson, what is your opinion on this matter?
        The VITA program operates for only about 4 months of the year
    during tax season and receives limited support from the IRS. Ms. Olson,
    in your statement, you say that the IRS should concentrate on
    developing a fundamental support structure for the program and expand
    the program. You also say that the IRS should not let VITA or any other
    volunteer program serve as a substitute for IRS-provided service.
        Ms. Olson, why do you take that position, and Mr. Everson, what is
    your response to this?
        Answer. As previously stated, the assistance the SPEC organization
    provides through the support of its partners play an important role in
    improving taxpayer service and is critical in providing no-cost tax
    return filing assistance to underserved taxpayers, including low-
    income, elderly, disabled, and taxpayers with limited English
    proficiency. However, it is important to note that the success we have
    achieved each filing season, as outlined in the preceding paragraph, is
    largely predicated on the rigorous planning effort that takes place
    throughout the fiscal year with national and local partners. A national
    program of this magnitude requires year-round support to incorporate
    planning, training, filing season assessment, partner recruitment
    activities and partner satisfaction improvement.
        This support is essential to maintaining existing partner
    relationships and attracting new partners and the investment is
    substantial. It provides partners with tax law and software training,
    marketing materials, educational products, research data for optimal
    site placement and effectiveness, supplies, technology support
    (software, computers and printers) and the necessary products,
    procedures, and technical expertise for effective site operations.
    SPEC, with its partners, supports over 12,000 volunteer return
    preparation sites nationwide that are strategically placed to
    facilitate access for low-income taxpayers. Our annual research report
    on SPEC site coverage indicates 99 percent of low-income taxpayers have
    access to a free tax return preparation site within 45 minutes of their
    home. This coverage is a complement to, rather than a replacement of,
    IRS-provided services.

             SETTING TAXPAYER ASSISTANCE CENTERS (TACS) UP TO FAIL

        Question. In a briefing last year by TIGTA on Taxpayer Assistance
    Centers, I learned that some TACs have as little as one or two staff,
    what TIGTA calls a ``critical staffing shortage''. The House and
    Senate, Majority and Minority, said no to your proposal to cut back
    TACs until TIGTA completes a study on the impact of such reductions on
    taxpayer compliance and taxpayer services.
        Mr. Everson, are you, in fact, allowing these TACs to eventually
    close by letting the staffing levels dwindle? Do you believe that is
    consistent with the direction from this committee?
        Answer. In response to the congressional directive received with
    our fiscal year 2006 budget appropriation, a concentrated effort was
    made to keep all of our 400 Taxpayer Assistance Centers (TAC) open
    during filing season. I am pleased to report that we not only kept all
    of these TACs open, but we addressed all potential critical staffing
    shortages in our one and two person TACs. Specifically, during the
    fiscal year 2006 filing season, we hired almost 60 critical permanent
    front line employees, returned seasonal employees and detailed back
    former TAC employees who were assigned to other IRS organizations. We
    also temporarily deployed technical employees as necessary from other
    TACs in an effort to keep every TAC open daily. We initiated a second
    wave of hiring after the filing season and expect to employ over 300
    front line employees to fill behind attrition. These actions will bring
    our staffing levels at the end of fiscal year 2006 to the same on-rolls
    we had at the beginning of fiscal year 2006 (2,080), as well as
    position us to deliver services in fiscal year 2007 with a minimal
    amount of contingencies required.
        While we expect the Taxpayer Assistance Blueprint (TAB) initiative
    to guide future decisions about the proper staffing levels for the TACs
    and the kinds of services we will offer, we are committed to achieving
    and maintaining an appropriate level of staffing and service in the
    TACs as demonstrated this fiscal year.
        Question. Mr. George or Ms. Olson, do either of you care to
    comment?
        Mr. Everson, your statement mentions the identification and
    elimination of non-critical vacancies as one of the means through which
    you intend to achieve efficiencies within taxpayer service programs and
    processes.
        When it comes to staffing at the taxpayer assistance centers, are
    you trying to achieve through attrition what you couldn't achieve due
    to legislative restrictions?
        Answer. As indicated in our above response, we are committed to
    achieving and maintaining an appropriate level of staffing and service
    in the TACs. The IRS demonstrated this commitment by the staffing
    actions taken to prepare for the 2006 filing season and the post-filing
    season actions to fill behind attrition. We expect to employ over 300
    front line employees to address staffing vacancies caused by attrition.
    These actions will bring our staffing levels at the end of fiscal year
    2006 to the same on-rolls we had at the beginning of fiscal year 2006
    (2,080, including the 300 attrition hires), as well as position us to
    deliver the same level of services in fiscal year 2007 with little to
    no alternative staffing contingencies.

                            SERVICES OFFERED AT TACS

        Question. Mr. Everson and Ms. Olson, why hasn't the IRS involved
    taxpayers who need or desire face-to-face assistance in determining
    what services are offered at the TACs?
        Answer. Since September 2005, the Taxpayer Assistance Blueprint
    (TAB) team has been conducting extensive research directly with
    taxpayers to identify taxpayer needs and preferences for receiving
    services including those offered at our TACs. As you know, we delivered
    the TAB Phase 1 Report to Congress in April 2006. The TAB Phase 2
    report, which we expect to deliver to Congress in October 2006, will
    validate the service recommendations through extensive primary research
    with taxpayers. Current ongoing customer preference and needs research
    includes surveys, focus groups, and experimental research aimed at
    providing customer-centric information to decision-makers.
        Question. Mr. George, your recent audit report says that prior to
    making decisions on closing any TACs, the IRS should ensure that it is
    known which taxpayers visit the TACs for assistance and why, so the IRS
    can determine the impact on these taxpayers and ensure alternative
    service deliver channels are effective in meeting the needs of these
    taxpayers.
        Ms. Olson, I would imagine you agree?
        Mr. Everson, TIGTA recently found that 8 of 11 stakeholder groups
    believe that closing the TACs may make it harder for their constituents
    to stay compliant with tax laws and file tax returns. TIGTA also found
    that 11 of 11 stakeholder groups believe their constituents are not
    currently likely to use alternative methods, such as the internet or
    email to obtain the services they need.
        In light of your efforts to reduce face-to-face interaction between
    the IRS and the taxpayer and your efforts to increase compliance, have
    you re-thought some of your earlier decisions on reducing taxpayer
    services?
        Answer. Balancing customer service with enforcement to achieve
    compliance has been and will continue to be a fundamental goal of the
    IRS. Currently there are no efforts underway to reduce face-to-face
    interaction between the IRS and taxpayers. However, we are optimistic
    that the TAB study, which includes comprehensive research around the
    needs and preferences of taxpayers, will not only identify more
    efficient and cost-effective service delivery channels, but also
    provide a business model that balances taxpayer preference with
    business values. Our goal is to make service investment decisions in
    order to reach the most taxpayers through their preferred service
    channel within available resources.

                         REDUCTION OF TAXPAYER SERVICES

        Question. Mr. Everson, last year, you:
      --eliminated ``TeleFile'', the ability to file taxes by telephone;
      --proposed the elimination of as many as one quarter of all walk-in
            Taxpayer Assistance Centers;
      --proposed shortening phone assistance hours; and
      --began the process to eliminate several telephone call-routing
            sites.
        In a profile of online population, Census data indicates that in
    any given age group (ages 18-29; 30-39, etc.), not even one-third of
    adults are on-line. We know that the Nation's large senior citizen,
    limited proficient English, and underserved populations are not as
    likely to use or have access to the internet as other forms of
    communication.
        Given this and the digital divide at every generation, how do you
    rationalize the elimination of face-to-face and telephone interaction
    in favor of electronic communication?
        Answer. The Taxpayer Assistance Blueprint (TAB) team is analyzing
    taxpayer needs, preferences and behaviors to determine the optimal
    delivery of service across all channels. As stated previously, the TAB
    Phase 2 report, which we expect to deliver to Congress in October 2006,
    will use extensive primary research with taxpayers to validate its
    service recommendations. Current ongoing customer preference and needs
    research includes surveys, focus groups, and experimental research
    aimed at providing customer-centric information to decision-makers. In
    this context, careful consideration is being given to those taxpayers
    facing a barrier to online self-service options. Again, our goal is to
    maintain a balanced service portfolio that meets the needs of the
    greatest number of taxpayers within limited resources.
        We made our initial proposal to shorten phone assistance hours in
    an effort to more closely match our hours of operation to the hours of
    our customer's greatest demand to ensure the most efficient usage of
    our scarce resources while providing the best service possible to our
    customers. We decided not to implement this change as planned due to
    language in the 2006 appropriation bill directing the IRS not to reduce
    services.
        We made the decision to close three call sites (Boston, Chicago and
    Houston) because the IRS identified them as non-continuing sites in the
    early 1990's. This decision was made after a nationwide study showed
    the benefits of reducing the number of call sites and the best
    locations for consolidating our telephone operations based on rent,
    cost of living, competitive salaries and similar factors. Throughout
    the intervening years, we did not fill vacancies in Boston, Chicago,
    and Houston because of our long-standing plans to close those sites. As
    the number of employees in Boston, Chicago, and Houston continued to
    shrink it was no longer fiscally responsible to rent large, underused
    offices. By closing these sites and consolidating call operations, the
    IRS saved a significant amount of rent and support costs and gain
    productivity efficiencies with no impact whatsoever on our telephone
    customers.
        To further put this action in context, in the early 1970's we were
    operating 135 call sites. The IRS derived efficiencies from
    consolidating smaller sites into larger operations so that by 1975, the
    IRS had reduced the total number of sites to 85. By the early 1990's,
    the IRS had undertaken further consolidations toward achieving a 25-
    site footprint. We designated Boston, Chicago, and Houston as non-
    continuing, no-growth sites, along with others that have since closed
    including Anchorage, Brooklyn, Honolulu, Los Angeles, Milwaukee,
    Newark, Omaha, Phoenix and St. Paul.
        We serve our telephone customers using an enterprise approach and a
    toll-free telephone network that now consists of 25 call sites
    nationwide. Since we manage toll-free traffic nationally, the calls
    previously answered in Boston, Chicago and Houston are automatically
    routed to other call sites without affecting overall telephone service.
    Regardless of our customers' geographic locations, when they call us,
    our system routes their call to an available assistor who can best
    answer their type of question at any of our 25 sites. This routing
    occurs within seconds and is transparent to callers.
    how have you spent the additional enforcement funding you got in fiscal

                                   YEAR 2006?

        Question. Mr. Everson, the fiscal year 2005 budget resolution
    included language that enabled our bill last year to provide an
    additional $446 million to be used for enforcement. Your March 7, 2006
    report on enforcement indicates that 40 percent of that funding will
    maintain your base costs and 60 percent of that funding will allow
    hiring of 1,146 new enforcement FTEs, which you have already begun.
        At this point in time, how many of those positions have you hired?
        Answer. As of June, we have hired 1,224 positions for our fiscal
    year 2006 enforcement initiatives. These positions include over 500
    Revenue Agents, as well as additional front-line enforcement staff. The
    number of positions hired corresponds to 959 FTE.
        Question. What is your time frame for the rest of these hires?
        Answer. Several IRS business units are planning additional hires
    during the remainder of the fiscal year. Through the fourth quarter we
    will be hiring approximately 120 additional Revenue Agents and 60
    additional enforcement staff, though some of these will be allocated to
    attrition hiring.
        Question. How much money has not yet been obligated?
        Answer. Approximately $13.3 million in initiative enforcement funds
    remain to be obligated, primarily in salary and benefit resources that
    will be used to pay current and future staff costs through the balance
    of the fiscal year.

                               FREE FILE ALLIANCE

        Question. Mr. Everson, recently, the Finance Committee found that
    taxpayers using the Free File on-line tax return preparation services
    are presented with surprise fees, expensive add-ons, loan solicitations
    and other marketing pitches. While there is no obligation to buy these
    services, the fees occur so late in the process that taxpayers may feel
    forced to pay them or completely redo their taxes with another vendor
    who may also charge fees. It is my understanding that the IRS has not
    conducted much research on how many taxpayers fall prey to these sales
    pitches.
        What is the IRS doing to protect taxpayers from predatory sales
    pitches and do you plan to do more comprehensive research on these
    activities?
        Answer. The new Free File Alliance agreement contains a number of
    program improvements meant to increase the overall quality of the
    program and customer satisfaction. For example, the new agreement
    contains enhanced standards for consumer protection if a refund
    anticipation loan (RAL) is offered by a Free File Alliance (Alliance)
    member. Also, Alliance members must disclose on the members' individual
    landing pages if State tax return preparation and filing services are
    available and, if so, whether a fee will be charged for such services.
    If a fee is charged for such services, the cost to the taxpayer must be
    clearly stated on the members' landing pages.
        For the 2007 filing season, we will continue to be vigilant with
    the Alliance members to ensure that the companies are adhering to the
    terms of the agreement, including those provisions designed to ensure
    the protection of taxpayer rights and confidentiality of taxpayer
    information. We also acknowledge that the companies may offer products
    and services which are closely related to the tax preparation process
    and are of beneficial value to taxpayers.
        In order to conduct more research, we are conducting a Free File
    survey this year with the following objectives:
      --To determine, among taxpayers using Free File in 2006, how they
            were introduced to Free File, their reasons for choosing this
            electronic product, how they used it, and how they perceived
            the product in terms of its ease of use, use of specific
            product features, and satisfaction with the usage experience.
      --To provide results that can be used to assist the IRS with making
            policy decisions related to expanding the use of e-file.
           addressing shoddy work by tax preparers and practitioners
        Question. Just this month, GAO reported that there may be serious
    problems with the accuracy of the tax returns prepared by many of the
    private tax preparation companies. The GAO found that these companies
    often prepared returns that were incorrect, with tax consequences that
    were sometimes significant. Some of these mistaken returns could have
    exposed taxpayers to penalties for such things as negligence and
    willful or reckless disregard of tax rules. Furthermore, TIGTA found,
    this month, that the IRS is not taking the necessary disciplinary
    action against tax practitioners who have been convicted or had their
    licenses revoked by State authorities.
        Mr. Everson, why aren't you taking a more aggressive approach to
    regulating these individuals?
        Answer. I agree that all taxpayers should be able to receive
    accurate return preparation assistance. While most paid preparers do
    their best to provide their clients with tax returns that are fully
    compliant with our Nation's tax laws, preparers who violate this public
    trust should be identified and subjected to the full range of sanctions
    available. Although more can always be done, the IRS is aggressively
    pursuing those paid preparers who are negligent or encourage out-right
    fraud.
        In 2006, the IRS developed a new multi-functional Preparer
    Strategy, improving our coordination of preparer-related workload and
    ensuring that we work preparer non-compliance issues consistently,
    timely, and effectively. More than 500 Program Action Cases (PACs) were
    in process at the end of the first quarter of fiscal year 2006, a 500
    percent increase over the number in process for the same period in
    fiscal year 2005. PACs are one of the processes used to investigate
    appropriate return preparer penalties. The main preparer penalty
    provisions are  6694, Understatement of Taxpayer's Liability by Income
    Tax Return Preparer, and  6695, Other Assessable Penalties With
    Respect to the Preparation of Income Tax Returns for Other Persons.
    These two sections are exclusively applied to return preparers and
    range from $50 to $1,000 per offense.
        In fiscal year 2005, the Department of Justice secured injunctions,
    based on IRS referrals, against more than 40 promoters/preparers,
    preventing these individuals from preparing returns and promoting
    abusive schemes. The IRS continues to make referrals and work with the
    Department of Justice on securing injunctions against additional
    promoters/preparers to prevent these individuals from further
    participating in unscrupulous conduct.
        The Criminal Investigation Division (CI) initiated 248 return
    preparer investigations in fiscal year 2005, a 20 percent increase from
    the previous year. CI utilizes many techniques, including the use of
    the undercover program, search warrants, witness interviews; and
    contacts with informants, banks, and local law enforcement, to
    vigorously pursue investigations of unscrupulous return preparers.

              INAPPROPRIATE COMPETITIVE SOURCING OF MAILROOM WORK

        Question. Mr. Everson, the fiscal year 2004 Transportation-Treasury
    Appropriations Act included a prohibition on funding for the conversion
    of work performed by 10 or more Federal employees to a contractor
    without holding a public-private competition. At the time the bill was
    enacted (January 23, 2004), approximately 65 Federal employees,
    including those with disabilities, were performing mailroom work. Yet,
    in 2004, the IRS permitted a private contractor to replace the RIF'ed
    mailroom employees.
        How is it that the IRS did not conduct a public-private competition
    for its mailroom operations?
        Answer. In fiscal year 2003, the IRS made the decision to directly
    convert the mailroom positions and selected a contractor under the
    Javits-Wagner-O'Day Act Program, which provides greater employment
    opportunities for people with disabilities. The IRS chose to conduct an
    A-76 Direct Conversion to a NISH (formerly the National Institute for
    the Severely Handicapped) provider because fewer than 25 employees
    would be affected and because of the proven past performance with IRS
    mailrooms (the IRS already contracted 10 mailrooms through NISH). In
    October 2003, the IRS signed the contract with 4 option years with
    ServiceSource for mail delivery in 33 locations. ServiceSource is a
    Community Rehabilitation Partner which creates opportunities for
    individuals with disabilities, is certified by NISH and has over 30
    years of experience providing mailroom services to Federal and State
    agencies in both on-site and off-site facilities. The contract provided
    the capability for IRS and the contractor to incrementally on a site-
    by-site basis issue task orders to phase-in contractor performance.
    This phase-in approach afforded the IRS greater opportunity to work
    with employees on mitigation strategies to reduce the number of
    potential employees facing a reduction-in-force.
        The IRS had previously begun reduction-in-force negotiations with
    the National Treasury Employees Union (NTEU) and offered assistance to
    impacted employees--voluntary early retirement and voluntary separation
    incentive, some placement opportunities within IRS for other positions,
    and potential employment with the contractor. The IRS issued the
    reduction-in-force notices to 12 employees in October 2004. The IRS
    placed two of the employees in other agency positions and most of the
    remaining 10 employees went to work for the contractor.
        Question. Furthermore, I'm told that the Federal employees
    performed administrative and support activities, in addition to their
    mailroom responsibilities, such as opening mail and delivering mail to
    employee desks. I understand that the contract employees would not have
    done these additional duties, yet the IRS used the same assumptions
    when comparing these costs.
        How do you explain that?
        Answer. The IRS addressed the duties of opening and subsequent
    desktop delivery of mail during the data gathering phase of the
    Business Case Analysis for this Competitive Sourcing Initiative. That
    data indicated that desktop delivery of mail was not being performed in
    94 percent of the sites impacted by the study before the conversion to
    contract delivery. We retained that desktop delivery feature at those
    locations (2 of 32) when the Contractor took over this operation. As
    for opening of all mail, these duties were not identified as being
    performed in any sites.
        The process of researching mail where the delivery point was
    unidentifiable by the address provided was reflected in the data
    gathering phase as being performed at all locations. This research task
    did require the opening of this small percentage of correspondence by
    IRS mail clerks, and this practice has continued within the statement
    of work for the contractor.
        Question. A lawsuit was filed against the IRS, challenging the
    legality of the conversion of the mailroom employees. Subsequently, an
    IRS spokesperson said in mid-March that the IRS is currently reviewing
    the judge's decision.
        What is the result of that review?
        Answer. The interim court ruling concluded that even though the IRS
    had signed a contract prior to the enactment of the fiscal year 2004
    appropriations, the IRS could have exercised discretion on whether or
    not to issue the individual task orders, and therefore, violated the
    provisions of the 2004 appropriations. Both parties (NTEU and IRS) are
    currently exchanging proposals of remedy for the former employees who
    were involuntarily separated.

                                    TAX GAP

        Question. Mr. Everson, at a recent Senate hearing on the tax gap,
    you testified that the IRS could collect an additional $50-$100 billion
    each year without changing the way the Government interacts with the
    taxpayer. However, the five legislative proposals in your budget, aimed
    at reducing the tax gap, are estimated to raise only $3.5 billion over
    10 years, or $350 million per year.
        Mr. Everson, with a requested budget increase of 0.2 percent next
    year--basically a flat budget--how will the IRS be able to collect this
    $50-$100 billion?
        Answer. The collection of an additional $50 to $100 billion each
    year is a possibility without significant change in IRS interactions
    with taxpayers, however, the IRS cannot accomplish this alone. The IRS
    cannot audit its way out of the tax gap. Tax simplification must
    accompany any meaningful effort to reduce the tax gap, and would allow
    the IRS to further streamline its operations and increase the
    effectiveness of its compliance strategies. Additionally, legislative
    proposals such as those requiring increased information reporting in
    certain sectors, as well as the increase in information-sharing from
    other agencies, will further contribute to reducing the largest element
    of the tax gap--underreporting. Admittedly, the five proposals included
    in the fiscal year 2007 budget request are only first step toward
    addressing the quarter-trillion dollar tax gap. But they are a step in
    the right direction, and represent one critical element of a successful
    strategy.
        Question. Individuals have long been evading the payment of taxes
    by hiding income in other countries. The IRS recently won court
    approval to ask PayPal, a popular on-line payment service, to turn over
    customer records as part of an investigation into tax cheats who hide
    money overseas. This would involve those who sent money to a bank or
    credit card account in more than 30 foreign countries and would cover
    the past 8 years.
        What is the latest about whether PayPal will comply?
        Answer. We expect compliance, but the disclosure restrictions of
    IRC  6103 prohibit us from further discussion about the status of our
    efforts at this time. However, the Offshore Credit Card Project (OCCP),
    in furtherance of which the court issued the PayPal summons, is a
    continuing effort. The IRS has requested and the courts have issued
    prior John Doe summonses to major credit card companies, third-party
    credit card processors, and over 100 merchants in an effort to identify
    individuals who have evaded tax by moving money offshore. The IRS has
    completed several thousand examinations and over 1,200 are currently in
    process. In addition, the OCCP has provided leads and other information
    which has led to numerous successful criminal prosecutions.
        Question. What else are you doing to prevent offshoring of
    taxpayers' money?
        Answer. The IRS has several other initiatives to address this
    concern:
        Broker Initiative.--The IRS is identifying withholding agents for
    Form 1042 (Annual Withholding Tax Return for U.S. Source Income of
    Foreign Persons) examinations. The dual purpose of these examinations
    is to assess the withholding and information reporting compliance of
    the withholding agent, as well as that of the U.S. beneficial owners of
    accounts established in the names of entities domiciled in secrecy
    jurisdictions. The IRS is currently examining several withholding
    agents, with more planned.
        Seven Country Initiative.--Although this initiative was originally
    formed under the auspices of the Pacific Association Tax
    Administrations (PATA), the group's members currently consist of
    Australia, Canada, France, Germany, Japan, United Kingdom and the
    United States. The purpose of this group is to enhance each country's
    capacity to deal with compliance risks associated with offshore secrecy
    jurisdictions, share best practices and approaches addressing abusive
    offshore arrangements and their promoters. These discussions will
    provide opportunities for bilateral action and exchange of information.
    To further expand its compliance initiatives, the group formed
    subgroups to address non-compliance facilitated through the brokerage
    and banking industries and International Business Corporations (IBC).
    The Seven Country Initiative is focused on high wealth individuals and
    closely-held entities involved in abusive offshore arrangements using
    tax secrecy jurisdictions.
        Promoter Program.--The IRS has made significant strides in
    combating the offshoring of taxpayers' money through its efforts on
    promoters of offshore schemes and transactions. Based on referrals, the
    IRS has authorized investigations pursuant to I.R.C.  6700 (Promoting
    Abusive Tax Shelters) for various promoters of offshore schemes. When
    appropriate, the IRS has referred these promoters to the Department of
    Justice for potential pursuit of penalties and injunctions. This
    process prohibits the promoter from continued marketing of abusive
    schemes and assists the IRS in identifying participants in offshore
    transactions for compliance purposes.

     IS THE IRS COMPLYING WITH SECTIONS 205 AND SEC. 204 OF THE TTHUD BILL?

        Question. The Fiscal Year 2006 Transportation-Treasury
    Appropriations Act included a provision (Sec. 205) stipulating that no
    funds may be used to reduce taxpayer services as proposed in fiscal
    year 2006 until TIGTA completes a study detailing the impact of such
    proposed reductions on taxpayer compliance and taxpayer services, and
    the IRS's plans for providing adequate alternatives services, and
    submits such study and plan to us for approval. Despite this language
    and the provision Sec. 204 stating that funds shall be available to
    improve and increase 1-800 help line service, you decided to decrease
    those telephone hours last year after enactment of our bill. We had to
    add clarifying language in the Supplemental Appropriations Act last
    year so that you would not reduce telephone service hours.
        So, Mr. Everson, I'd like to ask you: Is the IRS complying with
    Sec. 205 and Sec. 204?
        Answer. Yes. We continue to provide the same number of daily hours
    of service as in fiscal year 2005 with our toll-free telephone lines
    open from 7:00 a.m. to 10:00 p.m. Monday through Friday (local time)
    and limited service on Saturdays during the filing season. In January
    2006, we actually extended the operational hours of service from 7:30
    a.m. to 6:00 p.m. Monday through Friday (local time) to 8:00 a.m. to
    8:00 p.m. Monday through Friday (local time), for the Practitioner
    Priority Service telephone line.
        Our proposal to change the operational hours in fiscal year 2006
    was another step towards providing our customers with the highest level
    of service as we continue to identify ways to improve our toll-free
    operation. To put our proposal to reduce hours of service into context,
    in 1999, we increased our operational hours to 24 hours a day, 7 days a
    week in an effort to expand service to our taxpayers. However, after
    identifying periods of low call demand (assistors were available and
    waiting for incoming calls) and alternate periods of excess demand (we
    did not have enough assistors on the phones to handle incoming call
    traffic during specific hours), we re-evaluated our decision to provide
    service around the clock. In October 2001, we reduced our operating
    hours to 7:00 a.m. to 10:00 p.m. Monday through Friday (local time)
    with limited service on Saturdays during filing seasons. This reduction
    afforded us the most efficient usage of our scarce resources while
    providing the best service possible to our customers.
        However, despite our attempt at providing coverage during the right
    periods of time, we continued to experience periods of low call demand,
    primarily before 8:00 a.m. and after 8:00 p.m., resulting in assistors
    sitting idle during these times. After further evaluation of incoming
    call demand and available assistor resources, we proposed a reduction
    to our fiscal year 2006 hours of service. However, we did not implement
    this change, in accordance with Sec. 205.

                      BUSINESS SYSTEMS MODERNIZATION (BSM)

        Question. Over the long-term, Business Systems Modernization (BSM)
    has suffered numerous project delays and cost overruns, which has
    warranted oversight and recommendations from GAO. On an encouraging
    note, in the past 2 years, progress has been made. GAO's No. 1 concern
    is that since the BSM vision and strategy is no longer current given
    project delays, the IRS must develop brand-new long-term program goals
    and strategies. Although the IRS is developing a 5-year plan, GAO still
    believes further longer-term goals are necessary.
        Mr. Everson, how do you respond?
        Answer. We appreciate the Senate Appropriations Committee's
    acknowledgement of BSM's improved performance.
        The MV&S team specifically chose a 5-year planning horizon for two
    reasons. First, given the rapid pace of technological change, it is
    increasingly difficult to predict what technology will become
    commonplace over longer planning horizons. Second, IRS's business
    emphasis can likewise change over longer planning periods. Recognizing
    these issues, the IRS believes that the key element is not the planning
    horizon, but rather the commitment to institutionalize an annual
    planning process that reassesses and updates the MV&S 5-year plan based
    on IRS's current technology environment, foreseen future technology
    enablers, and the current IRS strategic focus.
        Given this context, longer-term goals have provided a meaningful
    backdrop to MV&S planning. The first goal is to make investments in
    technology that will have a demonstrable impact on lowering the $300
    billion-a-year tax gap. IT initiatives that both support increased
    voluntary compliance (through better IRS service) and enforcement
    (through improved compliance productivity) are vital to lowering the
    tax gap over time. Second, given the explosion of the Internet, the IRS
    needs to leverage its power to offer better service to our constituents
    while lowering our own costs (chiefly by offering self-assist/self-
    correct capabilities). Finally, we recognize that true IT modernization
    will only come about when the IRS can finally retire our aging master
    files and the Integrated Data Retrieval System (IDRS)--systems built
    originally in the 1960's and 1970's. These systems are the core of the
    U.S. tax administration system today, but hamper the IRS's ability to
    provide real-time, accurate, and complete data to our constituents. The
    IRS must place continued focus on replacing these systems with
    modernized systems, including the Customer Account Data Engine (CADE)
    to replace the master files and projects to replace IDRS.
                                     ______

                 Questions Submitted by Senator Byron L. Dorgan

                        PROPOSED DISCLOSURE REGULATIONS

        Question. Mr. Commissioner, I am deeply concerned about the
    disclosure regulations proposed by the Internal Revenue Service (IRS)
    last December. I believe these regulations put at risk rampant
    distribution of private taxpayer information by tax return preparers
    for all kinds of unrelated marketing purposes.
        You point out that tax return preparers can currently seek consent
    from customers to use tax return information to solicit their customers
    to purchase products by the tax preparer or its affiliated group. The
    approach taken in the regulations now expands this by allowing tax
    preparers to solicit their customers to purchase products from third
    parties including marketers and data brokers--risking even further
    dissemination of taxpayer information.
        Do you believe that this proposed change provides additional
    disclosure protections for taxpayers?
        Answer. I want to assure you that protecting taxpayer privacy by
    preventing return preparers from improperly disclosing or using tax
    return information is of utmost importance. The proposed rules
    represent a significant improvement over existing regulations in
    protecting taxpayer privacy interests and would strengthen taxpayers'
    control over their tax information in the hands of tax preparers and
    tax preparation software companies. Specifically, the proposed rules
    provide that tax return preparers must give all taxpayers clear
    warnings and consent notices that allow taxpayers to make a knowing,
    informed, and voluntary decision over the disclosure or use of their
    tax information by their preparer.
        In addition, Congressional concerns and inquiries led to proposed
    changes to the rules requiring written taxpayer consent before a return
    preparer may outsource preparation services or send tax return
    information outside the United States. This protection does not exist
    under the current regulations. The proposed rules also retain the
    requirement that tax return preparers obtain written consent from
    taxpayers to ``use'' tax return information. The current rules,
    however, do not define ``use,'' creating uncertainty in a number of
    areas, including whether the term includes targeted advertising. The
    proposed rules eliminate this uncertainty by expressly defining ``use''
    to include return preparers' reliance upon tax return information to
    target advertising to their customers.
        Under the proposed regulations, return preparers must still obtain
    customer consent before using any information gleaned from tax returns
    as a basis for marketing any product or service. The consent must
    identify each specific type of product or service that may be
    solicited. If the taxpayer declines to execute the consent, the
    information cannot be used and the return preparer cannot ask for the
    taxpayer's consent again.
        Question. You appear to justify this particular change because you
    believe that such solicitations may be for products that positively
    affect taxpayers' financial lives.
        Answer. Our primary focus in proposing the regulations was to
    update existing rules, promulgated in the early 1970's, that do not
    provide adequate guidance to protect taxpayers' return information in
    an era of electronic return preparation and filing. While the IRS is
    sensitive to the impact that these rules may have on taxpayers'
    finances, our primary concern is protecting taxpayer privacy. Other
    reasons for publishing the proposed regulations include concern about
    whether return preparers were engaged in practices not contemplated
    when the regulations were originally promulgated, including outsourcing
    preparation services or sending tax information outside the United
    States. Congressional inquiries about the appropriateness of
    outsourcing preparation services and sending tax return information
    overseas without the knowledge of the taxpayer contributed to
    prioritizing the project.
        Additionally, there has been a misunderstanding regarding the
    proposed rules with respect to the difference between ``disclosure''
    and ``use'' of tax return information that has led to confusion over
    how the proposed rules relating to the disclosure of tax return
    information have been strengthened. The misunderstanding of the
    proposed rules stems from a proposed change relating not to preparer
    disclosure of information to third parties, but rather to a return
    preparer's own use of tax return information to solicit additional
    products and services for itself or other parties. Currently, return
    preparers may seek consent from customers to use tax return information
    to solicit their customers to purchase current products or services
    offered by the preparers or their ``affiliated group.'' Since few
    return preparers are organized in a corporate structure, much less an
    ``affiliated group,'' this provision has little current relevance or
    application. Moreover, notwithstanding the ``affiliated group''
    limitation on ``use'' of return information, the existing regulations
    do not limit the permissible ``disclosure of return information to
    third parties with the taxpayers' consent.'' Such disclosures may be
    for products that positively affect taxpayers' financial lives or
    participation in government benefit programs.
        As before, the regulations afford taxpayers the ability to control
    and direct the disclosure or use of their own tax return information.
    Under the proposed regulations, return preparers must still obtain
    customer consent before using information gleaned from tax returns as a
    basis for marketing any product or service. The consent would need to
    identify each specific type of product or service that may be solicited
    and if the taxpayer says no, the information cannot be used and the
    return preparer cannot ask again.
        Question. Do you think that when Section 7216 was enacted and
    imposed a stiff fine and possible jail time for tax preparers who make
    unauthorized disclosures of taxpayer return information that Congress
    intended to allow sweeping exceptions for widespread marketing?
        Answer. Neither the current regulations, which have been in place
    since 1974, nor the proposed regulations, contain sweeping exceptions
    for widespread marketing. To the contrary, the existing regulations
    require taxpayer consent for most disclosures and the proposed
    regulations tighten the applicable consent provisions to help ensure
    that the consents are informed. That is, the taxpayer, and only the
    taxpayer, can control and direct the disclosure or use of tax return
    information by a tax return preparer. Section 7216 as enacted in 1971,
    provides the Secretary with the authority to prescribe regulations
    governing the disclosure or use of tax return information. It was clear
    at that time that Congress understood that there would be circumstances
    when the disclosure or use of tax return information by tax return
    preparers for purposes other than tax return preparation would be
    permissible. Consistent with this understanding and the long-standing
    regulations, it has been common industry practice to solicit taxpayer
    disclosure consents for a variety of purposes other than tax return
    preparation.
        Question. You indicate that in both the current regulations and the
    proposed regulations tax return preparers have been permitted to
    disclose their customers' tax return information to affiliates and
    third parties if the customers consent.
        Do you have the authority to prohibit such disclosures to
    affiliates or third parties if such disclosure is not for purposes
    relating to the preparation of a taxpayer's return? Would legislation
    be required to prohibit such disclosures?
        Answer. Congress provided broad authority to the Secretary under
    Section 7216(c) to prescribe regulations permitting the disclosure or
    use of tax return information. By giving the Secretary this broad
    authority, it is clear Congress understood there would be circumstances
    when the disclosure or use of tax return information by tax return
    preparers for purposes other than tax return preparation would be
    permissible. The regulations implementing Section 7216(c) have been in
    place for more than 30 years. Given the long-standing existence of the
    current regulations under Section 7216, the absence of virtually any
    controversy with respect to consensual disclosures under the current
    regulations, and the fact that the current controversy is the result of
    a mischaracterization of the nature and scope of both the current
    regulations and the proposed regulations, I believe that legislation
    would be the way to completely prohibit the types of disclosures to
    affiliates or third parties that you reference.

                                TAX HAVEN ABUSES

        Question. We have known for many years that some very profitable
    U.S. multinational businesses are using offshore tax havens to avoid
    paying their fair share of U.S. taxes. In fact, recent evidence
    suggests that the tax-haven problem is getting much worse and may be
    draining the U.S. Treasury of tens of billions of dollars every year.
        According to an investigative report written by David Evans with
    Bloomberg News, there is a building called the Ugland House in Grand
    Cayman that is used as the address of 12,748 companies. In my judgment,
    it is the hood ornament of the growing tax haven abuse problem.
        I have authored legislation with Senator Levin that we believe
    would put an end the tax benefits for U.S. companies that shift income
    to offshore tax-haven subsidiaries. The Joint Tax Committee says our
    legislation to close this tax avoidance scam would save U.S. taxpayers
    some $15 billion over the next decade.
        Do you agree that the use of offshore tax havens by large
    multinational firms to park profits that would otherwise be taxed in
    this country is a problem? If so, what is the IRS doing to tackle it?
        Answer. As I stated in my testimony of June 13, 2006, we recognize
    that certain taxpayers seek to shift significant profits offshore.
    These taxpayers manipulate the price of related transactions so they
    can claim that the income is earned outside the United States,
    preferably in a low- or no-tax jurisdiction. Further, the transfer of
    intangibles outside the United States has been a high risk compliance
    concern for the Service and we have seen a significant increase in such
    transactions in recent years. Cost-sharing arrangements are often the
    method for this activity. The buy-in amount in cost-sharing
    arrangements is frequently troublesome. It is often understated,
    resulting in the improper shifting of income offshore.
        In response to the compliance risks of pricing issues, the LMSB
    Commissioner issued guidance to all field examination personnel
    regarding potential transfer pricing issues and we require all field
    examination personnel to request and review taxpayer transfer pricing
    studies. As a subset of the transfer pricing issue category, a section
    936 Termination Strategy issue has been identified for additional
    compliance coordination. Associated with the sunsetting of section 936,
    taxpayers have created structured transactions to transfer U.S.
    intangibles that were used in Puerto Rico to other low tax
    jurisdictions. An Issue Management Team (IMT) has been established to
    identify, coordinate, and propose resolution alternatives for this
    issue.
        As part of our response to the cost-sharing arrangements issues, we
    proposed a comprehensive set of cost-sharing regulations in August 2005
    to ensure that such arrangements do not facilitate a disguised transfer
    of intangible assets outside the United States in a manner inconsistent
    with the arm's-length standard. We intend to finalize these regulations
    this year.
        We have also established a cost-sharing IMT to improve Service-wide
    coordination in the identification, development, and resolution of
    cost-sharing issues. The IMT issued a cost-sharing audit checklist in
    2005 that provides guidance to field examiners for developing potential
    cost-sharing audit issues and ensuring consistency. The team has
    completed its efforts to identify and review cases with a cost-sharing
    issue to determine the impact and compliance risk. The team is
    developing a coordinated issue paper that will provide the basis and
    support for examining issues and to assist with potential Appeals
    Settlement Guidelines.
        Question. What action did the IRS take when the Ugland House matter
    was reported in the press?
        Answer. The IRS has recognized that companies are using entities
    such as international business corporations (IBCs) in offshore
    financial secrecy jurisdictions. Depending on the offshore
    jurisdiction, shareholders of the IBC may remain confidential. When the
    article you cited came out in 2004, we canvassed a number of offshore
    jurisdictions (including the Cayman Islands) and requested they provide
    a list of their registered IBCs. At that time the jurisdictions we
    contacted could not provide the information due to their financial
    secrecy laws. If we have a name or IBC number we are able to contact
    public registries directly and get information on companies
    incorporated or registered in the jurisdiction, but that information is
    limited to IBC name and number, name and address of registered agent,
    authorized capital, and status of the IBC (whether it is active or
    inactive.) The public registries do not contain ownership information
    or shareholders. That information is held by registered agents (RA) and
    is often subject to the secrecy and privacy laws.
        Over the past few years, the IRS and Treasury Department have been
    negotiating Tax Information Exchange Agreement (TIEAs) with these
    jurisdictions. We can now make requests under these TIEAs for the
    ownership information. The Cayman Islands TIEA became effective March
    10, 2006 for civil tax issues. If we have a valid tax administration
    purpose, the TIEAs enable us to request information such as books and
    records, minutes of meetings, and analysis of functions a company
    performs to determine whether they have complied with U.S. tax
    provisions. This is predicated upon the fact that such documentation
    exists in the jurisdiction.
                                     ______

               Question Submitted by Senator Barbara A. Mikulski

        Question. I remain very concerned about any proposals to reduce
    taxpayer services or close any of the 68 Taxpayer Assistance Centers
    (TACs) across the country, including 4 of 8 in my home State of
    Maryland. According to a recent Treasury Inspector General for Tax
    Administration (TIGTA) report (Reference Number: 2006-40-061),
    management does not have reliable data on the Taxpayer Assistance
    Centers (TACs) to make decisions about TAC operations. TIGTA also
    points out that 47 of the 400 TACs nationwide--nearly 12 percent--are
    ``critically'' understaffed, meaning that they would be in danger of
    closing were it not for the dedicated IRS employees who are filling in
    from nearby TACs and through the use of seasonal employees. In its
    first report, TIGTA sharply criticizes the business model the IRS used
    to justify the TAC closings last year (see TIGTA Reference Number:
    2006-40-067). These two reports strongly indicate that the IRS lacks
    the management information necessary to provide adequate oversight of
    its TAC operations, much less make a decision to close any of them.
        How does IRS plan to report to Congress with reliable and
    verifiable data on the status of taxpayer services and explain how cuts
    to customer services would affect underserved populations such as the
    elderly, low-income taxpayers, minorities, those with language barriers
    and those without access to the Internet? How will you measure the
    affect of such closures on taxpayers when TIGTA points out that the IRS
    does not track this data?
        Answer. We have taken a number of steps to improve both the data
    capture methodology and the reliability of management information
    discussed in the TIGTA reports you mention. Efforts include automating
    a previously manual process of capturing the number of taxpayers served
    in the Taxpayer Assistance Centers and development and piloting of a
    web-based Management Information System that provides critical program
    planning and control data at the local and national levels. Input data
    from all of these sources will be incorporated in future iterations of
    the TAC Business Model.
        In addition, the research and initiatives currently underway in the
    Taxpayer Assistance Blueprint (TAB) will significantly enhance
    collection of customer information and customer characteristics. As you
    know, we delivered the TAB Phase I report in April 2006. The TAB Phase
    II report, which we expect to deliver to Congress in October 2006, will
    use extensive primary research with taxpayers to validate its service
    recommendations. Current ongoing customer preference and needs research
    includes surveys, focus groups, and experimental research aimed at
    providing customer-centric information to decision-makers. The service-
    related research includes the underserved taxpayers identified in your
    question. We intend to continue extensive research initiatives in
    future years to enrich and refine our understanding of these taxpayers'
    needs.
        Finally, we do not envision that taxpayer services will be reduced.
    Careful consideration is being given to those taxpayers facing a
    barrier to online self-service options and how to best meet those
    needs. The goal is to maintain a balanced service portfolio that meets
    the needs of the greatest number of taxpayers within available
    resources.
                                     ______

                 Questions Submitted to Raymond T. Wagner, Jr.
               Questions Submitted by Senator Christopher S. Bond

                                  BSM FUNDING

        Question. As noted at our hearing and as recommended by the Board,
    the IRS's Business Systems Modernization (BSM) program should receive
    more funding for fiscal year 2007 above the budget request.
        If additional funding were to be provided to the BSM account, which
    projects could most benefit from additional funding? How would
    additional funding benefit the BSM program?
        Answer. Two BSM projects would particularly benefit from additional
    funding during fiscal year 2007: the Customer Account Data Engine
    (CADE) and Modernized e-Filing (MeF). The CADE project is so central to
    IRS modernization that any additional money spent on speeding up the
    replacement of the 40-year-old Individual Master File (IMF) by CADE
    would offer many benefits to taxpayers. The legacy IMF system limits
    the IRS to weekly updates, but CADE will give the IRS the ability to
    update taxpayer records daily, and provide the IRS with the capability
    to serve taxpayers much like modern financial institutions serve their
    customers. On the other hand, using additional BSM funding in fiscal
    year 2007 on the Modernized e-Filing project would allow the IRS to
    begin the modernization of the e-filing platform for Form 1040 tax
    returns a year earlier than currently planned. Such modernization is a
    prerequisite for the IRS to offer a direct filing portal to individual
    taxpayers. The Electronic Tax Administration Advisory Committee
    (ETAAC), in both its 2005 and 2006 annual reports has stressed the
    importance of modernizing the system for receiving individual tax
    returns.
        Based on consultations with IRS BSM personnel, the Board believes
    that the MeF project would be a better choice for additional funding in
    fiscal year 2007. The CADE project is already funded in fiscal year
    2007 but the MeF project is not. Funding MeF in fiscal year 2007 would
    allow this project to start a year earlier, and bring the benefits of
    improved electronic filing systems to taxpayers a year earlier. The
    Board believes this would be of more benefit to taxpayers than spending
    additional money on the CADE project, which is already underway.

                            BETTER TAX GAP ESTIMATES

        Question. While the IRS has done a commendable job in updating the
    tax gap estimates, there remain significant gaps in the gap. The IRS
    and others have expressed concerns with the certainty of the overall
    tax gap estimate in part because some areas of the estimate rely on old
    data (from the 1970's and 1980's) and it has no estimates for other
    areas of the tax gap. GAO, TIGTA, the Taxpayer Advocate, and the IRS
    Oversight Board also have all recommended greater and more frequent
    data collection and studies of the tax gap. I wholeheartedly agree.
        What will it take in terms of resources to address these concerns?
    Should the IRS conduct research on how services affect compliance?
        Can your office conduct research on the impact of taxpayer service
    on compliance?
        Answer. The IRS Oversight Board believes additional research will
    provide the IRS with better data on taxpayer compliance, which will
    help the IRS better identify areas of non-compliance and ultimately
    provide some feedback on how IRS service and enforcement programs are
    affecting taxpayer compliance. This belief is consistent with
    recommendations from the National Taxpayer Advocate, who recommended
    that the IRS undertake a research-driven taxpayer needs-assessment that
    will identify services taxpayers need and how best they should be
    delivered.
        For these reasons, the Board recommended that the following
    research initiatives be included in the fiscal year 2007 budget: (1)
    Improve Tax Gap Estimates (+$46 million); and (2) Additional Customer
    Service Research (+$15 million).
        The first initiative, Improve Tax Gap Estimates, will establish
    permanent staffing for the National Research Program (NRP) and put the
    IRS on a path to conducting research annually, without affecting the
    existing examination staff in place within the operating divisions.
    Currently it takes too long to conduct research that can be used on a
    timely basis; the tax gap estimates released by the IRS in 2006 are
    based on an analysis of 2001 tax returns. Prior estimates were based on
    extrapolations of 1988 data.
        As part of an overall strategy to conduct more research and use it
    to guide IRS service and enforcement efforts, the Board believes the
    IRS would be well-served to develop a long-range strategic plan for
    research that is separate from its overall IRS Strategic Plan and goes
    beyond the current 2009 end date for that plan, covering approximately
    a decade. In such a plan, the IRS should describe how it will bring its
    research on all taxpayer segments up to date, and perform a limited
    sample every year so that its research on all segments will be as
    current as possible.
        The GAO was particularly supportive of this approach during its
    testimony to the committee. It testified that ``doing compliance
    studies once every few years does not give IRS or others information
    about what is happening in the intervening years. Annual estimating of
    the compliance rate could provide information that would enable IRS
    management to adjust plans as necessary to help achieve the goal in
    2009. One option that would not increase the cost of estimating
    compliance would be to use a rolling sample. IRS Oversight Board
    officials and we agree that instead of sampling, for example, once
    every 5 years, one-fifth of the sample could be collected every year.''
        The Board believes the availability of up-to-date research data
    will allow the IRS to focus more effectively its service and
    enforcement programs on areas that have the greatest impact on taxpayer
    compliance, and use the changes in taxpayer compliance rates as
    feedback to evaluate the effectiveness of IRS's service and enforcement
    program on actual taxpayer compliance. Achieving such a capability will
    be a vast improvement over the current situation in which the lack of
    data makes it virtually impossible to evaluate the effectiveness of IRS
    activity on taxpayer compliance and make informed decisions.
        The second research initiative recommended by the Board is to add
    $15 million to begin research on the impact of customer service on
    voluntary compliance and the service needs of taxpayers. The need for
    such research is also consistent with recommendations made by Treasury
    Inspector General for Tax Administration and the National Taxpayer
    Advocate in testimony last year to the Senate Appropriations Committee.
        In response to the Board's request, the IRS has said that it could
    extend and update research efforts in two major areas: evaluating the
    service needs of taxpayers and estimating the effect of customer
    service on taxpayer compliance. Additional resources in fiscal year
    2007 would be used to further evaluate the service needs of taxpayers
    and to scope and design the data gathering and analysis capability to
    estimate the effect of customer service on taxpayer compliance.
        With respect to your question on whether the Board could conduct
    research on the impact of customer service on compliance, please see
    the answer to question 4. The Board has a limited budget for survey
    work, but did conduct a survey of customer service needs and channel
    preferences, which has been provided to the IRS.

                              DIRECT FILING PORTAL

        Question. Some experts have suggested that the IRS develop a direct
    filing portal through the IRS website to increase e-filing. To be
    clear, this is not about the Government preparing tax returns but to
    simply provide an easier, cheaper way for taxpayers to file their
    returns.
        What are your thoughts on the direct filing portal? Do you believe
    it would significantly increase e-filing? Would this approach be more
    cost-effective for the IRS than continuing to use an extremely labor-
    intensive approach to processing paper returns?
        Answer. As your question noted, the concept of a direct filing
    portal has received considerable attention lately, although much of the
    expert commentary has not been based on a common definition of a direct
    filing portal. The best way to explore these differences is to start by
    differentiating the act of tax preparation from the act of tax filing.
        Commercial tax software products, including products available
    through the Free File Alliance, typically perform both functions. They
    guide the taxpayer though the process of tax preparation by using a
    series of questions, checklists, interview techniques, and reference
    material to ensure that all tax obligations have been identified,
    critical choices explained, relevant decisions made, and all
    calculations completed accurately. At the end of this process, most
    programs provide a summary review of the process to let the taxpayer
    know that preparation is complete.
        At the completion of the tax preparation phase, the program then
    presents the taxpayer with filing and payment options. The taxpayer may
    choose to print the completed return and mail it to the IRS, or file it
    electronically. Payment or refund options, both paper and electronic,
    are also presented to the taxpayer.
        If a taxpayer elects to file electronically, an output file is
    sent, not to the IRS, but to the tax software company, which combines
    individual returns into large batches, and sends these batched returns
    to the IRS. The IRS receives the batched returns and notifies the
    transmitter, usually the software company in the case of self-prepared
    returns, if the return has been accepted. Returns prepared by
    professional tax preparers go through a similar process, except that
    professional preparers may use a third-party transmitter instead of the
    software company to transmit batched returns to the IRS. A direct
    filing portal would allow taxpayers to file their already completed
    returns directly to the IRS without going through a third-party
    intermediary.
        There has been some confusion because there are different
    interpretations of the term ``direct filing portal.'' Many experts,
    when speaking of a direct filing portal, only refer to the capability
    of the IRS to receive a completed output file in what is known as
    Extensible Markup Language (XML). The creation of the output file must
    still be accomplished by a separate software package that assists the
    taxpayer to perform tax preparation. The developers of the tax
    preparation software must ensure that the output file created is
    compatible with IRS's direct filing portal. However, the software gives
    the taxpayer the opportunity to send the output file directly to the
    IRS instead of the software company. This feature relieves the software
    company of the responsibility to receive the output files created by
    its software product, batch them, send them to the IRS, and maintain
    and protect them. The elimination of this responsibility reduces cost
    to the software developer and consequently is expected to remove a
    barrier to entry of new tax preparation software companies from the
    marketplace.
        However, other experts have used the term direct filing portal to
    refer to the capability for a taxpayer to access an IRS site where the
    taxpayer may do both elementary tax preparation as well as electronic
    tax filing, all in a single operation. Under this definition, tax
    preparation is combined with electronic filing, both of which are
    performed under the auspices of the IRS. Some States (e.g., Maryland)
    offer direct filing portals that offer taxpayers the opportunity to
    fill in a simple tax form and file it directly with the State
    department of revenue.
        The Oversight Board believes that the IRS should explore the
    possibility of developing a direct filing portal that is capable of
    receiving output files produced by commercial tax preparation packages.
    The Modernized e-File program for 1120 tax returns offers the taxpayer
    the option of filing the return directly with the IRS. The Board
    believes that individual filers would benefit if offered such a choice,
    and that the availability of such a choice would promote electronic
    filing. A recent survey completed by the Board indicated that many
    taxpayers have concerns about security on the Internet, and the
    availability of a direct filing portal may alleviate some of these
    concerns. However, a complete cost benefit analysis should be conducted
    to determine if the benefits of developing this capability justified
    the development costs. The Board encourages further evaluation of this
    important issue.
        On the other hand, the Board has reservations about the development
    of a direct filing portal to perform both tax preparation and filing
    functions, except for possibly the simplest of tax returns, as was the
    case with the TeleFile program. The IRS Restructuring and Reform Act of
    1998 states that it is Congress's intent for the IRS to offer a
    comparable program to Telefile on the Internet. However, such a
    development involves complex public policy issues, such as the
    appropriate role for government in tax preparation. The Act encourages
    the IRS to cooperate with the private sector and encourage competition
    in the private sector. The Board believes that creation of a direct
    filing portal strictly to receive output files from commercial tax
    software products would be one effective method to promote private
    sector competition. Again, the Board encourages further evaluation of
    this issue.

                         TAXPAYER ASSISTANCE BLUEPRINT

        Question. As mandated by our appropriations act, the IRS recently
    issued the first phase of the Taxpayer Assistance Blueprint (TAB). I
    asked for this business plan so that the IRS and the Congress could
    plan strategically on developing future taxpayer services based on
    taxpayer needs. I also expected the plan to address demographic and
    geographic differences. Ultimately, this plan should help to improve
    voluntary compliance with the tax code. I expected the plan to focus
    beyond current IRS services and develop innovative approaches.
        Since the IRS is mandated by the act to work with the Board on the
    TAB, please explain how the Board has been involved with this project
    and if the Board believes the TAB is addressing my needs and
    expectations.
        Answer. The IRS has provided the Oversight Board with several
    opportunities to participate in the process of developing the Taxpayer
    Assistant Blueprint (TAB). The Board Chairman has been asked to become
    a member of the TAB Executive Steering Committee (ESC), and has
    participated both directly and through representation in a number of
    ESC teleconference meetings.
        The IRS has also provided to the Board access to its working
    documents and plans, and has invited Board members and staff to
    participate in TAB in-process planning and review meetings. Board staff
    have attended several meetings in Atlanta during the development of the
    Phase I report as well as a Phase II planning meeting.
        The Board has recently completed its own survey of taxpayer service
    needs and channel preferences. The survey results were recently
    presented to the full Board at its last meeting, and the full results
    provided to the IRS. The Board Staff Director and survey company
    Project Director traveled to Atlanta to present and discuss the results
    of the Board's survey with IRS's complete TAB project team, which lead
    to a comprehensive discussion of the results and how the IRS might
    incorporate the results into the Phase II report.
        The Board is currently preparing a public report on the results of
    its survey, but would be pleased to present the results to you and your
    staff at any time.
                                     ______

                  Questions Submitted by Senator Patty Murray

                            SERVICES OFFERED AT TACS

        Question. Mr. Everson and Ms. Olson, why hasn't the IRS involved
    taxpayers who need or desire face-to-face assistance in determining
    what services are offered at the TACs?
        Mr. George, your recent audit report says that prior to making
    decisions on closing any TACs, the IRS should ensure that it is known
    which taxpayers visit the TACs for assistance and why, so the IRS can
    determine the impact on these taxpayers and ensure alternative service
    deliver channels are effective in meeting the needs of these taxpayers.
        Ms. Olson, I would imagine you agree?
        Mr. Everson, TIGTA recently found that 8 of 11 stakeholder groups
    believe that closing the TACs may make it harder for their constituents
    to stay compliant with tax laws and file tax returns. TIGTA also found
    that 11 of 11 stakeholder groups believe their constituents are not
    currently likely to use alternative methods, such as the Internet or
    email to obtain the services they need.
        In light of your efforts to reduce face-to-face interaction between
    the IRS and the taxpayer and your efforts to increase compliance, have
    you re-thought some of your earlier decisions on reducing taxpayer
    services?
        Mr. Wagner, the IRS Oversight Board has recommended budget
    increases in customer service and toll-free telephone service in
    particular.
        Would you care to comment?
        Answer. Based on the belief that good customer service leads to
    fully-informed and satisfied taxpayers who understand their tax
    obligations and experience few problems in complying with the tax code,
    the Board recommends funding an increase in customer service to restore
    customer service to fiscal year 2003/4 levels and investing in
    telephone infrastructure. The rationale behind these recommendations is
    that it is less expensive to prevent problems before a taxpayer files
    than to correct it later. While some IRS services have continued to
    improve, others have not and should be restored to their prior levels.
        To restore the level of service in fiscal year 2007 to those
    achieved during fiscal year 2003 and fiscal year 2004, the Board
    recommends adding $32 million to the IRS's service budget. The Board
    also recommends an $8.7 million investment in telephone infrastructure
    to expand services to callers and provide telephone representatives
    with a more state-of-the-art call center environment. The IRS predicts
    this investment would result in lower queue times across the enterprise
    for all applications and would counter a negative trend in telephone
    service. (Wait time on hold for taxpayers has been increasing in the
    last 3 years. It has gone from 158 seconds in fiscal year 2004 to 258
    seconds in fiscal year 2005, and the fiscal year 2006 target is 300
    seconds.)
        With respect to taxpayers' needs for in-person services, I would
    note that the Board has recently completed its own survey of taxpayer
    service needs and channel preferences. The survey results were recently
    presented to the full Board at its last meeting, and have been
    presented and discussed with the IRS's complete Taxpayer Assistance
    Blueprint project team. The Board's survey resulted in an innovative
    approach to segmenting taxpayers by attitude, behavior, and need, which
    led to a comprehensive discussion of the results and how the IRS might
    incorporate them into the Phase II report.
        The Board is currently preparing a public report on the results of
    its survey, but would be pleased to present the results to you and your
    staff at any time.
                                     ______

                    Questions Submitted to J. Russell George
                  Questions Submitted by Senator Patty Murray

           ADDRESSING SHODDY WORK BY TAX PREPARERS AND PRACTITIONERS

        Question. Just this month, GAO reported that there may be serious
    problems with the accuracy of the tax returns prepared by many of the
    private tax preparation companies. The GAO found that these companies
    often prepared returns that were incorrect, with tax consequences that
    were sometimes significant. Some of these mistaken returns could have
    exposed taxpayers to penalties for such things as negligence and
    willful or reckless disregard of tax rules. Furthermore, TIGTA found,
    this month, that the IRS is not taking the necessary disciplinary
    action against tax practitioners who have been convicted or had their
    licenses revoked by State authorities.
        Mr. George, do you think the IRS is doing an adequate job here?
        Answer. Recently, the IRS has placed a greater emphasis on the
    oversight of tax practitioners. To help ensure adequate resources are
    devoted to provide this oversight, the IRS substantially increased the
    budget and staffing of the Office of Professional Responsibility (OPR).
    In fiscal year 2002, the OPR had a budget of $1.8 million and a staff
    of 15. By fiscal year 2005, it had a budget of $5 million and a staff
    of 56.
        During this time, the number of disciplinary actions by the OPR
    also increased, primarily because of expedited suspensions, which are
    generally used by the OPR in response to action already taken by
    Federal or State Government agencies to convict or disbar a tax
    practitioner or to revoke a practitioner's license.
        Notwithstanding the increases in enforcement activity, there are
    still a significant number of tax practitioners whose conduct appears
    to warrant disciplinary action by the IRS but who have not been
    identified by the OPR. TIGTA believes the OPR needs to improve its
    ability to identify such practitioners so it can take appropriate
    disciplinary actions. Some tax practitioners who have been convicted of
    tax-related crimes or whose licenses have been suspended or revoked by
    State authorities have not been suspended from practice before the IRS.
        In March of this year, TIGTA reported that the IRS does not have an
    adequate method to notify the OPR of tax practitioners who are not
    compliant with their own tax obligations. In a statistical sample of
    750 of the approximately 407,000 licensed tax practitioners, there were
    34 (4.5 percent) who were not compliant with their individual tax
    obligations. These 34 practitioners had a total of 81 tax periods with
    balances due of $826,709 and 34 tax periods for which required tax
    returns had not been filed. Based on this sample, TIGTA estimates that
    there are approximately 22,500 licensed tax practitioners who are not
    compliant with their tax obligations but who have not been identified
    for referral to the OPR.
        TIGTA previously reviewed the OPR in 2001 (the OPR was then known
    as the Office of the Director of Practice) and reported problems with
    the lack of information needed to assess or manage the resources used
    for the disciplinary proceedings program. During the March 2006 review,
    TIGTA found that the OPR had not implemented some of the
    recommendations from 2001. Consequently, the problems reported in 2001
    still existed. The OPR still does not have the information needed to
    effectively monitor program activities and resources, and the case
    management system still contains unreliable information.
        In March 2006, TIGTA recommended that the Director, OPR: (1) work
    with other law enforcement agencies, including the Department of
    Justice, to improve the referral process and develop a process to
    obtain relevant information on State disciplinary actions by
    coordinating with State licensing authorities such as State bar
    associations and boards of accountancy; (2) coordinate with other IRS
    functions to identify practitioners who are not compliant with their
    individual tax obligations; and (3) implement the recommendations from
    the 2001 report. The IRS agreed to take corrective actions on our
    recommendations.
        Question. In a briefing last year by TIGTA on Taxpayer Assistance
    Centers, I learned that some TACs have as little as one or two staff,
    what TIGTA calls a ``critical staffing shortage.'' The House and
    Senate, Majority and Minority, said no to your proposal to cut back
    TACs until TIGTA completes a study on the impact of such reductions on
    taxpayer compliance and taxpayer services.
        Mr. Everson, are you, in fact, allowing these TACs to eventually
    close by letting the staffing levels dwindle? Do you believe that is
    consistent with the direction from this committee?
        Mr. George or Ms. Olson, do either of you care to comment?
        Answer. During the 2006 Filing Season, TIGTA auditors visited 70
    TACs from January through April 2006. The 70 TACs consisted of 10 TACs
    in each of the IRS's five geographical areas, plus 20 TACs in areas
    heavily affected by Hurricanes Katrina and Rita. TIGTA did not identify
    or report any significant concerns relating to staffing or wait times.
    All TACs that TIGTA visited were open and their addresses and hours of
    operations matched the addresses posted on the IRS's Internet site
    (irs.gov) and provided through the IRS's toll-free telephone numbers.
        TIGTA plans to audit the Taxpayer Assistance Blueprint in fiscal
    year 2007 and also plans to monitor the 2007 Filing Season.
                                     ______

                      Questions Submitted to Nina E. Olson
               Questions Submitted by Senator Christopher S. Bond

                    BALANCE BETWEEN SERVICE AND ENFORCEMENT

        Question. There continue to be questions and debate on the proper
    balance between taxpayer service and enforcement. But given the data
    limitations of the tax gap and the IRS's inability to measure
    quantitatively the return on investment on service or enforcement, it
    is a difficult question to answer.
        Based on your expertise, what are your views on the balance between
    service and enforcement? Do you believe that one approach is more cost-
    effective than the other? Since most revenue is collected voluntarily,
    should the IRS invest more in service than enforcement?
        Answer. Without a doubt, voluntary compliance is more cost-
    effective than enforced compliance. When a taxpayer complies
    voluntarily, the Government incurs no costs beyond the cost of
    processing the taxpayer's return. When a taxpayer fails to comply, the
    Government must spend funds identifying errors on a return if
    submitted, locating the taxpayer, and seeking to collect the balance
    due. The IRS is spending billions of dollars to audit and collect
    balances from substantially less than 1 percent of taxpayers. Even if
    we were somehow able to double the examination rate, more than 98
    percent of taxpayers would not be examined each year. So we need to
    focus on maximizing voluntary compliance by simplifying the tax laws,
    increasing third-party information reporting, and improving IRS
    outreach and education efforts, while reserving targeted enforcement
    actions to combat clear disputes or abuses and send a message to all
    taxpayers that noncompliance has consequences.
        As it is, Congress seems likely to appropriate nearly $5 billion
    for enforcement and only about $2 billion for taxpayer services for
    fiscal year 2007, and the IRS seems inclined to continue to seek a
    higher proportion of resources for enforcement in the future. I am
    concerned that the IRS is emphasizing stepped-up enforcement over
    stepped-up taxpayer service without data to support this approach.
        To arrive at an optimal allocation of resources to close the tax
    gap, the IRS needs to do a better job of understanding the reasons why
    the tax gap exists.
        At the risk of oversimplifying matters, let me suggest that we
    consider three types of taxpayers: (1) taxpayers who will go to great
    lengths to comply with whatever requirements exist; (2) taxpayers who
    view taxes as one of many burdens they face in everyday life and who
    will comply if doing so is straightforward and not time-consuming; and
    (3) taxpayers who willfully seek to evade their tax obligations.\1\
    ---------------------------------------------------------------------------
        \1\ Analysis has been conducted on types of noncompliance that is
    more detailed and subdivides taxpayers into narrower categories. See
    Leslie Book, ``The Poor and Tax Compliance: One Size Does Not Fit
    All'', 51 U. Kan. L. Rev. 1145 (2003).
    ---------------------------------------------------------------------------
        For each type of taxpayer, what is the reason for noncompliance and
    what is the optimal government response?
      --For taxpayers who generally will go to great lengths to comply, the
            likely source of noncompliance is the complexity of the tax
            code. Thus, our approach should be to emphasize simpler laws
            and better explanations.
      --For taxpayers who will comply if doing so is easy enough, our main
            emphasis should also be simpler laws and procedures, and better
            outreach and education. Here, though, we might also want to
            incorporate gentle enforcement action in our approach to try to
            persuade taxpayers that paying taxes must be a higher priority.
            In doing so, the IRS should incorporate taxpayer service within
            its enforcement actions. That is, at the same time that the IRS
            conducts audits or seeks to collect unpaid tax liabilities, the
            IRS should be courteous and should focus on trying to teach
            taxpayers how to avoid getting into trouble in the future. The
            IRS also must be careful to avoid creating noncompliance by
            imposing unrealistic procedural burdens on taxpayers who are
            trying to comply.
      --For taxpayers who willfully seek to avoid paying taxes, enforcement
            is required--although even for these taxpayers, I think IRS
            employees generally should focus on trying to induce the
            taxpayers to comply prospectively.
        What percentage of taxpayers falls into each of these three
    categories? I suspect that the middle category is largest, although it
    is impossible to know with precision. But we need to know more.
    Determining the reasons for noncompliance and measuring the impact of
    taxpayer service on compliance and the indirect impact of enforcement
    actions on compliance (i.e., the increase in compliance that results
    from taxpayers not subject to audits when word of the IRS's increasing
    audit coverage spreads) is admittedly difficult research to do, but
    that is not an adequate reason not to do it. At present, the IRS has
    very little hard data to compare the return on investment of a dollar
    spent wisely on enforcement against the return on investment of a
    dollar spent wisely on taxpayer service. Indeed, there is very little
    hard data that has been developed to show what a ``wise'' expenditure
    would be on either the service or the enforcement side.
        I believe this committee and the IRS itself would benefit
    considerably if more research were conducted in this area to help guide
    us in making intelligent resource allocation decisions.

                              DIRECT FILING PORTAL

        Question. Some experts have suggested that the IRS develop a direct
    filing portal through the IRS website to increase e-filing. To be
    clear, this is not about the government preparing tax returns but
    simply provide an easier, cheaper way for taxpayers to file their
    returns.
        What are your thoughts on the direct filing portal? Do you believe
    it would significantly increase e-filing? Would this approach be more
    cost-effective for the IRS than continuing to use an extremely labor-
    intensive approach to processing paper returns?
        Answer. I believe the IRS should provide a direct filing portal to
    enable taxpayers to e-file their returns directly with the IRS for
    free. In fact, I made exactly this recommendation in my 2004 annual
    report to Congress.\2\
    ---------------------------------------------------------------------------
        \2\ See National Taxpayer Advocate 2004 Annual Report to Congress
    471-477 (Key Legislative Recommendation: Free Electronic Filing for All
    Taxpayers).
    ---------------------------------------------------------------------------
        E-filing brings benefits to both taxpayers and the IRS. From a
    taxpayer perspective, e-filing eliminates the risk of IRS transcription
    errors, pre-screens returns to ensure that certain common errors are
    fixed before the return is accepted, and speeds the delivery of
    refunds. From an IRS perspective, e-filing eliminates the need for data
    transcribers to input return data manually (which could allow the IRS
    to shift resources to other high priority areas), allows the IRS to
    easily capture return data electronically, and enables the IRS to
    process and review returns more quickly. For these reasons, Congress in
    1998 directed the IRS to set a goal of having 80 percent of all returns
    filed electronically by 2007.\3\
    ---------------------------------------------------------------------------
        \3\ Internal Revenue Service Restructuring and Reform Act, Public
    Law No. 105-206,  2001(a)(2), 112 Stat. 685 (1998).
    ---------------------------------------------------------------------------
        To its considerable credit, the IRS has succeeded in raising the e-
    file rate above 50 percent. That is a significant achievement, but the
    rate remains substantially below 80 percent. In addition, the IRS
    reports that nearly 40 million returns are currently prepared using
    software--which means they are generally in a form that could be easily
    transmitted electronically--yet are printed out and mailed into the IRS
    on paper.
        If the IRS could persuade these nearly 40 million taxpayers to file
    these returns electronically, it would achieve its 80 percent e-filing
    goal. Under the current system, there are two significant reasons why
    taxpayers shy away from e-filing. First, some taxpayers are unwilling
    to pay a separate fee to third-party software providers to file their
    tax returns. This is an understandable sentiment. As it is, taxpayers
    are filing tax returns to comply with the requirement that they pay a
    high percentage of their income--often 33 percent or more--to the
    Government. The notion that they should have to pay a fee in order to
    pay over all this money is unpalatable to many. Second, some taxpayers
    have concerns from a security standpoint about routing personal
    financial and tax information through third parties. In focus groups,
    taxpayers have said they would be comfortable transmitting this
    information directly to the IRS, but they are concerned that the risk
    the data could be improperly accessed increases when routed through
    third parties.
        A direct filing portal would address concerns about fees and
    security. For that reason, I believe it could help the IRS considerably
    in its efforts to boost the e-filing rate.

                            BETTER TAX GAP ESTIMATES

        Question. While the IRS has done a commendable job in updating the
    tax gap estimates, there remain significant gaps in the [data]. The IRS
    and others have expressed concerns with the certainty of the overall
    tax gap estimate in part because some areas of the estimate rely on old
    data (from the 1970's and 1980's) and it has no estimates for other
    areas of the tax gap. GAO, TIGTA, the Taxpayer Advocate, and the IRS
    Oversight Board also have all recommended greater and more frequent
    data collection and studies of the tax gap. I wholeheartedly agree.
        What will it take in terms of resources to address these concerns?
    Should the IRS conduct research on how services affect compliance?
        Can your office conduct research on the impact of taxpayer service
    on compliance?
        Answer. Determining the resource commitment required to update all
    components of the tax gap is a complex problem. Given the information,
    planning assumptions and analyses required, TAS cannot provide an
    accurate estimate in response to this question. The actual cost would
    vary greatly depending on the methods chosen to address the various tax
    gap components, the time frames in which the research would be done,
    and the commitment made to periodically refresh information to assure
    continued accuracy. For example, where the IRS relies on examinations
    to identify underreporting for a particular class of returns (e.g.,
    individual income as reported on the Form 1040 series of returns),
    costs would vary depending on a variety of factors, including:
      --The total number of examinations (increasing the number of
            examinations allows the IRS to study more subsets of the
            taxpaying population in isolation--e.g., EITC taxpayers, self-
            employed taxpayers, etc.);
      --The number of examinations conducted face-to-face (as opposed to
            via correspondence);
      --The number of issues that would not have to be addressed during the
            examination because they could be resolved using data available
            through electronic means;
      --The number and kinds of analyses conducted once examination results
            became available (which would depend on the purposes for which
            the information is to be used).
        This question could probably best be addressed by the IRS, based on
    experience to date with the National Research Program (NRP), and
    current planning assumptions. I do believe, however, that conducting
    such research is vital to increasing IRS productivity and taxpayer
    compliance. Each year, the IRS should identify a particular category of
    taxpayers--individual, pass-through, corporate, or tax-exempt--and
    dedicate a unit of its auditors to examining a random sample of
    returns. The revenue resulting from the improved selection of returns
    for audit should more than offset the minor reduction in audit
    resources used to conduct these studies. The IRS must learn to view
    this type of research as part of its regular tax administration
    activity instead of as a special activity that ``distracts'' its
    auditors from their ``real'' work.
        Concerning the need to conduct research on how services affect
    compliance, as I stated above in my response to question No. 1, the IRS
    has very little hard data to compare the return on investment of a
    dollar spent wisely on enforcement against the return on investment of
    a dollar spent wisely on taxpayer service. In addition, the data that
    is available suggests that a substantial percentage of noncompliance is
    inadvertent. Additional research is needed to develop better
    information on the underlying causes of noncompliance and the degree to
    which different approaches, including enhancements to customer service,
    can improve compliance.
        TAS is working with the Taxpayer Assistance Blueprint (TAB) team to
    develop and conduct research projects that will help identify the
    impact customer service has on taxpayer compliance. Several studies are
    currently underway that are exploring various facets of this issue,
    including:
      --The impact of IRS return preparation on compliance;
      --The impact of other customer service options on compliance; and
      --The impact of high-end account resolution services on compliance.
        We will be in a better position to assess the need for additional
    research once we have reviewed the results of these studies.
                                     ______

                  Questions Submitted by Senator Patty Murray

      CUTTING THE IRS OFFICE RESPONSIBLE FOR SERVICE WHILE EXPECTING MORE
                            FROM VOLUNTEER PROGRAMS

        Question. Mr. Everson, the IRS's Stakeholder, Partnership,
    Education and Communication (SPEC) office has overall responsibility
    for community partnerships such as the Volunteer Income Tax Assistance
    (VITA) and Tax Counseling for the Elderly (TCE) programs. In recent
    years, this IRS office has suffered cutbacks while the number of
    taxpayers seeking help from by VITA and TCE for tax preparation
    continues to increase dramatically. Moreover, you stated recently that
    you expect to rely heavily on VITA programs to improve taxpayer
    services.
      --How do you justify continuing to cut the SPEC office while giving
            it an increasing workload?
      --Ms. Olson, what is your opinion on this matter?
        Answer. I strongly support the VITA Program, and commend the
    tireless efforts of its volunteers in assisting an underserved segment
    of taxpayers. If the IRS wants to retain responsibility for VITA and
    set the standards that sites must meet, however, it must be willing to
    give the sites more assistance than it currently provides. The IRS must
    be willing to change its relationship with VITA from one that is merely
    supplementary, where VITA sites are providing a service the IRS is
    unwilling to provide, to a relationship that is complementary, where
    the IRS and VITA sites work together to provide a service and achieve
    specific goals. As the IRS considers the future of VITA, it must take a
    hard look at the needs and concerns of local and national partners,
    without whose continued support the program will cease to exist.
        The IRS must also provide adequate funding for the VITA Program.
    From 1999 to 2004, the number of VITA sites grew dramatically from
    6,000 to nearly 14,000, an increase of 8,000 sites.\4\ From 2001 to
    2004, the amount of technology support provided to the VITA Program
    increased only modestly, from $2.9 to $3.3 million, an increase of
    $400,000.\5\ In combination, technology support decreased from $483.00
    per site to $236.00 per site on average, a decrease of more than 50
    percent. Thus, aggregate funding and support provided by the IRS have
    not been increasing at a rate sufficient to keep up with the growth of
    the program. The IRS needs to determine the growth limit of the VITA
    Program and how to respond when that limit is reached. It must also
    undertake more comprehensive strategic planning regarding the future of
    the VITA program and the support it is providing before it continues to
    increase the amount of assistance it expects these sites to provide.
    ---------------------------------------------------------------------------
        \4\ Stakeholder Partnerships, Education and Communication, ``VITA
    Celebrates Its Thirtieth Year of Service''; additional information
    provided by the IRS.
        \5\ Information provided by the IRS. It is important to note that
    budget information is not available for years prior to 2001 when the
    VITA Program operated under the Taxpayer Education function.
    ---------------------------------------------------------------------------
        Question. The VITA program operates for only about 4 months of the
    year during tax season and receives limited support from the IRS. Ms.
    Olson, in your statement, you say that the IRS should concentrate on
    developing a fundamental support structure for the program and expand
    the program. You also say that the IRS should not let VITA or any other
    volunteer program serve as a substitute for IRS-provided service.
        Ms. Olson, why do you take that position?
        Answer. As the IRS struggles with limited resources to meet the
    service needs of all taxpayers, we have already begun to reduce free
    tax preparation assistance previously provided to taxpayers. Over the
    past 3 years, the IRS has reduced the number of tax returns prepared in
    Taxpayer Assistance Centers (TACs) from 665,868 tax returns in fiscal
    year 2003 to a proposed 305,000 tax returns in fiscal year 2006.\6\ To
    fill the gap, the IRS has increased its reliance on the VITA Program to
    provide free tax preparation assistance to taxpayers.
    ---------------------------------------------------------------------------
        \6\ Wage and Investment, ``Business Performance Review, Wage and
    Investment Operating Division, Fiscal Year 2006''; Wage and Investment,
    ``Business Performance Review, Wage and Investment Operating Division,
    Fiscal Year 2005''; Wage and Investment, ``Business Performance Review,
    Wage and Investment Operating Division, Fiscal Year 2004''; Wage and
    Investment, ``Business Performance Review, Wage and Investment
    Operating Division, Fiscal Year 2003.''
    ---------------------------------------------------------------------------
        Clearly, partners are very important to effective tax
    administration, and I applaud the efforts of dedicated professionals
    and volunteers in assisting taxpayers. However, this reliance raises
    several concerns. First, when the IRS relies on partners to deliver a
    message, we need to study what happens to the message in the course of
    delivery. Does the message change over distance and time? Is it less
    accurate? Second, we need to measure the downstream consequences of
    this trend. What are the true costs of effective oversight over these
    partners? Who conducts such oversight and bears the cost? Will the IRS
    actually realize any savings or will it incur more expense through
    additional enforcement activity that could be avoided if the IRS itself
    delivered the assistance?
        On the other hand, if we begin to rely more heavily on our partners
    for the delivery of services, we must also ensure that we are providing
    our partners with adequate support and assistance. Without a sufficient
    support system in place, we cannot expect our partners to act as a
    delivery channel for services we are unable or unwilling to provide.
        While the service VITA provides is critical, the IRS cannot rely
    entirely on these volunteers to provide a service the IRS has deemed
    too costly or time-consuming to provide itself. Instead of
    concentrating on expanding the VITA Program, the IRS should concentrate
    on developing a fundamental support structure for the program,
    including site management, training, and quality review. Once the IRS
    has developed a strong infrastructure for the VITA Program and has
    established consistent quality in the returns prepared by volunteers,
    then the IRS can work to expand the program. However, the IRS must
    remain cognizant that VITA, or any volunteer program, cannot and should
    not be expected to serve as a substitute for IRS-provided service.
    Taxpayers have the right to expect some level of assistance from the
    tax agency they fund with their tax dollars.

             SETTING TAXPAYER ASSISTANCE CENTERS (TACS) UP TO FAIL

        Question. In a briefing last year by TIGTA on Taxpayer Assistance
    Centers, I learned that some TACs have as little as one or two staff,
    what TIGTA calls a ``critical staffing shortage.'' The House and
    Senate, Majority and Minority, said no to your proposal to cut back
    TACs until TIGTA completes a study on the impact of such reductions on
    taxpayer compliance and taxpayer services.
        Mr. Everson, are you, in fact, allowing these TACs to eventually
    close by letting the staffing levels dwindle? Do you believe that is
    consistent with the direction from this committee?
        Mr. George or Ms. Olson, do either of you care to comment?
        Answer. The IRS is facing a challenge. It has limited resources yet
    also has the responsibility to serve all taxpayers. Thus, it must
    decide by taxpayer segment how to deliver needed services in the most
    effective and efficient manner possible, and in a way that does not
    negatively impact taxpayers' ability to comply with the tax laws.
    Toward this end, the IRS must gather data and develop criteria to make
    those decisions. The Phase I report of the Taxpayer Assistance
    Blueprint (TAB) is the first step toward developing a comprehensive 5-
    year plan for taxpayer service that will establish a long-term strategy
    for delivering needed taxpayer services within existing resource
    limitations.
        The IRS must take a close look at what services taxpayers need and
    want. The status quo is not necessarily what taxpayers want--it is
    merely what the IRS has been willing (or able) to deliver. Instead the
    IRS must conduct research to develop a baseline of services. Only after
    this research is completed will we be able to measure how effective we
    are in improving our ability to meet taxpayer needs and begin to study
    how any changes to our current service offerings will affect taxpayer
    compliance.

                            SERVICES OFFERED AT TACS

        Question. Mr. Everson and Ms. Olson, why hasn't the IRS involved
    taxpayers who need or desire face-to-face assistance in determining
    what services are offered at the TACs?
        Answer. The Taxpayer Assistance Blueprint Team (TAB), as part of
    its work developing a 5-year plan for taxpayer service, conducted a
    number of research projects designed to identify the needs and
    preferences of taxpayers. As part of these studies, the IRS is looking
    specifically at taxpayers who use the TACs to determine what services
    these taxpayers need. This data will hopefully allow the IRS to
    structure the TACs in order to best meet the needs of the taxpayers who
    require face-to-face assistance.
        Question. Mr. George, your recent audit report says that prior to
    making decisions on closing any TACs, the IRS should ensure that it is
    known which taxpayers visit the TACs for assistance and why, so the IRS
    can determine the impact on these taxpayers and ensure alternative
    service deliver channels are effective in meeting the needs of these
    taxpayers.
        Ms. Olson, I would imagine you agree?
        Answer. Before the IRS makes any decision about altering the
    current services offered to taxpayers, it should study the trends in
    taxpayer service in order to understand the impact of taxpayer service
    on compliance and how taxpayers need services to be delivered. The
    Taxpayer Assistance Blueprint Team (TAB) conducted a number of research
    projects designed to identify the needs and preferences of taxpayers.
    One research study involves interviews with taxpayers who sought TAC
    services, including those who were not actually served or did not
    receive the service they requested. This information will be invaluable
    in determining taxpayer needs and preferences. However, additional
    research must be conducted to determine the impact of taxpayer service
    on compliance. This research would allow the IRS to determine how
    changes to taxpayer service will potentially impact compliance.

                         REDUCTION OF TAXPAYER SERVICES

        Question. Mr. Everson, last year, you:
      --eliminated ``TeleFile'', the ability to file taxes by telephone;
      --proposed the elimination of as many as one-quarter of all walk-in
            Taxpayer Assistance Centers;
      --proposed shortening phone assistance hours; and
      --began the process to eliminate several telephone call-routing
            sites.
        In a profile of online population, Census data indicates that in
    any given age group (ages 18-29; 30-39, etc.), not even one-third of
    adults are on-line. We know that the Nation's large senior citizen,
    limited-proficient English, and underserved populations are not as
    likely to use or have access to the internet as other forms of
    communication.
        Given this and the digital divide at every generation, how do you
    rationalize the elimination of face-to-face and telephone interaction
    in favor of electronic communication?
        Ms. Olson, does this concern you?
        Answer. I believe the IRS should work harder to identify the best
    channels through which to deliver services to taxpayers. While
    electronic and self-assistance channels may be growing in popularity,
    mere use or access to these services does not necessarily mean that
    taxpayers are computer literate and can conduct website searches for
    complex tax information--much less understand how to apply that
    information once they find it.
        Moreover, we need to understand why certain taxpayer segments have
    difficulties with our existing services and why they are reluctant to
    use lower cost channels (if indeed they are). Only then can we develop
    effective ``migration'' strategies to encourage and educate taxpayers
    about appropriate lower cost channels--ones that will not ultimately
    increase noncompliance and lead to greater downstream costs.
    Additionally, we must always remain cognizant that there is a segment
    of the population that cannot and will not avail itself of self-service
    options. However, by providing more self-service opportunities for
    taxpayers, the IRS should be able to reserve its in-person (face-to-
    face or telephone) interaction for those issues and taxpayers that need
    such engagement.

                               FREE FILE ALLIANCE

        Question. Mr. Everson, recently, the Finance Committee found that
    taxpayers using the Free File on-line tax return preparation services
    are presented with surprise fees, expensive add-ons, loan solicitations
    and other marketing pitches. While there is no obligation to buy these
    services, the fees occur so late in the process that taxpayers may feel
    forced to pay them or completely redo their taxes with another vendor
    who may also charge fees. It is my understanding that the IRS has not
    conducted much research on how many taxpayers fall prey to these sales
    pitches.
        What is the IRS doing to protect taxpayers from predatory sales
    pitches and do you plan to do more comprehensive research on these
    activities?
        Ms. Olson, do you have a view on this?
        Ms. Olson, you've advocated for free tax preparation on the IRS
    website.
        Do you believe that is the only way the IRS will achieve its goal
    of having 80 percent of taxpayers filing electronically?
        Answer. I have significant concerns about the Free File Program. It
    is very confusing for taxpayers to navigate, some of the participating
    companies subject taxpayers to an array of confusing sales pitches, and
    it has done very little to achieve the IRS's objective of increasing
    the e-filing rate. On this latter point, I note that only about 4
    million taxpayers used Free File during the 2006 filing season out of
    approximately 135 million individual income tax returns filed--and IRS
    data from the prior year shows that the significant majority of Free
    File users filed their returns electronically in prior years,\7\ which
    means that Free File's success at creating new e-filers is limited at
    best. As I have recommended previously, I believe the IRS and taxpayers
    would both be much better off if the IRS were to create a direct filing
    portal and to make available a basic electronic filing template on its
    website for those taxpayers who are unwilling to pay fees to purchase
    fully functional software products.\8\
    ---------------------------------------------------------------------------
        \7\ IRS Wage & Investment Research Group 6, ``Final Report: Free
    File Survey Analysis, Research Project 6-05-08-2-038N'' 12 (Aug. 31,
    2005).
        \8\ See National Taxpayer Advocate 2004 Annual Report to Congress
    471-477 (Key Legislative Recommendation: Free Electronic Filing for All
    Taxpayers).
    ---------------------------------------------------------------------------
        As for navigating Free File, several experienced attorneys in my
    office tested each of the Free File sites in March 2006 seeking to
    prepare returns reflecting four fact patterns on each site. We
    conducted the tests partly to follow up on testing my office performed
    in 2004 and partly in response to a request from the staff of the
    Finance Committee. The goal of the testing was to determine the
    experience of taxpayers as they attempt to navigate the sites and
    prepare and file their returns through Free File products accessible
    through the official IRS website. The results of our tests, in my view,
    were disappointing.\9\ We found that Free File is not generally an easy
    service for taxpayers to navigate, and it can even result in inaccurate
    returns. As structured during the 2006 filing season, Free File
    amounted to a Wild, Wild West of differing eligibility requirements,
    differing capabilities, differing availability of and fees for add-on
    products, and many sites were difficult to use.\10\
    ---------------------------------------------------------------------------
        \9\ The objective of our study was to determine the existence and
    extent of limitations and problems that a user of the Free File sites
    would encounter. In some instances, the tax attorneys testing the sites
    found them very difficult to navigate and were unable to locate forms
    or answers that later testing was able to locate. Therefore, the
    results we describe reflect simply what our attorneys experienced and
    not necessarily what a site was capable of accomplishing.
        \10\ For a detailed discussion of the tests, see ``Preparing Your
    Taxes: How Costly Is It? Hearing Before Senate Comm. On Finance'',
    109th Cong., 2nd Sess. (Apr. 4, 2006) (statement of Nina E. Olson,
    National Taxpayer Advocate, IRS).
    ---------------------------------------------------------------------------
        From an IRS perspective, the rationale for creating the Free File
    program was to make e-filing more accessible to taxpayers and thereby
    help it to achieve the congressionally-mandated goal of having 80
    percent of all taxpayers filing their returns electronically. However,
    the relatively low usage of Free File, the remarkably low usage by new
    e-filers, and the decline in usage in 2006 as compared with 2005
    indicate that the program is not meeting its objectives. Taking into
    account the additional concerns about cross-marketing of other
    products, the appearance that the IRS is endorsing the Free File
    products (notwithstanding disclaimers, taxpayers start out from the
    official IRS website), and taxpayer concerns about the confidentiality
    of their tax data, I see little justification to continue with Free
    File and every justification for the IRS to develop a tax preparation
    template and to provide free e-filing for all taxpayers--just as it
    does for paper filers. If the IRS template and direct filing portal are
    simple, accurate, and confidential, I think both the IRS and taxpayers
    will benefit enormously and the e-file rate will increase.

                              SUBCOMMITTEE RECESS

        Senator Murray. This subcommittee is recessed until
    Thursday, May 4 when we take testimony from the Federal
    Aviation Administrator.
        Thank you very much.
        [Whereupon, 11:25 a.m., Thursday, April 27, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      DEPARTMENTS OF TRANSPORTATION, TREASURY, THE JUDICIARY, HOUSING AND
    URBAN DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR
                                      2007

                                  ----------

                             THURSDAY, MAY 4, 2006

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:36 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Christopher S. Bond (chairman)
    presiding.
        Present: Senators Bond, Bennett, Stevens, Burns, Murray,
    Durbin, and Dorgan.

                          DEPARTMENT OF TRANSPORTATION

                        Federal Aviation Administration

    STATEMENT OF HON. MARION C. BLAKEY, ADMINISTRATOR
    ACCOMPANIED BY:
            DAVID DOBBS, ASSISTANT INSPECTOR GENERAL FOR AVIATION AND
                SPECIAL PROGRAM AUDITS, OFFICE OF INSPECTOR GENERAL,
                DEPARTMENT OF TRANSPORTATION

                OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Good morning. The Senate Appropriations
    Subcommittee on Transportation, Treasury, Judiciary, HUD and
    related agencies will come to order.
        It is a pleasure to welcome FAA Administrator Marion Blakey
    and thank her once again for appearing before us today to
    testify on the Federal Aviation Administration's budget request
    for fiscal year 2007.
        Madame Administrator, no matter what concerns I raise, I
    want you to know that I respect your dedication and commitment
    to the success of FAA. There are no simple issues. I know you
    have committed yourself to making the FAA a model agency. I
    want that to be on the record, because we will have many areas
    of difficult questions that we need to raise and I want
    everybody to understand how much we support your efforts.
        The administration's budget proposes $13.7 billion in new
    spending commitments for the FAA, a $560 million decrease from
    fiscal year 2006. While the FAA operational activities would
    see a 3.2 percent increase over the amount provided last year,
    the budget would impose a dramatic cut in Federal airport
    construction investment, most in funding reductions in the
    Airport Improvement Program.
        In addition, facilities and equipment would receive $2.5
    billion which is a 0.5 percent decrease from last year, and
    $607 million below the authorized level.
        Nevertheless, the real cut comes from the Airport
    Improvement Program, which would only get $2.57 billion, down
    $765 million from last year or a 22 percent decrease and $950
    million below the authorized amount.
        We have tried to make the case to the Office of Management
    and Budget, and anybody else who would listen, that the AIP
    program is critical to the future of commercial aviation in the
    Nation. My colleagues and I are ones who understand and use the
    airport services around the country and we know how important
    they are to the successful economic growth of our communities
    and the businesses, employers and employees who depend upon
    them.
        Unfortunately, this cut means increased funding for
    salaries and expenses, and the hiring of air traffic
    controllers and safety inspectors comes at the expense of
    funding needed for airport investment improvements under the
    AIP program.
        If the administration were to follow the blueprint of
    VISION-100, the authorizing legislation for aviation, in the
    same manner in which we funded needed highway improvements
    under SAFETEA, the AIP number for 2007 would be $3.7 billion
    rather than the $2.57 billion requested. Consequently, I need
    to understand the justification for this funding cut and how
    the administration and OMB intends to maintain a world class
    commercial aviation industry.
        In particular, I am very much concerned about what cuts to
    the AIP program formula will mean specifically to the
    construction needs of airports, especially small airports since
    larger airports tend to rely on per capita passenger facility
    charges or bond issues to pay for their capital development.
        As I understand it, the formula entitlement for primary
    airports would be cut by 44 percent under the budget request
    which would result in a drop from $1 million to $650,000 for
    primary airports.
        The formula entitlement for general aviation would also cut
    funding for general aviation airports by 29 percent, resulting
    in the elimination of the current $150,000 annual minimum per
    airport. In fact, many general aviation airports would lose
    funding altogether.
        In addition, and more importantly, the Aviation Trust Fund
    is slowly going broke and needs real reform. This is a key
    issue facing Congress and I urge the administration to announce
    its proposal on the funding of the Trust Fund as soon as
    possible. These are complex issues that deserve comprehensive
    consideration over a significant period of time. There are no
    quick or easy answers.
        In particular, the poor economic condition of the aviation
    industry has had a negative impact on the Trust Fund. Trust
    Fund revenues more than doubled from $4.9 billion in 1990 to
    $10.7 billion in 2000. The trend changed in fiscal year 2001
    when revenues fell slightly to $10.2 billion. In 2003 revenues
    again dropped slightly to $10.1 billion. Because aviation has
    remained constant, there has been a steady decline in the
    uncommitted balance in the Trust Fund, which stood at $4.8
    billion at the end of 2002. Over the next 2 years these funds,
    and any other collections, are expected to be fully spent on
    aviation activities.
        Also, over the next 15 years, passenger boarding is
    expected to grow by some 15 percent, including a 30 percent
    growth in air transport and commercial operations. At the 35
    busiest airports in the Nation, total operations are expected
    to grow by more than 34 percent by 2020.
        While the administration is expected to propose new ways to
    fund the Aviation Trust Fund, we cannot afford to shortchange
    our commercial air needs in the meantime. We need answers to
    all these issues but more importantly we need adequate funding.
        The bottom line is there needs to be a new approach to the
    Aviation Trust Fund to ensure the long-term stability and
    growth of the airline/aviation industry. First, all taxes that
    go to the Trust Fund will expire on September 30, 2007. As a
    result, I expect and understand the FAA has been doing outreach
    on alternative funding options, although I expect taxes and
    other fees to remain a significant part of any proposal.
        While there has been a lot of pressure by the major air
    carriers to balance out the funding of the Trust Fund, we need
    to ensure that we develop a healthy balance that supports the
    economic viability of all aspects of the aviation industry,
    from small planes and general aviation to the large carriers.
        This is a fragile industry, as you well know, and it must
    be respected. As a matter of perspective, the air traffic
    control system in fiscal year 2005 served some 739 million
    passengers and over 39 billion ton miles of freight, a number
    that is very difficult to comprehend because of its size.
        The FAA also maintains a system of some 70,000 facilities
    and equipment. There are FAA operated or contract operated
    towers at 500 airports with the FAA responsible for inspection
    and certification of 220,000 aircraft and 610,000 pilots. The
    size and the magnitude of the aviation industry is huge and we
    must balance how we pay and support the industry. This is
    critical to the economic vitality and the growth of our Nation
    and its economy.
        The FAA is facing many other important issues regarding
    oversight and administration of a number of contracts designed
    to modernize equipment. In particular, and this is an area of
    major concern to me, the FAA IG reviewed 16 major acquisitions
    in 2005 and found projects experience a growth cost of over
    $5.6 billion from $8.9 billion to $14.5 billion. In addition, 9
    of 16 projects had schedule delays ranging from 2 to 12 years,
    and 2 other projects were deferred pending further evaluation.
    Since the last report on these projects, the estimated cost of
    6 of the 16 has increased by nearly $1.7 billion.
        More importantly, the IG recently raised concern about the
    FAA Telecommunications Infrastructure Contract where the FAA
    intends to replace seven existing FAA-owned and leased
    telecommunication networks with a single network that would
    cost less to operate. Unfortunately, we understand that costs
    are growing, which means that the expected savings are eroding.
    I think this is a critical issue requiring your complete
    attention. The network needs to be implemented quickly and at a
    fair price if we are to make the change to save money.
        In addition, there are a number of other important issues
    facing the FAA, including the current impasse over the air
    traffic controller contract. Obviously, this is a tough issue.
    We have a fine group of air traffic controllers who are
    responsible for the management of our airways and we depend
    upon them for safety in our flight activities. They do a great
    job which places them under substantial stress.

                               PREPARED STATEMENT

        Nevertheless, I understand the FAA has tried to balance the
    contract needs of the air traffic controllers with the
    skyrocketing costs that have occurred under the last contract.
    I do not think the FAA contract proposal is a perfect document,
    but it appears the FAA has attempted in good faith to find a
    balance that is fair and equitable and ultimately this will
    mean savings that will free up funds for other staffing,
    redevelopment and capital needs. These are critical funds in a
    time of tight budgets.
        Again, I thank you for your hard work and I look forward to
    hearing your testimony. I now turn to my ranking member,
    Senator Murray.
        [The statement follows:]

               Prepared Statement of Senator Christopher S. Bond

        The Senate Appropriations Subcommittee on Transportation, Treasury,
    the Judiciary, HUD, and Related Agencies will come to order. We welcome
    FAA Administrator Marion Blakey and thank her for appearing before us
    today to testify on the Federal Aviation Administration's budget
    request for fiscal year 2007. Ms. Blakey, no matter what concerns I
    raise, I want you to know that I respect your dedication and commitment
    to the success of the FAA. There are no simple issues, and I know you
    have committed yourself to making the FAA a model agency.
        The administration's budget proposes $13.7 billion in new spending
    commitments for the FAA, a $560 million decrease from fiscal year 2006.
    While the FAA operational activities would see a 3.2 percent increase
    over the amount provided last year, the budget would impose a dramatic
    cut in Federal airport construction investment, mostly in funding
    reductions in the Airport Improvement Program (AIP). In addition,
    Facilities and Equipment would receive $2.5 billion, which is a half
    percent decrease from last year, and $607 million below the authorized
    level. Nevertheless, the real cut comes from the Airport Improvement
    Program, which would only get $2.75 billion, down $765 million from
    last year, or a 22 percent decrease, and $950 million below the
    authorized amount.
        As the administration knows, the AIP program is critical to the
    future of commercial aviation in the Nation. This cut means increased
    funding for salaries and expenses and the hiring of air traffic
    controllers and safety inspectors at the expense of funding needed for
    airport investment improvements under the AIP program. If the
    administration were to follow the blueprint of VISION-100, the
    authorizing legislation for aviation, in the same manner in which they
    funded needed highway improvements under SAFETEA, the AIP number for
    fiscal year 2007 would be $3.7 billion, rather than the $2.75 billion
    requested. Consequently, I need to understand the justification for
    this funding and how the administration intends to maintain a world-
    class commercial aviation industry.
        In particular, I am very concerned about what cuts to the AIP
    program formula will mean specifically to the construction needs of
    airports, especially small airports since larger airports tend to rely
    on per capita passenger facility charges or bond issues to pay for
    their capital development. As I understand it, the formula entitlement
    for primary airports would be cut by 44 percent under the budget
    request which would result in a drop from $1 million to $650,000 for
    primary airports. The formula entitlement for general aviation would
    also cut funding for general aviation airports by 29 percent, resulting
    in the elimination of the current $150,000 annual minimum per airport.
    In fact, many General Aviation Airports would lose funding altogether.
        In addition, and more importantly, the Aviation Trust Fund is
    slowly going broke and needs real reform. This is a key issue facing
    Congress and I urge the administration to announce its proposal on the
    funding of the trust fund as soon as possible. These are complex issues
    that deserve comprehensive consideration over a significant period of
    time. There are no easy or quick answers.
        In particular, the poor economic condition of the aviation industry
    has had a negative impact on the trust fund. Trust fund revenues more
    than doubled from $4.9 billion in fiscal year 1990 to $10.7 billion in
    fiscal year 2000. The trend changed in fiscal year 2001 when revenues
    fell slightly to $10.2 billion. In fiscal year 2003, revenues again
    dropped slightly to $10.1 billion. Because aviation has remained
    constant, there has been a steady decline in the uncommitted balance in
    the trust fund, which stood at $4.8 billion at the end of fiscal year
    2002. Over the next 2 years these funds and any other collections are
    expected to be fully spent on aviation activities.
        Also, over the next 15 years, passenger boarding is expected to
    grow by some 15 percent, including a 30 percent growth in air transport
    and commercial operations. At the 35 busiest airports in the Nation,
    total operations are expected to grow by more than 34 percent by 2020.
    While the administration is expected to propose new ways to fund the
    aviation trust fund, we cannot afford to shortchange our commercial air
    needs in the meantime. We need answers to all these issues, but more
    importantly, we need adequate funding.
        The bottom line is there needs to be a new approach to the Aviation
    Trust Fund to ensure the long-term stability and growth of the airline/
    aviation industry. First, all taxes that go to the Trust Fund will
    expire on September 30, 2007. As a result, I expect and understand that
    the FAA has been doing outreach on alternative funding options although
    I expect taxes and other fees to remain a significant part of any
    proposal. While there has been a lot of pressure by the major air
    carriers to balance out the funding of the Trust Fund, we need to
    ensure that we develop a healthy balance that supports the economic
    viability of all aspects of the aviation industry, from small planes in
    general aviation to the large carriers.
        This is a fragile industry that must be respected. As a matter of
    perspective, the air traffic control system in fiscal year 2005 served
    some 739 million passengers and over 39 billion ton miles of freight.
    FAA also maintains a system of some 70,000 facilities and equipment.
    There are FAA-operated or -contract towers at 500 airports with FAA
    responsible for the inspection and certification of about 220,000
    aircraft and 610,000 pilots. The size and magnitude of the aviation
    industry is huge and we must balance how we pay and support the
    industry. This is critical to the economic vitality and growth of the
    Nation.
        The FAA is facing many other important issues regarding oversight
    and the administration of a number of contracts designed to modernize
    equipment. In particular, the FAA IG reviewed 16 major acquisitions in
    2005 and found projects experiencing a growth cost of over $5.6
    billion, from $8.9 to $14.5 billion. In addition, 9 of the 16 projects
    had schedule delays ranging from 2 to 12 years and 2 other projects
    were deferred pending further evaluation. Since the last report on
    these projects, the estimated cost of 6 of the 16 projects has
    increased by nearly $1.7 billion.
        Most importantly, the IG recently raised concern about the FAA
    Telecommunications Infrastructure contract where the FAA intends to
    replace 7 existing FAA-owned and -leased telecommunications networks
    with a single network that would cost less to operate. Unfortunately,
    costs are growing which means any expected savings are eroding. This is
    a critical issue requiring your complete attention. This network needs
    to be implemented quickly and at a fair price.
        In addition, there are a number of other important issues facing
    FAA, including the current impasse over the Air Traffic Controller
    contract. Obviously a very tough issue. We have a fine group of air
    traffic controllers who are responsible for the management of our
    airways. They do a great job which places them under substantial
    stress. Nevertheless, the FAA has tried to balance the contract needs
    of the air traffic controllers with the skyrocketing costs that have
    occurred under their last contract. I do not think the FAA contract
    proposal is a perfect document but I do believe that the FAA has
    attempted in good faith to find a balance that is fair and equitable,
    and ultimately this will mean savings that will free up unneeded funds
    for other staffing needs, redevelopment and capital needs. These are
    critical funds in a time of tight budgets.
        Again, I thank you for your hard work and look forward to hearing
    your testimony. I now turn to my ranking member, Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you very much, Mr. Chairman, for
    calling this hearing and I join you in welcoming our FAA
    Administrator, Marion Blakey, before the subcommittee this
    morning.
        Commercial aviation is a critical part of our national
    economy and our future. In 2004, the U.S. civil aviation sector
    generated $1.37 trillion of output, supported 12.3 million
    jobs, and created $418 billion in personal earnings. That
    represents almost 9 percent of overall employment in this
    country, and in my State that percentage is even higher.
        Having a strong aviation sector requires a strong FAA that
    guarantees safety for all users. The FAA must ensure the safety
    of every flight, of every airplane part, and of the system
    overall. That requires a well-trained and fully staffed
    workforce of safety inspectors and air traffic controllers, and
    modern equipment.
        As I review the current status of the FAA and the agency's
    financial needs, I am sorry to say this Department deserves a
    much better budget. It also needs strong leadership and closer
    attention from this Congress.
        The Bush administration is seeking to cut the FAA by more
    than $560 million, almost 4 percent in direct appropriations.
    When you include all of the proposed funding rescissions in the
    President's budget, that cut rises to $937 million or 6.8
    percent. The biggest cut proposed by the administration is a
    whopping $750 million cut in capital investment in our Nation's
    airports.
        We know that passenger boardings are expected to grow by 60
    percent over the next 15 years. That means we should be
    investing more. But instead, the Bush administration wants to
    cut our support for America's airports.
        Mr. Chairman, thanks to your leadership, we have rejected
    cuts in airport capital investments in the past but we have not
    been successful in fending off all cuts within the FAA's
    budget, such as cuts to modernize our outdated air traffic
    control system.
        This year the Bush administration seeks to cut
    modernization by $50 million, and that comes on top of much
    larger cuts in prior years. If we accept the President's level
    for air traffic control modernization, we will have cut
    modernization by $518 million, or 17 percent, in just the last
    5 years.
        I must confess to being enormously frustrated with the way
    this administration has handled the FAA and its budget needs.
    My frustration stems in part from the administration's effort
    to play a continuing game of hide the ball when it comes to the
    budgetary realities of this agency.
        For the last several months, I have been asking for very
    simple answers to some very simple questions. It was not until
    this subcommittee actually scheduled hearings with the
    Transportation Secretary and the FAA Administrator that we have
    been able to get any answers. And then the Secretary's answers
    have contradicted the administrator's answers.
        For example, I have been asking, of the hundreds of
    aircraft safety inspectors that are expected to retire this
    year, how many will the agency be able to hire to fill those
    vacancies? Those safety inspectors represent some of the most
    critical air safety positions in the entire agency.
        We have received numerous reports from the Inspector
    General and the Government Accountability Office that we need
    more inspectors and better training because more domestic
    airlines are doing their aircraft maintenance overseas. It is a
    sad fact of life that at the present the FAA does not even have
    the manpower or ability to inspect some of the facilities that
    are conducting these critical maintenance activities.
        When I asked this question of Secretary Mineta back on
    March 16, he told me the Department was going to be in a
    position to hire the 238 safety inspectors that we called for
    in our appropriations bill. But just this past Friday the
    Administrator told us to expect about 30 percent fewer
    inspectors to be hired.
        So with all the requirements placed on our flight safety
    inspectors, their number will still be well below the level the
    Agency had back in 2003.
        Similarly, for months I have been asking how many air
    traffic controllers the FAA will be able to hire to make up for
    the hundreds of controllers that are expected to retire this
    year. Here again the Secretary gave me one number, the
    Administrator gave me another. The Secretary told me he would
    be funding the 1,249 controllers that were called for last
    year. The Administrator is now telling me that we should only
    expect 930.
        These disconnects highlight my concern that the
    administration does not have a real plan for dealing with the
    looming retirement crisis both in the inspector and controller
    workforce.
        Back in December 2004, the FAA released this multi-year
    controller staffing plan. At the time, the FAA assured us that
    this plan would be renewed annually and updated for market
    conditions and actual retirements. We were assured this plan
    would not be ignored by OMB and would not grow dusty sitting on
    a shelf. We were told the administration was committed to
    updating the plan every year and funding it.
        Well, now it is May 2006. The annual update for this plan
    was due more than 6 months ago and we still do not have it. The
    absence of this plan cannot be blamed on the fact that the FAA
    and the controllers do not have a contract. That should not
    influence this plan. To me, it is simply inexcusable that this
    critical safety plan is being ignored.
        The fact that the agency cannot afford to hire enough
    inspectors or controllers does not come as a complete surprise
    to me. There are a number of funding shortfalls that undermine
    the FAA's ability to hire enough staff. A small part of the
    problem is that Congress approved a larger pay raise than the
    agency budgeted for.
        A much larger part of the problem is that despite my
    efforts and the efforts of several other Senators, the Congress
    imposed a 1 percent across-the-board cut on all agencies,
    including the FAA's operation accounts. These across-the-board
    cuts have become some kind of annual ritual and they occur
    because the Republican budget resolutions impose an unrealistic
    ceiling on agency funding.
        Last year was no different. Despite the fact that the
    Transportation Treasury Bill included enough funding to hire
    enough controllers and inspectors at the level called for by
    our subcommittee, the Defense Appropriations Bill then cut all
    accounts by 1 percent. With the large operating account the FAA
    has, that 1 percent cut had a real impact.
        I must commend the FAA Administrator for sounding the alarm
    on this possibility. She sent me and the other managers of this
    bill a letter expressing her worry about the potential impact
    of another across-the-board cut. I was sufficiently concerned
    that I took to the Senate floor in December to warn my
    colleagues against imposing an across-the-board cut. I
    specifically cited the potential impact of this cut on the
    FAA's ability to hire sufficient safety staff.
        In fact, I put Administrator Blakey's letter into the
    record for all of my colleagues to see. Unfortunately, my
    speech and the Administrator's letter were not sufficient to
    spare the FAA from the across-the-board cut. And now we are
    seeing the results when it comes to critical safety staffing.
        So Congress is part of the problem here, but not all of the
    problem. A large share of the responsibility lies with the way
    the FAA has failed to manage major procurement projects. The
    FAA has had a long history of wasting millions and sometimes
    billions of dollars on mismanaged procurement for which the
    taxpayer and the flying public have gotten very little or
    inadequate results.
        Recently we received an Inspector General's report
    indicating that this pattern still persists. The report made
    clear that the FAA's efforts to modernize its
    telecommunications infrastructure are way behind schedule and
    over budget. And I will discuss that in greater detail later.
        The IG found that if the FAA had managed these projects
    effectively it would have saved $33 million last year in
    operating funds and more than $100 million this year. Those
    operating savings would have been more than enough to fully
    fund the FAA's controller staffing plan and would have hired
    enough safety inspectors to get us back to the 2003 level. But
    because the FAA mismanaged these projects, it never enjoyed the
    savings and its critical safety needs are now being
    shortchanged.

                               PREPARED STATEMENT

        So Mr. Chairman, I believe this agency deserves a better
    budget, it deserves better leadership from the Secretary on
    down, it needs better management when it comes to these
    multimillion dollar procurements, and it needs better attention
    from this Congress. Only then will the flying public know that
    this system is truly safe.
        I look forward to working with you to achieve all of these
    objectives. Thank you, Mr. Chairman.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        Commercial aviation is a critical part of our national economy and
    our future. In 2004, the U.S. civil aviation sector generated $1.37
    trillion of output, supported 12.3 million jobs, and created $418
    billion in personal earnings. That represents almost 9 percent of
    overall employment in this country, and--in my State--that percentage
    is even higher.
        Having a strong aviation sector requires a strong FAA that
    guarantees safety for all users. The FAA must ensure the safety of
    every flight, of every airplane part, and of the system overall. That
    requires a well-trained and fully-staffed workforce of safety
    inspectors and air traffic controllers and modern equipment.
        As I review the current status of the FAA and the agency's
    financial needs, I am sorry to say that this department deserves a much
    better budget. It also needs strong leadership and closer attention
    from this Congress.
        The Bush Administration is seeking to cut the FAA by more than $560
    million--almost 4 percent in direct appropriations. When you include
    all of the proposed funding rescissions in the President's budget, the
    cut rises to $937 million or 6.8 percent.
        The biggest cut proposed by the administration is a whopping $750
    million cut in capital investments in our Nation's airports. We know
    that passenger boardings are expected to grow by 60 percent over the
    next 15 years. That means we should be investing more. But instead, the
    Bush Administration wants to cut our support for America's airports.
        Mr. Chairman, thanks to your leadership, we have rejected cuts in
    airport capital investments in the past, but we have not been
    successful in fending off all cuts within the FAA's budget--such as
    cuts to modernize our outdate air-traffic control system.
        This year, the Bush Administration seeks to cut modernization by
    $50 million. That comes on top of much larger cuts in prior years. If
    we accept the President's level for air traffic control modernization,
    we will have cut modernization by $518 million or 17 percent in just
    the last 5 years.
        I must confess to being enormously frustrated with the way this
    administration has handled the FAA and its budget needs. My frustration
    stems in part from the administration's effort to play a continuing
    game of ``hide the ball'' when it comes to the budgetary realities of
    this agency.
        For the last several months, I have been seeking very simple
    answers to some very simple questions. It was not until this
    subcommittee actually scheduled hearings with the Transportation
    Secretary or the FAA Administrator that we have been able to get any
    answers. And then, the Secretary's answers have contradicted the
    Administrator's answers.
        For example, I've been asking: Of the hundreds of air safety
    inspectors that are expected to retire this year, how many will the
    agency be able to hire to fill those vacancies? These safety inspectors
    represent some of the most critical air safety positions in the entire
    agency. We have received numerous reports from the Inspector General
    and the Government Accountability Office that we need more inspectors
    and better training because more domestic airlines are doing their
    aircraft maintenance overseas.
        It is a sad fact of life that, at present, the FAA does not even
    have the manpower or ability to inspect some of the facilities that are
    conducting these maintenance activities.
        When I asked Secretary Mineta about this back on March 16, he told
    me the department was going to be in a position to hire the 238 safety
    inspectors that we called for in our appropriations bill. But just this
    past Friday, the Administrator told us to expect about 30 percent fewer
    inspectors to be hired. So with all the requirements placed on our
    flight safety inspectors, their number will still be well below the
    level the agency had back in 2003.
        Similarly, for months I have been asking how many air traffic
    controllers the FAA will be able to hire to make up for the hundreds of
    controllers that are expected to retire this year. Here again, the
    Secretary gave me one number, and the Administrator gave me another.
    The Secretary told me he would be funding the 1,249 controllers that
    were called for last year while the Administrator is now telling me
    that we should only expect 930.
        These disconnects highlight my concern that the administration
    doesn't have a real plan for dealing with the looming retirement crisis
    both in the inspector and controller workforce. Back in December 2004,
    the FAA released this multi-year controller staffing plan. At the time,
    the FAA assured us the plan would be renewed annually and updated for
    market conditions and actual retirements. We were assured this plan
    would not be ignored by OMB and would not grow dusty sitting on a
    shelf. We were told the administration was committed to updating the
    plan every year and funding it.
        Well, it is now May 2006, the annual update for this plan was due
    more than 6 months ago, and we still don't have it. The absence of this
    plan cannot be blamed on the fact that the FAA and the controllers
    still do not have a contract. That shouldn't influence this plan.
        To me, it is simply inexcusable that this critical safety plan is
    being ignored. The fact that the agency cannot afford to hire enough
    inspectors or controllers does not come as a complete surprise to me.
    There are a number of funding shortfalls that undermine the FAA's
    ability to hire enough staff.
        A small part of the problem is that Congress approved a larger pay
    raise than the agency budgeted for. A much larger part of the problem
    is that, despite my efforts, and the efforts of several other Senators,
    the Congress imposed a 1 percent across-the-board cut on all agencies,
    including the FAA's operations account.
        These across-the-board cuts have become an annual ritual. They
    occur because the Republican budget resolutions impose an unrealistic
    ceiling on agency funding. Last year was no different. Despite the fact
    that the Transportation, Treasury bill included enough funding to hire
    enough controllers and inspectors at the level called for by our
    subcommittee, the Defense Appropriations bill then cut all accounts by
    1 percent. With the large operating account that the FAA has, that 1
    percent cut had a real impact.
        I must commend the FAA Administrator for sounding the alarm on this
    possibility. She sent me and the other managers of this bill a letter
    expressing her worry about the potential impact of another across-the-
    board cut. I was sufficiently concerned that I took to the Senate Floor
    in December to warn my colleagues against imposing an across-the-board
    cut.
        I specifically cited the potential impact of this cut on the FAA's
    ability to hire sufficient safety staff. In fact, I put Administrator
    Blakey's letter into the record for all my colleagues to see.
    Unfortunately, my speech and the Administrator's letter were not
    sufficient to spare the FAA from this across-the-board cut. Now, we are
    seeing the results when it comes to critical safety staffing.
        So Congress is part of the problem here, but not all of the
    problem. A large share of responsibility lies with the way the FAA has
    failed to manage major procurement projects.
        The FAA has had a long history of wasting millions and sometimes
    billions of dollars on mismanaged procurements for which the taxpayer
    and the flying public have gotten very little or inadequate results.
        Recently, we received an Inspector General's report indicating that
    this pattern still persists. The report made clear that the FAA's
    efforts to modernize its telecommunications infrastructure are way
    behind schedule and over budget. I will discuss this in greater detail
    later.
        The IG found that if the FAA had managed these projects
    effectively, it would have saved $33 million last year in operating
    funds and more than $100 million this year. Those operating savings
    would have been more than enough to fully fund the FAA's controller
    staffing plan and would have hired enough safety inspectors to get us
    back to the 2003 level. But because the FAA mismanaged these projects,
    it never enjoyed the savings, and its critical safety needs are now
    being shortchanged.
        So in summary, Mr. Chairman, I believe this agency deserves a
    better budget, it deserves better leadership from the Secretary on
    down, it needs better management when it comes to these multi-million
    dollar procurements, and it needs better attention from this Congress.
    Only then will the flying public know that the system is truly safe. I
    look forward to working with you to try to achieve all of these
    objectives.

        Senator Bond. Thank you very much for your candid comments,
    Senator Murray.
        I will see if our other colleagues have brief opening
    statements. Senator Bennett.
        Senator Bennett. I do not, Mr. Chairman.
        Senator Bond. Senator Burns.
        Senator Burns. No, sir. Proceed.

                      STATEMENT OF SENATOR BYRON L. DORGAN

        Senator Bond. Senator Dorgan.
        Senator Dorgan. Mr. Chairman, I will be very brief.
        I wanted to mention, we have an Energy Committee hearing
    that I have to attend, but to Administrator Blakey, we have an
    issue in Bismarck, North Dakota with respect to the movement of
    the radar.
        As you know, the original FAA plan was to purchase the ASR-
    11 radar in 2003 and deploy it by 2006. As a result of that,
    Bismarck took a number of actions. We have a blind spot in the
    radar in Bismarck that was to be updated with the ASR-11 order.
        They also took action to begin developing the Northern
    Plains Commerce Center, which has an impact on the radar. And
    so they took action expecting that radar to be deployed by
    2006.
        Now we are stuck and that has slipped. I would like to
    continue to work with you and your staff to find a way to solve
    the peculiar problem that exists in Bismarck.
        Let me mention one other point, if I might. I am concerned
    about this issue of the air traffic controller situation and
    the contract dispute. I know that you have sent it to the
    Congress on April 5. If no action is taken then you impose your
    own set of circumstances.
        I do not like the way that is set up. I know that is set up
    in law, but I also know they have indicated they want to come
    back and continue to negotiate on the three items that you said
    were at an impasse.
        I want a good air traffic control system. I want the
    controllers to be fairly paid, and I want them to be
    professional, and I want that system to work well. I think the
    American people do as well.
        I would much prefer to see a circumstance that it go to
    binding arbitration with a good panel to take a look at it.
        But however this ends up, I think the current circumstance
    is pretty well stacked against the controllers. I expect
    Congress will likely not take action. I expect there is plenty
    of energy here to block action. So the result is you will end
    up simply imposing your decision to begin cutting salaries. And
    that troubles me a great deal. I do not think that is the way
    we are going to end up with a good system.
        So Administrator Blakey, I want you to succeed in your job.
    But I wanted to mention both of these issues, both of which I
    am concerned about.
        Senator Bond. Thank you very much, Senator Dorgan. As I
    understand it, the FAA recommendation is a generous increase in
    salaries and not a cut, but we will allow the Administrator to
    make her opening comments.
        And then I am going to turn to my ranking member for her
    questions because she has to go to the floor and I will allow
    her to ask her--
        Senator Murray. I am happy to have you go first on
    questions and I can go second.
        Senator Bond. No, no, I want you to get your questions out
    there first.
        Senator Murray. He wants the supplemental out on the floor.

                       STATEMENT OF HON. MARION C. BLAKEY

        Senator Bond. Madame Administrator, thank you.
        Ms. Blakey. Thank you.
        Chairman Bond, Senator Murray, Senator Dorgan, Senator
    Bennett, Chairman Burns of our Aviation Subcommittee, I am
    delighted to see all of you this morning. And thank you very
    much for the opportunity this represents to talk about the
    FAA's fiscal year 2007 budget request.
        You are absolutely right, Mr. Chairman, the aviation
    industry is facing numerous challenges at this time and we
    strive to maximize our resources so that we can continue to
    operate and maintain the very safest and most efficient air
    transportation system in the world. And we are very proud of
    doing that.

                                     SAFETY

        Our safety record is impressive by any standards. In terms
    of sheer numbers alone, over 2 billion passengers have traveled
    on our system over the last 3 years. That is seven times the
    population of this great Nation.
        In fact, the fatal accident rate is at an all-time low. It
    is the diligence of the entire aviation community and the
    oversight of committees such as this one that make all of this
    possible. Our pilots, flight attendants, mechanics, inspectors,
    controllers, engineers, technicians, they all have contributed
    to this really phenomenal achievement.
        The President's $13.7 billion budget for 2007 addresses our
    needs. About 70 percent of that money goes to maintain and
    advance the safety of the system. You will also be pleased to
    know that the vast majority of our capital investment programs
    are on track and on budget. I sense we need to do a better job
    communicating with this committee about recent achievements on
    that front and we will do so. We are running the FAA much more
    like a business and we are seeing real results.

                              PROMISING TECHNOLOGY

        Our 2007 budget provides significant increases for two
    promising technologies that will serve as critical platforms
    for the next generation air transportation system, Automatic
    Dependence Surveillance Broadcast or ADS-B, and Systemwide
    Information Management or SWIM.
        The capabilities of ADS-B have already been demonstrated in
    the field. It provides the automatic broadcast of aircraft
    position, altitude, velocity and enhanced visibility not just
    of aircraft but of vehicular traffic, for pilots and air
    traffic controllers alike. It also uses GPS, which further
    reduces our reliance on ground-based infrastructure.
        Another innovative program is our Systemwide Information
    Management, SWIM for short. In essence, we are creating an
    aviation Internet to move information within the FAA and to
    other Government agencies faster, better, cheaper. Much like
    the world wide web revolutionized American commerce, SWIM lays
    the aviation information superhighway. It is going to lead to
    dramatic improvements in air transportation safety, security
    and capacity.

                              AVIATION TRUST FUND

        However, just as the chairman has noted, the FAA must
    remain focused on a much larger issue, and that is the Aviation
    Trust Fund. It is a constant reminder that unless we address
    this challenge and provide the Agency with a funding mechanism
    that is both reliable and consistent we will be unable to meet
    the needs of the flying public.
        Simply put, we need a funding stream that is linked
    directly to the actual cost of what it takes the Federal
    Government to serve the business of aviation. Right now we are
    tied to the Airport and Airway Trust Fund. The Trust Fund
    receives revenue from aviation excise taxes, including a
    domestic segment tax, an international passenger tax, and
    commercial and general aviation fuel taxes.
        But the primary source of income for the FAA's operations
    and capital accounts is a 7.5 percent tax on the price of
    commercial airline tickets. Obviously, with the advent of the
    low-cost carriers, low-cost tickets are great for all of us.
    But the price of those tickets has fallen dramatically.
    Competition has increased. And our revenue stream has suffered.
        At the same time, we see rising passenger levels and more
    planes in the sky as airlines fly a greater number of smaller
    jets and the workload of the FAA will go up accordingly. Our
    costs go up without a corresponding boost in revenues.
        As I have said before, we might as well tie our funding to
    the price of a gallon of milk.
        The taxes that fuel the Trust Fund will expire on September
    30, 2007. That may sound a bit of a way off at this point but
    history shows otherwise. Secretary Mineta and I continue to
    place a very high priority on finalizing our proposal. It is
    undergoing review right now at the most senior levels of the
    administration and I am confident resolution is just around the
    corner.

                              MORE LIKE A BUSINESS

        As you know, in striving to operate more like a business,
    we are constantly pushing to stretch our resources. Our
    business plans mirror the industry we serve. We have
    reorganized our entire air traffic services organization,
    cutting multiple levels of senior management, reducing our
    executive ranks by 20 percent. We have streamlined operations,
    eliminating and consolidating administrative staffs and support
    functions.
        Perhaps the single greatest impetus to operate like a
    business is our need to design, deploy and pay for the next
    generation system. Our existing infrastructure will not be able
    to handle the doubling or even potentially tripling of traffic
    that we know is coming.
        Under the leadership of Secretary Mineta, we are building a
    plan for the future system with four Cabinet-level agencies all
    combining their expertise. Unless a consistent and cost-based
    revenue stream is established to pay for it, this effort will
    likely be for naught. As it is, the agency is headed toward a
    balancing act among competing resources. Do we cut back on air
    traffic services? Do we slow the course of modernization? Do
    certification efforts for new aircraft take a slow roll? Those
    are choices none of us want to make.

                  NATIONAL AIR TRAFFIC CONTROLLERS ASSOCIATION

        Now I would be remiss if I did not mention one of the
    largest issues on our plate currently, and that is our contract
    with the National Air Traffic Controllers Association, NATCA.
    Over 9 months of negotiation, including 4 weeks of mediation,
    the controllers union consistently refused to offer meaningful
    changes in the current pay structure to address the long-term
    affordability of their contract. Our proposal protects the
    existing workforce. It grandfathers the salaries and benefits
    of controllers already on board and preserves 82 percent of
    their premium pay, on average.
        We also bring the salaries of new controllers into line
    with other employees of the agency, reversing a trend that
    under the current contract has caused the pay differential to
    more than double.
        At the end of 2005, the average compensation package for
    our existing controllers, salary plus premium and benefits, is
    about $166,000 a year. Our proposal? Our proposal pushes that
    to $187,000 by the end of the agreement.
        New hires in training start at an average of just under
    $37,000 in base and locality pay, but get to over $93,000 with
    premiums in 5 years. Quite a generous pay package by anyone's
    standards.
        In 1996 Congress put in place the law that requires any
    contract impasse to be sent to the Hill before the agency can
    implement its proposal. As much as we did not want to do that,
    when NATCA refused to address the core issues our proposal was
    sent to Congress for a 60-day review. Unless Congress chooses
    to act, on June 5 we will be in a position to implement our
    proposal.
        As I have said before, we cannot and will not sign a
    contract we simply cannot afford.
        In closing, with the broad scope of the issues that face
    the agency, the Trust Fund, modernizing the system, safety, the
    new contract for our controllers, it is clear that the FAA must
    continue to find new ways operate more like a business.

                               PREPARED STATEMENT

        You have my firm commitment that we will continue to
    deliver the world's safest and most efficient form of
    transportation while doing so.
        Thank you very much.
        [The statement follows:]

                     Prepared Statement of Marion C. Blakey

        Chairman Bond, Senator Murray, members of the subcommittee, it is
    my pleasure to appear before you on behalf of the men and women of the
    Federal Aviation Administration (FAA) on our fiscal year 2007 budget
    request. Before discussing the request and the agency's short-term
    needs, I would like to highlight briefly our efforts to ensure the
    agency's long-term financial viability.
        The FAA's long-term financial outlook depends largely on the
    Airport and Airway Trust Fund (AATF or Trust Fund). Each year, the FAA
    receives appropriations drawn from the Trust Fund and from the General
    Fund. This year, about 82 percent of FAA's total budget will come from
    the Trust Fund and 18 percent from the General Fund. The Trust Fund
    receives revenues from several aviation excise taxes--including a
    domestic segment tax, an international passenger tax, and commercial
    and general aviation fuel taxes. However, the primary source of income
    for the Trust Fund is a 7.5 percent tax on the price of commercial
    airline tickets. While the sharp decline in airline ticket prices has
    been good news for consumers over the last several years, it has made
    the Trust Fund vulnerable due to its heavy reliance on the ticket tax.
    At the same time, FAA's workload and operating costs continue to rise
    due primarily to operational changes in the aviation industry. These
    changes include the increased use of smaller regional jets and business
    jets, both of which generate less revenue per flight for the Trust Fund
    than larger airline jets. Consequently, there is currently no nexus
    between the workload of providing air traffic services and how they are
    funded.
        In recent years, appropriations from the Trust Fund have been
    funded not only from the annual revenue and interest going into the
    Trust Fund, but also from drawing down the uncommitted balance of the
    Trust Fund, which was over $7 billion in 2001. In fiscal year 2005, the
    uncommitted balance of the Trust Fund was $1.9 billion and the
    President's fiscal year 2007 budget projects that it will dip to about
    $1.7 billion at the end of this fiscal year, less than 2 months of FAA
    spending at our current rate.
        As you know, all the taxes that go to the Trust Fund will expire on
    September 30, 2007. During the past year, we have worked closely with
    our stakeholder community to explore other financing alternatives.
    Under Secretary Mineta's leadership, we conducted a broad outreach to
    the aviation community to explore funding options that would be in the
    long-term best interest of the traveling public, the aviation industry,
    and the FAA. In my view the comments we received have greatly informed
    our decision-making. I look forward to discussing the specifics of the
    administration's funding proposal as soon as it is finalized.
        As I've often stated over the past year during our outreach, our
    belief in the need for funding reform for the FAA is not fundamentally
    about generating more money for the FAA. It is about creating a stable
    and predictable funding system that provides appropriate incentives to
    users and to the FAA to operate more efficiently and facilitating
    modernization of the aviation system on a more rational, equitable, and
    predictable basis.

                 PERFORMING LIKE A BUSINESS IN FISCAL YEAR 2007

        The FAA operates 24 hours a day, 7 days a week, 365 days a year. We
    run a multi-billion dollar air traffic control system that in fiscal
    year 2005 served 739 million passengers and over 39 billion cargo
    revenue ton miles of freight. We operate and maintain a system
    comprised of more than 70,000 facilities and pieces of equipment. There
    are FAA-operated or contract towers at 500 airports, and we are also
    responsible for inspection and certification of about 220,000 aircraft
    and 610,000 pilots. We have some 43,000 dedicated government employees
    working to serve the traveling public and the businesses that depend on
    a reliable air transportation system.
        When Congress mandated the FAA to realign its operations and manage
    more like a business, we rose to the challenge. The FAA's efforts over
    the past 3 years have paid real dividends, not just to the flying
    public but to the taxpayer as well. By implementing improved management
    tools, including better cost accounting systems and instituting a pay-
    for-performance program, we have made more efficient use of our
    resources. The tangible results are reflected in our fiscal year 2007
    budget request of $13.7 billion. This is a reduction of $561 million,
    or 4 percent less than the fiscal year 2006 enacted level. The request
    upholds our commitments to increase the safety, capacity, and
    efficiency of the national aviation system.
        The fiscal year 2007 budget provides $8.4 billion for our
    Operations account and reflects the FAA's rising labor costs and
    aviation industry challenges. Most of the funds requested for FAA
    operations in fiscal year 2007 support our paramount goal of
    maintaining and increasing aviation safety. It also reflects our
    continuing efforts to control our operating costs while maintaining the
    safest aviation system in the world.

                               CONTROLLING COSTS

        Our business and budget planning activities are more closely
    aligned than ever, and they both include explicit cost savings
    initiatives. Each organization must include at least one cost reduction
    activity in its annual business plan, which is then reviewed by the
    management board monthly for progress. These identified cost savings
    and avoidance initiatives are integral to FAA's strategy to absorb
    budget shortfalls (e.g., unfunded pay raises and rescissions).
        The agency's emphasis on bottom-line results has not been easy. The
    FAA has slashed costs where possible and slowed the rate of growth of
    our labor costs through productivity improvements and reducing
    overhead, as well as reducing management layers. We also continue to
    apply effective management and financial principles to our labor
    negotiations. The simple fact of the matter is that we cannot and will
    not sign a contract the taxpayer cannot afford. As you know, we are at
    an impasse with NATCA, the union representing our controller workforce.
    Since 1998, the first year of the current NATCA contract, the
    increasing imbalance in compensation between NATCA and the rest of the
    agency has cost the taxpayer a total of $1.8 billion. Neither the FAA
    nor the taxpayer can afford a repeat performance.
        The FAA and NATCA began negotiations to replace the current
    agreement in July 2005. Despite extensive negotiation over 9 months,
    including 4 weeks of mediation with the Federal Mediation and
    Conciliation Service, we failed to reach agreement on several of the
    key proposed articles affecting compensation, benefits, and work rules.
    Therefore, as required by law, we transmitted our proposal, along with
    NATCA's proposals and objections, to Congress on April 5, 2006.
        Long-term affordable pay structures are only a part of the
    equation. In addition, we are taking steps to achieve savings of 10
    percent by fiscal year 2010 in controller staff costs through
    productivity improvements. We achieved the first 3 percent of this goal
    in fiscal year 2005 which avoided about $23 million in costs last year.
    This fiscal year and in fiscal year 2007, we project a minimum of a 2
    percent productivity improvement each year.
        In December 2004, the Agency submitted our Air Traffic Controller
    Workforce Plan to Congress. We are updating the Plan, which will be
    released soon. This plan provides a comprehensive 10-year strategy to
    make sure we have the right number of controllers in place at the right
    time to address the controller retirement bubble. Our funding request
    of $18.2 million is consistent with the targets being developed for the
    updated staffing plan and will enable us to meet the future needs of
    the National Airspace System.

                                A-76 COMPETITION

        This year, we completed the largest non-military A-76 competition
    in Federal Government and will see the first installment of cost
    savings--$66 million--in fiscal year 2007. The Agency's network of
    automated flight service stations, which provide weather guidance and
    other assistance to the pilots of small airplanes, will be reduced from
    58 to 20. The contract not only saves money, it also commits the vendor
    to modernize and improve the flight services we provide to general
    aviation pilots. In addition, the employees who left Federal service as
    a result of this transition were given offers to work for Lockheed
    Martin, the successful bidder of the contract.

               PRIORITIZING FACILITIES AND EQUIPMENT (F&E) NEEDS

        We are requesting $2.5 billion for F&E to improve and modernize the
    airspace system. We are also scrutinizing our capital investments,
    revisiting business cases, and eliminating programs whose benefits no
    longer justify the costs. We are increasing our emphasis on programs
    that will save the agency money.
        We are making similar inroads with equipment. In fiscal year 2005,
    we removed 177 obsolete navigation aids from service, which saved the
    taxpayer about $2.7 million. This year, we plan to remove 100 more,
    followed by another 100 in 2007. We are taking steps to save wherever
    possible. The removal of these land-based navigation aids is consistent
    with our long-term goal of transitioning to satellite-based navigation.

                      KEEPING PACE WITH TODAY'S CHALLENGES

        Our resources and activities are closely linked with the dynamic
    industry we oversee and serve. The pace and depth of change in aviation
    is unparalleled. Business models evolve as rapidly as the technology
    changes: markets once dominated by wide body aircraft are now giving
    way to smaller jets. Entrepreneurs now are marketing microjets, which
    may one day become the ``personal taxi'' of the sky. Fractional
    ownership is making it easier for businesses to own and operate
    aircraft.
        Although our recent forecasts show a decline in operations from
    last year to this year, air travel now exceeds pre-September 11 levels
    and remains on track to carry more than 1 billion passengers by fiscal
    year 2015. Even with the financial shake-up in the airline industry,
    all major forecasts project the long-term demand for air travel will
    outstrip existing capacity. After a temporary drop this year in
    projected operations at airports with FAA or contract towers, we
    forecast an average annual growth of 2 percent in terminal and a 3
    percent growth for en route/oceanic operations from 2005-2017.

                        ENSURING A PATHWAY TO THE FUTURE

        The future portends a wide range of aircraft with divergent
    infrastructure, air traffic management, regulatory, and procedural
    requirements. We must be prepared to support a system that includes the
    Airbus Double Decker A380 and the microjet (and everything in between).
    We must be able to support airlines, large and small, national and
    regional. Recognizing that aviation represents about 9 percent of the
    U.S. Gross Domestic Product, we must provide this infrastructure in
    time to keep the Nation's economy growing while controlling the costs
    of that system.
        We are laying the foundation for our future with a commitment to
    increasing the system's capacity to accommodate the air transportation
    system's predicted growth. We will meet these future needs by
    harvesting new technologies that will support the Integrated National
    Plan for the Next Generation Air Transportation System (NGATS). This
    plan, submitted to Congress in December 2004, brings together four
    cabinet-level agencies and NASA in the Joint Planning and Development
    Office (JPDO) to eliminate duplication and wasted resources. The plan
    is a road map that will leverage Federal funds and allow us to provide
    the national aviation system that can handle the safety, capacity and
    security needs of the future. For the FAA, the plan will drive
    discussions about the: (1) size, role, and training needs of our
    workforce; (2) number of facilities maintained by the FAA; (3)
    transition from ground-based to satellite-based systems; and (4)
    redesign of airspace. For the FAA, the plan is already being
    incorporated into our budget. Specifically, the 2007 budget supports
    two cornerstones to the next generation air transportation system and
    begins to build this new infrastructure by committing to Automatic
    Dependent Surveillance Broadcast (ADS-B) and System Wide Information
    Management (SWIM).
        The budget requests $80 million for ADS-B--a technology that has
    already provided benefits in the field. ADS-B provides: (1) automatic
    broadcast of aircraft position, altitude, velocity, and other data; (2)
    enhanced ``visibility'' of aircraft and vehicle traffic for pilots and
    air traffic controllers; and (3) use of Global Positioning Systems,
    allowing us to reduce our reliance on ground-based infrastructure.
    Implementation of ADS-B throughout the national airspace system will
    reduce infrastructure costs, increase capacity and can have significant
    safety benefits as shown in the Alaska context, where this technology
    has already been fielded as part of a demonstration project. Some
    safety improvements result because ADS-B provides more complete
    coverage in remote and mountainous terrain than traditional radar-based
    surveillance systems.
        The backbone for the future system is an information network that
    can provide better data to more decision-makers--whether it be the
    controller, the pilot or the other agencies dealing with security or
    national defense. The FAA's request of $24 million for SWIM will begin
    to make these advanced information distribution and sharing
    capabilities possible. Every year, FAA builds applications for air
    traffic management systems that require unique interfaces between the
    new application and existing systems. SWIM will replace those unique
    interfaces with a reusable interface and provide many operational
    benefits (e.g., common situational awareness, standardized information
    security, and more cost-effective security implementation).

                             FLIGHT PLAN 2006-2010

        One of the major reasons we are confident in our stewardship of the
    FAA is our Flight Plan. The Flight Plan is FAA's rolling 5-year
    strategic plan that we first undertook in 2004. As scheduled, we
    updated it last fall, with input from our internal and external
    stakeholders. The Flight Plan is organized around the agency's primary
    goals: increased safety; greater capacity; increased U.S. international
    leadership; and organizational excellence. It is our blueprint for
    managing the agency. It serves to focus our efforts on what is most
    important to our stakeholders.
        The plan has made the FAA more businesslike, more performance-
    based, more customer-centered and more accountable. It is dynamic,
    adaptable, and cost-driven. Most ``strategic plans'' are distinguished
    only by their place on a dusty bookshelf. Our Flight Plan is costed out
    and contains specific measures and targets that we track monthly at the
    most senior levels of our agency. It has become our marching order
    toward success. Our goal is to become more accountable to the taxpayer,
    and we work hard every day to reach it.
        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, budgeted and tied to what the customers need. The agency's
    business plan goals have been built into a performance-based tracking
    system that are posted to the FAA website each quarter. It lists each
    of the agency's goals, performance targets, who is responsible, and the
    status of each. Using this data, the senior management team conducts a
    monthly review of our performance. When used with other cost and
    performance data, the Flight Plan information clearly and precisely
    identifies the effectiveness of a program across the entire agency.
    With this perspective, the agency is able to capitalize on successful
    strategies. Let me address our performance and budget requests under
    each of our goals.

                                INCREASED SAFETY

        As I noted earlier, safety remains our No. 1 priority and our No. 1
    success story, with the trends in both commercial and general aviation
    showing consistent improvement. The safety record we have achieved for
    air carriers is a remarkable accomplishment, which our entire
    workforce--inspectors, engineers, technicians, and controllers--shares
    with the broad aviation community. Over the past 4 years, 3 billion
    people have traveled safely in the air transportation system--that's 10
    times the population of the United States.
        Safety is not only a top public interest priority, it is also an
    economic necessity. People fly only if they feel safe. They must trust
    the system and their trust must be upheld. Although commercial aviation
    is in the safest 3-year period in transportation history, safety
    requires more than no accidents.
        The fiscal year 2007 budget reflects the agency's steadfast
    commitment to safety. Out of a total request of $13.7 billion, about 70
    percent, or $9.6 billion, will contribute to our efforts to improve our
    already historic safety record. This includes further progress in
    reducing commercial and general aviation fatality accidents, and the
    number of runway incursions and HAZMAT incidents. Our overarching goal
    is to constantly improve aviation safety.
        To increase aviation safety oversight commensurate with expanding
    activity and the introduction of new aviation equipment and business
    practices, the budget requests $18.5 million for additional staff and
    technical training. Within this total, $8 million is requested to add
    101 aviation safety inspectors to strengthen our safety oversight of
    the aviation industry. The request also funds 32 additional positions
    for the Air Traffic Safety Oversight office--a recently established
    office under the Associate Administrator for Aviation Safety with the
    responsibility for providing an independent safety oversight and review
    of the Air Traffic Organization (ATO) operations.
        Our efforts to run the FAA in the most effective and efficient
    manner are further reflected in our NAS Plan Handoff Program. Under
    this program, we transition capital assets from their deployment under
    the Facilities and Equipment (F&E) appropriation to operation and
    maintenance under the Operations appropriation, in accordance with
    generally accepted accounting principles (GAAP). Full funding for NAS
    Plan Handoff in our Operations appropriation allows us to provide for
    the operations, maintenance, and training for these new capital assets,
    and addresses congressional and GAO criticisms about covering the
    operating costs for new systems in F&E for an indefinite period.

                              INCREASING CAPACITY

        While safety is our primary concern, our mission includes expanding
    capacity throughout the aviation system--both in the air and on the
    ground. The fiscal year 2007 budget requests $3.1 billion to expand
    capacity and improve mobility. 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.
        Beginning in fiscal year 2005, FAA worked with our industry and
    government partners to deliver two key technologies: Domestic Reduced
    Vertical Separation Minimum (DRVSM) and Advanced Technologies and
    Oceanic Procedures (ATOP). DRVSM alone, by increasing en route capacity
    and the ability to avoid severe weather, is expected to result in
    savings for the airlines that could reach $5 billion through 2016.
    These two technologies helped operators participate in reduced
    separation standards and will allow them to fly more aircraft in a
    given airspace and the most fuel-efficient route safely.
        FAA continues to develop criteria and guidance materials that will
    be used for new area navigation (RNAV) and required navigation
    performance (RNP) routes and procedures. Use of RNP permits greater
    flexibility and standardizes airspace performance requirements. By
    adopting RNAV and RNP and leveraging existing and emerging cockpit
    capabilities, the FAA in collaboration with the aviation community will
    be able to improve airspace and procedures design, leading to increased
    capacity and improved efficiency.
        The fiscal year 2007 budget also includes $375.7 million to
    continue the En Route Automation Modernization (ERAM) initiative. This
    is a critical program that replaces obsolete hardware and software of
    the main host computer system that is the backbone of en route air
    traffic operations. The most significant ERAM benefits are improved
    efficiency, capacity, and safety by providing controllers with newer,
    faster, and more capable technology to manage the continuing growth in
    air traffic. The modern en route automation system will also
    accommodate the development of functions that are expected to provide
    significant savings to users through more fuel efficient routes,
    reduced flight times and delays, and increased controller productivity.
        In today's challenging budget environment, we have been forced to
    take a long hard look at all of our funding requirements. Our fiscal
    year 2007 budget request for Grants-in-Aid to Airports is $2.75
    billion, which is lower than recent authorized and enacted levels.
    Nevertheless, under our proposed budget, FAA will be able to support
    all high priority safety, capacity, security and environmental
    projects. There will be adequate funds to meet all current and
    anticipated Letter of Intent (LOI) commitments, which relate to high
    priority, multiyear projects within the national system. The
    President's fiscal year 2007 budget includes support of major capacity
    projects such as the Chicago O'Hare redesign, a new runway at
    Washington Dulles International Airport and major projects at Atlanta-
    Hartsfield International. We will also be able to fund projects to meet
    the FAA's Flight Plan goal for improving runway safety areas (RSAs),
    help airports obtain security equipment and facilities required to meet
    their Transportation Security Administration (TSA) security
    requirements, and continue work on phased projects.

                            INTERNATIONAL LEADERSHIP

        Today, the FAA has operational responsibility for about half of the
    world's air traffic. We certify nearly three-quarters of the world's
    large jet aircraft. We have provided assistance to more than 100
    countries to help them to improve their aviation systems. Safety may be
    our most important export. Even so, we still must become even more
    globally focused to ensure that U.S. citizens can travel safely around
    the world. We also must continue to be a catalyst for the harmonized
    implementation of safety and capacity enhancing technology around the
    world. The fiscal year 2007 budget requests $35.5 million to support
    international leadership and global connectivity.
        It is clear the FAA's role in advancing the international
    leadership of the United States in aviation goes well beyond the
    borders of the Far East and Latin America. The numbers and the activity
    point to the need for a global approach to aviation and we are working
    to shape that destiny. We are working together with all our key
    regional partners to identify the next generation of air traffic
    management technologies and practices. The agency believes that
    together we can create a road map for the global community. To give us
    the safety tools that we need, we are working to negotiate and sign
    Bilateral Aviation Safety Agreements with key countries around the
    world. These agreements benefit everyone--passengers, the Agency, and
    the aviation industry. Also, through our efforts with other
    International Civil Aviation Organization members, we will continue to
    develop and implement global safety and certification standards to
    improve efficiency and trade.

                           ENVIRONMENTAL STEWARDSHIP

        As we increase capacity, we've been careful to ensure environmental
    responsibility. The fiscal year 2007 budget requests $391.2 million to
    support environmental stewardship for noise mitigation, fuel efficiency
    enhancements, and a comprehensive approach to addressing both noise and
    emissions.

                                    SECURITY

        While the U.S. Department of Homeland Security's TSA now has
    primary responsibility for transportation security, the FAA still
    retains responsibility for the security of its personnel, facilities,
    equipment and data. FAA provides financial and other assistance to help
    airports meet security requirements. Security projects required by
    statute or regulation carry the highest priority for AIP funding. The
    agency works closely with TSA and other Federal agencies to support
    aviation security, transportation security, and other national security
    matters.
        FAA insures the operability of the national airspace system through
    the facilities, equipment, and personnel of the air traffic control
    system, which is essential to the rapid recovery of transportation
    services in the event of a national crisis. The budget request includes
    $173 million to continue upgrading and accrediting facilities, procure
    and implement additional security systems, and upgrade Command and
    Control Communications equipment to meet the increased national
    security demands since the September 11 attacks.

                           ORGANIZATIONAL EXCELLENCE

        To fulfill our mission the FAA must become a world-class
    organization. The agency is committed to finding and eliminating
    barriers to equity and opportunity. We believe that fairness and
    diversity fortify our strength. Further, we must give our staff 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 are becoming increasingly
    performance-based. This allows the agency to pay for results and reward
    success.
        In simple terms, our objectives are to: strategically manage our
    human capital; improve our financial performance; and control costs
    while delivering quality customer service. The fiscal year 2007 budget
    requests $437 million for organizational excellence initiatives.
        In support of the President's Management Agenda (PMA), we're making
    significant strides in improving our financial management. Over the
    past several years, we have made increased progress in making cost
    control a priority throughout FAA. We have implemented information
    tools and processes to manage costs and productivity. Last year marked
    our fifth year of receiving a clean audit from the Department of
    Transportation's Office of the Inspector General. For the third
    consecutive year, the FAA has received the Certificate of Excellence in
    Accountability Reporting. This year we are wrapping up the
    consolidation of nine separate accounting operations into a single
    Finance Center located in Oklahoma City, Oklahoma. The benefits we see
    from this effort include annual cost savings on accounting operations,
    standardization of accounting practices, and improved quality and
    timeliness of financial information.
        Ongoing improvements in financial performance will focus on
    providing more timely and accurate financial information used by
    management to inform decision-making and drive improved results in FAA
    operations. Planned business process improvements will focus on quicker
    capitalization of our projects, streamlined processes for managing
    agency reimbursable agreements, and training and improvement efforts to
    reduce financial data quality problems.
        In particular, the FAA is planning to improve the utilization of
    information from Delphi, the DOT financial management system. Delphi
    gives the FAA more accurate financial data and allows the agency to
    better manage its spending on operations as well as capital investments
    in assets that will ensure the safety of the airways. To improve
    operational efficiency in accounting operations, imaging capability for
    invoices will be added to the Delphi system for fast and efficient
    payment processing.
        Each year, the FAA procures more than $1.3 billion in contract
    services. The newly created Office of Financial Controls will implement
    increased controls over agency procurements. It will ensure that
    funding used for contract services reflect wise investments,
    duplication of effort is avoided, and excessive labor rates are not
    included in contracts. Any procurement request resulting in contract
    award or increase in the scope of an existing contract, where the total
    value of the contract or added work exceeds $10 million, will be
    thoroughly reviewed by the Office of Financial Controls before it is
    processed.

                                    CLOSING

        In closing, let me assure you that we continue to make difficult
    choices and take decisive steps to ensure that we manage the taxpayer's
    investment wisely. We are running more like a business and delivering
    the world's safest transportation system while doing so. I thank you
    for your time and look forward to discussing these issues in greater
    detail.

        Senator Bond. Thank you very much, Madame Administrator.
    And now we turn to Senator Murray for her questions.
        Senator Murray. Mr. Chairman, thank you so much for
    accommodating me and I do have a few questions I want to get in
    before I head to the floor.

                     AIR TRAFFIC CONTROLLER WORKFORCE PLAN

        Administrator Blakey, the FAA, as I said in my opening
    remarks, published an air traffic controller workforce plan
    back in December 2004. And at that time you promised in very
    clear terms that this workforce plan would be updated annually.
        It is now May and we have yet to see an update of that
    annual plan. And if we receive one at all this year it will be
    at least now 6 months late. How are we to believe that the
    administration has an updated workforce plan when it is
    unwilling to release it? And can you tell me why we have not
    received it yet?
        Ms. Blakey. Well, there are a couple of things about this.
    No. 1, it is going to be an annual plan. There is about 4
    months' slippage. We had said we would bring one out for this
    year. And it is in final clearance right now. So there is no
    issue about providing an annual plan.
        What I do think makes sense though is this: as you know,
    the plan last year was the first time we had done that. And you
    learn a lot from these things. One of the things that we
    determined was that that plan was based on a forecast that now
    is more than two forecasts back. It is very dated data that was
    in that plan because of the timing of the way we did it.
        Senator Murray. Which is why we are waiting for one.
        Ms. Blakey. Because the annual forecast comes out in March
    and we have revised the controller staffing plan and all the
    models based on that. As I say, it is in final clearance. So as
    you can appreciate, we are talking about a couple of months
    after the forecast.
        We will try to make it closer to March next year but right
    now you should see it shortly.
        Senator Murray. When is the date that we will see that
    then?
        Ms. Blakey. I do not know an exact date because, again it
    is in final clearance within the administration. But I think--
        Senator Murray. Are we talking days or weeks?
        Ms. Blakey. Something like that, yes.
        Senator Murray. Not months?
        Ms. Blakey. I cannot, again, commit other people. But I can
    tell you that it is certainly a matter of weeks, at most.
        Also, as you know, we have provided you a lot of the key
    data out of the plan. So I do not think there are any surprises
    there.

                           AVIATION SAFETY INSPECTORS

        Senator Murray. In March, Secretary Mineta testified before
    us that the FAA would be able to hire an additional 238 safety
    inspectors, in spite of the 1 percent across-the-board cut and
    in spite of the unfunded pay raise. But last week you told us
    the FAA would actually be able to hire only 171 inspectors.
        If the FAA is going to be hiring 171 additional inspectors
    this year, your staffing level is going to be below the level
    we had in 2003. Are you comfortable with that level of
    staffing?
        Ms. Blakey. I think it is important to look at the way we
    are approaching this because, as you know, you pointed out
    yourself, that we were handed a 1 percent across-the-board
    rescission in December, well after all those figures were
    developed and planned. Plus, of course, the unfunded pay raise.
        It is important to look at how much money was involved
    there because the rescission itself was overall for the FAA
    $144 million. The unfunded pay raise was not a small thing. It
    was $37.9 million, almost $38 million, and it resulted in a
    shortfall of $182 million.
        Now we have been scrambling since that occurred. And again,
    that was at the end of year on the rescission, to try to figure
    out: Are there any ways that we can reallocate funds and we can
    try to address what is clearly a shortfall?
        There are no if, ands or buts about it. This does not
    surprise anyone. We would love to have made that 238 figure, if
    we could have. And we tried very hard. But the best we could do
    was to ask you all, and the request is now coming up to you,
    the Secretary has just signed off on this, that we have
    reprogrammed or are requesting to reprogram monies from all of
    our other small staff offices. And we are using the authority
    that you all have granted us for unobligated funds from
    previous years, which would give us the ability to pull the
    number up to 171 for this year.
        Senator Murray. Let me ask you that again. I know all the
    reasons why. But as Administrator of the FAA, are you
    comfortable with the staffing of safety inspectors for the
    flying public?
        Ms. Blakey. You will see, again, that we are requesting
    more for 2007. And that certainly tells all of us, we need more
    safety inspectors.
        Senator Murray. So I take it your answer is no?
        Ms. Blakey. I am simply saying there is a very strong
    reason we are going to continue to increase the safety
    inspector ranks. And a lot of that is the dynamic that we see
    growth in a number of key areas that are really coming at us
    and we have to address that.
        Senator Murray. The DOT IG testified earlier to us this
    year that the staffing gains over the next couple of years are
    unlikely to offset the number of safety inspectors that are
    eligible to retire. By 2010, in fact, half of the inspector
    workforce is going to be eligible for retirement.
        You claim you have a comprehensive staffing plan to handle
    the retirements of air traffic controllers, even though we have
    not seen it yet. I wanted to know if you have a similarly
    comprehensive plan to handle the retirements among inspectors?
    And is OMB committed to funding that?
        Ms. Blakey. OMB has been very responsive and cooperative on
    the issue of our safety inspectors and that workforce, the
    manager of our safety programs has a very exact idea about how
    many we need to hire of what. So we have those figures. We have
    it on paper.
        It is not a large published plan in the same way that the
    controller staffing plan is. But we can make it a more formal
    document if that would be helpful to this committee.
        Senator Murray. I think we need that information.
        Ms. Blakey. Absolutely. We have the information and we can
    turn it into a formal plan if that would be helpful.

                  FAA TELECOMMUNICATIONS INFRASTRUCTURE (FTI)

        Senator Murray. Okay. And you mentioned in your opening
    statement the replacement of the telecommunications
    infrastructure, and that you needed to update us. I want to
    give that opportunity.
        Because as I said in my opening statement, that program was
    supposed to achieve hundreds of millions of dollars in savings
    that would have helped us with much of the current situation.
    And at the start of the program in 1999 it was supposed to cost
    $1.9 billion. We are now being told it is going to be 27
    percent higher than that at $2.4 billion. And the DOT IG has
    told us it is going to cost even more. So we are not going to
    receive any savings on this in the foreseeable future, as I can
    see it.
        What can you tell us to give us your personal assurance
    that we are not going to continue to see this story?
        Ms. Blakey. The FTI contract, which is the capital
    investment program that you are referring to, of course, is the
    notable exception to the success we are having across the board
    in staying on schedule and on budget on all of our major
    capital investment projects. So I would point that out.
        That said, it is a contract to convert all of the FAA's
    legacy telecommunications networks to a network that is based
    on a service rather than an owned and operated business and
    pull it all into one unified system.
        It is a major logistics challenge, I will be straight up
    about this. And it has proven challenging to us.
        Now, we have put in place a recovery plan that we are
    seeing good results on. It still has a way to go. I will not
    make any bones about that. And I am as disappointed as anyone
    that we are not going to be seeing the cost savings over the
    existing contract that we had hoped and expected to this year.
    But that is what we are talking about here. We are talking
    about savings over the existing contract. These are savings
    that are deferred.
        What we are doing at this point is putting in place new
    metrics to start measuring all four stages. This is just as the
    IG has requested that we do. You referenced the fact that the
    IG has just brought out a report with recommendations. I think
    they are very good recommendations. They have given us very
    good advice on ways to more precisely track and measure the
    exact progress we are making on all four stages of the
    implementation.
        We were looking at it initially on the first stage, and I
    think we need to track all four in a master plan that we are
    putting in place.
        Senator Murray. You will probably get asked about this
    again. If you could get us really solid information, so we can
    see that we are not going to continue to see the same line
    going up on that, I would appreciate it.
        Ms. Blakey. We will work very hard. As I say, this is a
    challenging contract. But we are working very hard to hit the
    numbers.

                              MORE LIKE A BUSINESS

        Senator Murray. Let me ask you, in your testimony you said
    that you are operating more like a business in part because you
    have instituted a pay-for-performance program. And you have
    also proposed eliminating automatic pay raises for air traffic
    controllers, arguing that their pay increases should depend on
    performance on their job.
        Last year, however, the FAA awarded performance bonuses to
    11 senior employees based, in part, on their work on this FTI
    program. These bonuses were awarded at the same time the
    program was falling behind schedule and racking up costs. Can
    you explain why you gave these executives performance bonuses
    for deficient work product?
        Ms. Blakey. Well No. 1, the bonuses that were there were
    only in part, only 15 percent, related to the FTI contract. As
    I mentioned before, we are hitting our numbers on our major
    acquisition projects, which these executives are responsible
    for as well. There are a number of major capital investment
    programs that I am very proud, such as ERAM, that are
    absolutely on track and on schedule. So the bonuses are related
    to a much larger body of work than FTI.
        I also would point out that the contract initially was set
    up in tracking metrics on site acceptances. That is the very
    first stage of four stages of the FTI program. In that regard,
    we put in place a recovery plan. And as of August 2005, we
    really began hitting our numbers on that.
        Now, I do not think that is the key metric. What we have
    done, because I think the issue of performance in regard to the
    FTI contract, needs to be measured on all four aspects: site
    acceptance, service acceptance, when you actually cut over to
    the FTI network, and when you disconnect the legacy system. So
    all four of those benchmarks, if you will, are now built in to
    these executives' performance for this year.

                                     NATCA

        Senator Murray. Let me ask one final question here.
        The negotiations with NATCA has been mentioned several
    times here, and I believe that Congress should not be the venue
    for settling these kinds of contracts. But my objections do not
    change the fact that if Congress does not act to reverse your
    action in the next few weeks, your proposal for the final
    contract will be automatically put in place.
        That, in fact, will be the second time the FAA will have
    succeeded in resolving a dispute by those means, and I am
    concerned that we see a pattern emerging here where if the FAA
    does not get what it wants at the bargaining table it just
    submits it to Congress and counts on us not acting.
        FAA negotiates with 43 different bargaining units and many
    of these employees do not make six-figure salaries. Can you
    tell us, are we going to expect to see all of our future labor
    negotiations handled this way?
        Ms. Blakey. I certainly hope not. It is one reason why I
    feel so strongly that it is important that the mechanism that
    Congress rightly put in law for how an issue of this sort is
    resolved is one that Congress and all of us involved see
    through because it is an important way to balance what is an
    extraordinarily unusual privilege in government, and that is
    that the FAA is virtually unique in negotiating for pay with
    its employees.
        Other Federal agencies throughout the Government all are
    under the Civil Service or pay systems that involve no
    opportunity to negotiate for pay.
        Senator Murray. I assume you can understand that the morale
    of many of the employees is directly impacted by the fact
    that----
        Ms. Blakey. Senator Murray, I would refer you to a couple
    of things. Our pay scales at the FAA, on average, and I am
    going beyond the controllers, are somewhere between 8 and 14
    percent above market. That is something that is worth being
    aware of because it is reflected. When we have our employee
    attitude surveys, 70 percent of the FAA's employees across the
    board are very satisfied with their pay.
        Senator Murray. I appreciate the remarks and I do have
    other questions I would like to submit for the record. Mr.
    Chairman, thank you so much for accommodating me so I can get
    to the floor. And thank you, Administrator Blakey.
        Senator Bond. Thank you, Senator Murray. We will submit
    those questions for the record.
        Now we will turn to my colleagues; first, Senator Bennett.
        Senator Bennett. Thank you very much, Mr. Chairman.
        Madame Administrator, welcome. Thank you for your service.

                              AVIATION TRUST FUND

        I am impressed with your ability to respond to questions
    and your control of the detail. I have to get nostalgic for
    just a minute with your conversation about the Aviation Trust
    Fund, Airport Airway Trust Fund. It was my responsibility, as a
    member of the team under Secretary Volpe, to convince the
    Congress to pass the creation of the Airport Airways Trust Fund
    back in 1969. I was the head of Congressional Relations at the
    Department of Transportation and that was my first
    responsibility.
        I remember the glee with which Secretary Volpe called
    Secretary Nixon to tell him that we had succeeded in getting
    that passed, the first item of President Nixon's must-do list
    of legislation to pass the Congress. I went to the White House,
    had got my pen, and my picture taken with the President, and
    all the rest of it.
        Now I come back, basking in that nostalgia, to have you
    tell me it is not working anymore.
        I am perfectly willing to agree that it is not working
    anymore and the question is: ``What are we looking at as a
    replacement?'' You say, in your prepared testimony, that you
    have reached out to the industry and you are getting
    suggestions. Can you share with us some of the suggestions?
    Because I, with that background, and listening to you also,
    share the idea that the FAA should have a reliable source of
    funding. That was the whole idea behind setting up the Trust
    Fund in the first place, not have it subjected to the whims of
    the appropriations process.
        Now that I am an appropriator, I guess I like the
    appropriations process better than I did. But tell us what
    avenues you are pursuing as ways to go and places to look for
    some kind of stability in this situation.
        Ms. Blakey. The Trust Fund, as you and others set it up, I
    think very wisely at that point in time, worked very well for a
    long time. We have to remember that was before deregulation.
    And I do not think anyone could have anticipated at that point
    the dramatic changes in the airline industry and the plummeting
    price of tickets. So tying it to the price of a ticket at that
    point had a lot of relationship, I think, in those days to
    traffic volume and a variety of things.
        The situation now, I think, that we are faced with is one
    that virtually all of the stakeholders do acknowledge that the
    lack of relationship between costs and revenue produces a lack
    of accountability on both sides. The stakeholders ask for
    whatever they think they need but there is no issue of really
    how much it costs and that would affect, therefore, what they
    are charged and vice versa.
        So what I am seeing as the general aviation community, as
    the airlines, as the manufacturers, cargo folks all come in, is
    I think a real acknowledgment that we do need reform in terms
    of the Trust Fund.
        Senator Bennett. I understand all of it. Now where are we
    looking? You say facetiously it could be tied to the price of a
    gallon of milk. I am sure you are not looking at that as a way
    to do this. What specifics are people suggesting to you as a
    way to go?
        Ms. Blakey. I think what a number of people are suggesting
    is this: for parts of the community, a system that takes into
    account all of the activity in the system, numbers of flights,
    the usage of the air traffic control system, there are several
    ways to measure that. But you can run that activity data and
    you can show the usage of it by individual carrier or by
    stakeholder group. So there is a way which is done all over the
    world in a variety of ways to tie it to fees. And a fee-based
    system can be a part of the answer.
        Taxes, fuel taxes are also not as direct a measure of
    costs. But they work well for the general aviation community. I
    think there is much more support for fuel taxes coming from
    that group.
        Senator Bennett. Let me ask you one very parochial
    question, and this comes up every time we have an FAA
    Administrator before the subcommittee, so it is not going to
    surprise any of your staff.
        We are looking for an additional ASR radar system in Utah
    County, just south of Salt Lake County, to cover the blind
    spot. And we finally convinced the FAA to put one in during the
    Olympics, when we had a tremendous number of general aviation
    flights coming in. And because of the horror of having an
    accident occur in the Olympics, with that kind of traffic, they
    put one in.
        Now I advised them this may be a temporary radar, sink it
    as deep in concrete as you possibly can and surround it with a
    high fence. But it has disappeared now and we still need it.
    There is an increased use of regional jets that you are talking
    about. Salt Lake International Airport has seen an increase in
    traffic volume. This is a blind spot that we still need to have
    filled. And I take advantage of this opportunity to mention it
    to you once again and ask you to take a look at it.
        Ms. Blakey. Thank you very much. I certainly will.
        Senator Bennett. Thank you, Mr. Chairman.
        Senator Bond. Thank you very much, Senator Bennett.
        Now we will turn to Senator Stevens.
        Senator Stevens. Thank you very much. Administrator Blakey,
    it is nice to be here with you again.

                                SAFETY IN ALASKA

        I am constrained to say it looks as if this budget was
    prepared before the current attack on earmarks commenced. Let
    me just lay out a little problem I have.
        When the deregulation of CAB took place, Senator Cannon was
    chairman of the Commerce Committee and we reached an
    understanding. Before that time the FAA managed all of the
    airports in Alaska. We took over a considerable number of them.
    But the rural airports, roughly 160 of them, who serve small
    native villages were to receive under $150,000 annually for
    maintenance and light control and that sort of thing.
        This is the first time that those funds have not been
    requested. There is a reduction of $22.9 million, which adds up
    to $150,000 for 159 small airports.
        Secondly, our skies, as you know, have been the most
    dangerous skies in the world. Previously, in Alaska one out of
    11 pilots have died annually. We put into effect several safety
    programs and I do commend you. You certainly have been one of
    those who has helped us considerably. But the Medallion
    Program, which you and I helped establish, and which the
    Federal contribution was $5 million last year, has been zeroed
    out.
        In the period of time right at the beginning of this
    administration, you recall that a foreign airliner coming
    towards Alaska intersected the dust from one of the volcanoes
    along our chain and dropped about 20,000 feet before one of the
    engines was started. We established an Alaska Volcano
    Observatory. It is not only for local Alaska. It is for the
    planes that fly over our State. Your agency has contributed $5
    million a year to that observatory. That has been zeroed out.
        We have the Loran-C system for the northwest coast of the
    Pacific. Again, it is not really for Alaskans. It is for all
    the users of the North Pacific. This is the last station to be
    upgraded in that system, the Loran-C system. It has been zeroed
    out. There was $17.5 million last year for that.
        Now my problem is, all of those are aviation-related,
    aviation safety-related. But when I add the money back in, if I
    can be successful in convincing this subcommittee to do that,
    it is an earmark and it is going to be attacked as an earmark.
    And none of them really--well just the one, the first one, with
    159 small villages are Alaska-specific. Those are very
    important to Alaska. The rest are national expenses that are
    necessary to meet our United States' obligation to those who
    fly into or out of our airspace.
        I am really worried about the prospect that puts upon those
    of us who represent Alaska the duty of trying to reverse those
    budget cuts and be under attack again about earmarks.
        I really cannot ask you questions. I basically know where
    you are coming from. You had no alternative. But we have no
    alternative either to find some way to get that money back in
    there.
        There have been other cuts, one of them is the Capstone
    Program which again I thank you for your visit. You have come
    up and helped us recognize those people who have been part of
    that technology-focused safety program that have reduced the
    deaths in our State to where we are about the average now of
    aircraft accidents, despite the fact that 70 percent of our
    cities can be reached only by air. The Federal Government's
    assistance to that air system is less than any one city in the
    United States gets from the Highway Fund. We do not get money
    from the Highway Fund up there. We only get money from
    aviation.
        And I want to urge you to go back and talk to someone in
    the OMB and ask them if they understand that.
        Our people contribute rather heavily to the aviation funds
    because every time we get in an airplane we pay another $5
    towards that safety fund. And I have not heard very much reason
    why we should do it when we are flying planes that do not ever
    come near the size of the planes that were used in 9/11.
        But in any event, I really cannot justify the cutting of
    these Alaska-related aviation programs that are essential to
    safety. I would urge you, and I cannot even ask you a question,
    but I would urge you to talk to them about this. Even our Aid
    to Airports Program this year, it dropped $21.3 million in 2006
    and now it is going to drop another $10 million in 2007. And
    yet, as I said, we have the greatest demand on the aviation
    system per capita of any Americans.
        I just leave it before you and before the record. I do not
    know the answer to my questions. The only answer to my
    questions really is money. I do not see much leeway in this
    budget to even ask my friend from Missouri to take money from
    somewhere else and put it in these funds. The funds are safety-
    related, I think. It is the worst example of budget cutting I
    have seen in 38 years.
        I think unless there is a budget amendment coming up here,
    it is going to be impossible to restore that money. And I
    predict without the Alaska Observatory for Volcanoes, we are
    going to be right back where we were to start with. Those
    volcanoes are active right now as we speak. And one of them, as
    you know, just stopped spewing out its smoke and debris just
    last month.
        I would hope you would go back and ask them to review what
    is going to happen to Alaska under this program.
        And I would tell the chairman, I really do not think I am
    going to be too cooperative as far as this bill is concerned
    until there is some change made in the FAA budget that affects
    my State.
        Senator Bond. Thank you very much, Senator Stevens, for
    that good news. As we said earlier, I am very much concerned
    about this budget and on a number of issues and I think this is
    an area where the Office of Management and Budget has not dealt
    well with what is very important to all of us, and that is air
    safety. Having flown in Alaska, on occasion, I understand the
    concerns you have there.
        Madame Administrator, Senator Bennett raised the question
    about getting something other than the Airport Trust Fund. It
    looks like the administration is trying to find some way to
    raise money that is outside the appropriations process.
    Obviously, those of us who are appropriators have a lot of
    issues that are very important and we would miss this
    opportunity to discuss those with you.
        What is the official administration position on why you
    would want to get out of the appropriations process?
        Ms. Blakey. I will tell you, Mr. Chairman, there is not an
    official administration position on this. If there were, we
    would have a proposal before you right now that we could be
    discussing.
        As you can appreciate, trying to restructure the taxes and
    fees that support the Aviation Trust Fund is difficult to do,
    particularly if we are trying to make very substantial changes.
    I cannot tell you that there is consensus on this right now or
    that there is a position with regard to the specific issue you
    raise.
        I can absolutely put forward the fact that it would be my
    expectation that the appropriators will have a very healthy
    role in whatever system is put forward. I think there is no
    question about the fact that that would be the view of this
    administration.
        Senator Bond. Obviously, we are just going on the Wall
    Street Journal article of February 4, so I am glad to know
    there is no official position.
        Ms. Blakey. Not at this point.

                          AIRPORT IMPROVEMENT PROGRAM

        Senator Bond. Would you explain the rationale for the part
    of the budget that would minimize the funding for airports,
    especially small airports, which would lose the majority of
    funding? What is the justification for the proposed cuts that
    would impact both small and large airports? And will this not
    result in projects underway being stopped or reduced?
        Ms. Blakey. Yes, and I would appreciate it if the record
    could show that we are very supportive of the safety programs
    in Alaska, as Senator Stevens listed those, and the needs of
    small airports all over the country. Particularly Alaska has
    some real safety challenges that we hope to address in other
    ways.
        What we are faced with on the AIP funding is simply the
    reality of the budget climate overall. It was extremely
    difficult to continue to match the levels of authorization that
    were put forward several years ago for the Airport Improvement
    Program without continuing to reduce the funding in F&E, which
    is the capital investments and modernization.
        And at this point we are doing everything we know to
    control our operating costs, which of course goes to the
    importance of the contract negotiations. But they still
    continue to escalate. So, in that universe, where we have real
    demands on the Federal budget because of broader issues that I
    know you all know all too well, we had to make some tough
    choices. And that is really what this comes down to.
        In terms of the reason for the drop, and for the smallest
    airport elimination, of the $150,000 a year, it is because the
    way the program is set up in statute when you drop below $3.2
    billion appropriation, $3.2 billion, the formula changes. And
    at that point it does eliminate funding for the smallest
    airports on a formula basis.
        Now last year, when we were in a position where that was an
    issue, we suggested that the Congress, in fact, could change
    the law on that and therefore not have the small airports drop
    below the salt if you will.
        The other thing I would point out is this, that we do have,
    of course, discretionary funding available for airports of all
    sizes. And safety programs take the highest priority for those
    discretionary funds. So there is a mechanism for the very small
    airports to come in and request support for various safety
    needs that they do have.
        Senator Bond. I am very much concerned over this and I
    understand the situation that you are in. But the low cost and
    regional carriers have 43 percent share of the air traffic
    market, while regional carriers represent 37 percent of the
    traffic at the Nation's 35 busiest airports. Yet the top 35
    airports are nearing capacity. They handle 73 percent of
    aviation passengers, a significant percentage of instrument
    operation. And the costs and delays are going to increase
    without a major growth in capacity.

                               INCREASED CAPACITY

        Is there anything you can do to increase capacity? And
    without increased funds in the AIP program, is there any way to
    meet the growing needs? And what do you see as the overall
    funding need to meet the anticipated growth of the airline
    passenger traffic?
        Ms. Blakey. Well, I will certainly say this, that the very
    strong record of funding for AIP has resulted in a remarkable
    number of new runways coming on board. The capacity that those
    runways have generated is certainly serving to relieve a great
    deal of the congestion at major places such as Atlanta,
    Cincinnati, and Miami. I could tick through the major runways.
    And of course, the major project that is now going on at
    O'Hare. This will certainly make a big difference.
        I would say that the AIP funding that we have put forward
    will continue to be able to honor all of those major letters of
    intent for these big projects and the runway projects that are
    planned currently.
        That said, there are several things that we are doing or
    have done that make a big difference procedurally. I would
    reference the fact that we are changing the way we use the
    airspace and that is generating huge fuel savings for the
    carriers.
        Just in this last year, we reduced the vertical separation
    in the upper airspace. This was a major leap forward. The
    airspace now is 1,000 feet vertical separation as opposed to
    2,000, which created a lot more lanes in the sky.
        What this has meant is that carriers now have much more
    efficient routing. They are able to be in the optimal points in
    terms of jet stream and direct routing that they could not have
    before. As we look at this over time, over the next 10 years,
    that is conservatively worth over $5 billion in fuel saving.
        The new system we put in over the Atlantic and Pacific,
    over the oceans, is reducing separation, and we have new
    airspace routes in places like Atlanta, which again are giving
    enormous fuel savings to carriers like Delta because they are
    able to fly very precise routes in and out.
        So all of that is immediate, near-term, and it is
    mattering. And then, of course, the next generation system that
    we are bringing on, and we have requested before this committee
    funding for both ADS-B and SWIM, which are going to be backbone
    technologies for really achieving a satellite-based system,
    which will be highly efficient.
        Senator Bond. Thank you. I will turn now to Senator Durbin
    for questions.
        Senator Durbin. Thank you, Mr. Chairman.
        Administrator Blakey, thanks for being here and thank you
    for your service to our country.
        I said when you came by my office, and I would like to say
    publicly, I think you do an exceptionally good job.
        Ms. Blakey. Thank you.
        Senator Durbin. You are hard-working and skillful and
    bright and responsive. And you answer phone calls and I
    appreciate that very much.
        Ms. Blakey. Thank you.

                                MIDWAY ACCIDENT

        Senator Durbin. So thank you for your service.
        Let me ask you first about Midway Airport. We had a
    terrible accident there last December where a plane skidded off
    the runway in a snowstorm and killed a young boy in a car that
    rode nearby. We love that little airport. It is not so little,
    but we love that airport and it is surrounded by neighborhoods.
    And we are trying to make it safer.
        I have worked with the city of Chicago on an EMAS
    technology, a soft concrete technology that would slow an
    aircraft down if it overruns the runway. They have an
    application before you at the FAA. Can you tell me what the
    status is?
        Ms. Blakey. I can tell you that we are working very closely
    with Midway on this. We have just received the final aspects of
    the specs on that proposal for the EMAS system and I expect us
    to move very expeditiously on it.
        EMAS has proven its worth in a number of airports around
    the country where you do not have as much land for the runway
    safety areas. I think Midway will be a very good application of
    that. So we are glad that you have worked with the city and we
    have that before us, so we will work very quickly on resolving
    it.

                                     NATCA

        Senator Durbin. Let me talk about air traffic controllers,
    which we did in my office, and we had a long conversation about
    your concerns and the state of negotiations.
        I can recall a time when my predecessor in the Senate, Paul
    Simon, created the concept of incentive pay because we could
    not find air traffic controllers to take certain positions. And
    so we created salary incentives for them to move to areas where
    the job might be a little more demanding. And now I understand
    you are phasing out the incentive pay as part of your budget
    proposal.
        I am concerned about it in this respect. When we talked in
    our office about hiring future air traffic controllers, I
    believe you told me that you were going to try to return to
    1997 salary levels. Is that a figure that you recall?
        Ms. Blakey. The 1998 Civil Service spectrum that adjusted
    for all of the increases that have occurred in the civil
    service salaries since then. So it is not those levels. It is a
    framework.
        It also is tied to professional salaries for people like
    engineers, pilots, et cetera, at the FAA. So there is some
    adjustment on that, but yes, that is roughly closely
    approximate.
        Senator Durbin. Let me show you a chart that I am going to
    give you a copy of so that you can take a look at it and
    perhaps get back to the committee.
        I took a look at some of those 1997 levels for facilities
    around Illinois and see that there is a rather substantial cut
    that has been proposed, in terms of the pay structure, that is
    even lower than the 1997 levels.
        If you can see, for Moline for example, the $55,360 and the
    proposed salary level was $44,750. And the list goes on. My
    concern, I want you to take a look and see if there is
    something missing here, if there is an element that we should
    be considering in this.
        But my concern goes back to my original point. I do not
    think we should assume automatically that there are lots of
    people who want to be air traffic controllers and have the
    skills to do the job and want to take the toughest assignments.
    We found in the past that sometimes that is not the case. I
    worry if the starting salaries that we are talking about here
    are a cutback from levels that we had 8 or 9 years ago.
        I would like you to address that, if you would.

                                 CONTROLLER PAY

        Ms. Blakey. I cannot speak to exactly those without doing
    the analysis and which I would be very happy to do. I can tell
    you that salaries that we have proposed are ones that begin for
    the entry-level, developmental controllers, coming in with the
    salary and locality pay on average, base salary $31,700. Put in
    the locality pay and you are up to about $37,000, which by most
    people's standards, for someone coming right out of school with
    no experience is good--and by the way, as you know, for the
    first several years of a controller's service, it is mostly
    about training. So you have that prospect there.
        But after 5 years, on average, the base salary for
    controllers, with locality pay, is going to be about $84,000 a
    year. Now that is a pretty generous wage by almost anyone's
    standards. You put on the premium pays, and I am just talking
    about average premium pays here, and you are well up into the
    $90,000's.
        You put on the benefits, because as you know there is an
    enhanced retirement plan for controllers, average compensation
    for the new hires--and this is average--is $127,000 a year.
        Now I have not had anyone suggest to me so far that we will
    have any difficulty recruiting and retaining the best and
    brightest. I was anecdotally just at one of the collegiate
    schools up at La Guardia Airport that trains new controllers to
    come into our academy. And when I explained the proposal and
    what the benefits were, the only questions I got was were:
    ``Are you sure you are going to keep up the hiring? How quickly
    are you going to be hiring more? And we are really looking
    forward. Where can we expect to be positioned?''
        That is the nature of the questions.
        Senator Durbin. Has there not been a period over the last
    several years where we did not hire though?
        Ms. Blakey. There was. And therefore they are hoping that
    we are going to keep up a steady state of hiring. And I was
    able to assure them that we absolutely will, that they are
    looking forward to a boom in hiring at the FAA on an ongoing
    basis for many years.

                                     NATCA

        Senator Durbin. As I said to you in my office, and I will
    say in closing here, I really hope that there is a way that you
    can work out a negotiated settlement with the air traffic
    controllers. I think it would be a terrible outcome if this is
    dumped in the lap of Congress to decide. There are too many
    factors involved in this, and frankly the information from both
    sides conflicts in some areas and it is tough for us to sort it
    out.
        It would be far better if you could reach agreement with a
    group that the FAA needs to work closely with for the years to
    come. So I hope that that happens.
        Ms. Blakey. We would very much have liked to have had a
    voluntary agreement on this, believe me. I wish that there had
    been a way to close this gap because it was a very difficult
    one, $600 million just in the 5 years of the contract. But most
    importantly, the ability to adjust our pay scale for the new
    hires. We keep the existing controllers financially whole. But
    for the new hires, so that they have a fair wage that we can
    provide salary increases as the years go on, and they are
    equitable to the rest of the FAA's workforce.
        Senator Bond. Thank you very much, Senator Durbin.
        Senator Durbin. Thank you.

                     FAA TELECOMMUNICATIONS INFRASTRUCTURE

        Senator Bond. We have unfortunately just a few more
    minutes. I want to go into several questions I raised earlier,
    for example, the FAA Telecommunications Infrastructure.
        The FTI is critical. I understand that it consists of
    25,000 telecommunications services at over 4,400 FAA sites. The
    Harris Corporation is a prime contractor and the contract has a
    minimum value of $303 million.
        But the FAA is critical to the management of this program.
    According to the IG, the major problem with the program is that
    the FAA did not develop a detailed master plan or an effective
    transition plan. And they suggest that the FAA would have to
    exercise its 1-year option to extend the Verizon contract and
    maybe retain those services at a substantial cost.
        Has the FAA responded to the IG recommendation? And are you
    looking at having to pick up the Verizon 1-year option and
    perhaps a possible second year option on this? What are the
    costs that you see in this?
        Ms. Blakey. Basically, we are looking at the fact that we
    had hoped to be seeing substantial cost savings, in other
    words, reduction in what we are paying right now on the
    existing legacy contract through this FTI contract. We have not
    yet. And cost savings, for example, this year if we had hit our
    numbers, would have been $100 million. That is real money by
    anyone's standards.
        Believe me, we are working as hard as we know how with
    Harris and its subcontractors. Verizon is the incumbent
    contractor, and also a subcontractor to Harris, as are a number
    of others on this contract.
        We do expect at this point that we are going to be adopting
    the recommendations from the Inspector General. I think the
    idea of a much more detailed master plan with all of the
    metrics that they recommend will help us keep this contract,
    will help us get the contract back on track and then help us
    monitor it very precisely. So we are doing that and that plan
    will be out in June.
        We also are going to look at the extension. We have already
    sat down with Verizon to start talking about an extension. So
    we have the latitude at the end that we probably will need.
        Senator Bond. What do you expect the savings to be from
    this changeover?
        Ms. Blakey. The savings in the long run on the contract,
    and this goes out to 2017, I believe, is somewhere over $600
    million. So it is a very big sum of money.
        We are trying, we are on the track for a recovery plan
    here, and have begun on a number of fronts to hit the numbers
    again. But we still have a hill to climb here. There is no
    question about it. This is a little like stacking bricks, I
    hate to tell you, because it is all logistics. It is all start
    stacking them faster and in better order to make it all work.
        And we have learned a lot over the first couple of years of
    this contract. So we are trying to work a lot smarter and make
    it work.
        Senator Bond. My family used to be in the brick business
    and I used to stack bricks, and I understand. That is why I
    went to law school.
        I would like a quick comment--I believe Mr. Dobbs, the
    Assistant IG for Aviation is here. Mr. Dobbs, do you have
    anything additional to add on this? If you would please come
    up. Obviously this is a major concern and we want to do what we
    can help you get it right.
        Mr. Dobbs. Administrator Blakey explained----
        Senator Bond. For the record, give your full name, would
    you please?

              REMARKS OF ASSISTANT INSPECTOR GENERAL FOR AVIATION

        Mr. Dobbs. I am David Dobbs, Assistant Inspector General
    for Aviation and Special Program Audits, Office of Inspector
    General, Department of Transportation.
        Senator Bond. Thank you, Mr. Dobbs.
        Mr. Dobbs. I think the Administrator's testimony was
    correct. Our audit focused on FAA's management structure of
    running a program. And as she said, they focused only on site
    acceptance. That is initially just putting equipment in.
        Because of that they were still paying for the legacy
    systems and they had to pay for Harris. And that is why costs
    eroded.
        FAA has agreed with our recommendations to develop a
    realistic master schedule and improve their transition
    planning. And the results of that, as the Administrator just
    said, are supposed to be out in June. That will give us and
    FAA, of course, a better idea of when the project can get done
    and what the savings will be. But until that happens, until you
    get a master schedule, I do not think anybody can tell you with
    any certainty what the savings will be or when it will get
    done.

                             NATCA AND RETIREMENTS

        Senator Bond. Thank you very much, Mr. Dobbs.
        Let me return to questioning for the Administrator.
        There are lots of charges going back and forth. You have
    talked about the salary under the proposal for the controllers'
    contract. Each side has various assessments of whether there
    will be waves of retirements. What do you foresee as
    retirements if the FAA proposal becomes law without further
    negotiations? Do you see any significant number of controllers
    retiring?
        Ms. Blakey. We know that because there are a large number
    of people who will be retirement-eligible and then hit the
    mandatory retirement age of age 56, that we are going to see
    significant numbers of retirements over the next 10 to 12
    years. That has been true all along. That is a structural thing
    because of the number of controllers that were hired right
    after the PATCO strike. We have got a huge generation that is
    moving on. That is why this issue of the salary structure for
    new hires is so important to get right.
        But I was very surprised that the union suggested that
    there would be retirements that would be triggered by the
    contract proposal we put forward. No. 1, we certainly do not
    see any. I can tell you that, and I check in with HR.
        Senator Bond. Under your proposal again, what will the
    existing controllers get? What kind of increase would they get
    over their current salary if the FAA proposal were to go into
    effect, which it appears it would?
        Ms. Blakey. Average compensation and benefits right now are
    $166,000 a year. It will go to $187,000 a year.
        Senator Bond. That includes benefits?
        Ms. Blakey. It includes benefit as well, that is correct.
    So when you take the benefits off, which I think are about 30
    percent, you can ratchet that down. But the key point is that
    our proposal does allow for locality increases every year. It
    also includes performance-based increases every year of the
    contract. And this is something that therefore will and can
    increase the existing controllers' salary and benefits as they
    move forward.
        The other thing I would point out is this, that the
    controllers' retirement is based on two things. It is not just
    based on their high three, which by the way can be any high
    three but their salaries are going up so this will benefit
    them.
        But that said, it is also based on years of service. It
    does not, in any way, incentivize people to leave early because
    every year that they go forward the years of service add 1 to 2
    percent to their overall retirement package.
        Senator Bond. And they would be getting a pay increase,
    which would be the basis of the last 3 years on which their
    retirement is based; is that----
        Ms. Blakey. Every year they would be----
        Senator Bond. So if they work an extra year they not only
    get the additional year's service, but they get a higher base
    number in the salary? For the computation of retirement?
        Ms. Blakey. The controllers that are within the pay bands,
    because we work on a pay band basis--I am sorry, thank you very
    much.
        Benefits are 20 percent, I was wrong, rather than 30
    percent. So I am exaggerating the difference there. Cash
    compensation goes to $140,000 at the end of the 5 years, so
    that is the figure that we are working with here.
        But let me go back to this issue of increases. The
    increases for the bonuses, if you will, if they are within the
    salary caps they go to base pay and they do therefore ratchet
    up for retirement. If they are above the salary caps, they are
    given as lump sum increases. So it depends on how high your
    salary is as to how much that increases your retirement. But
    your retirement, as I say, in addition to being based on an
    already very high salary level will also be based on the number
    of years of service.
        And when you realize that annuities--just think about
    $120,000, for example, as the salary for an existing
    controller, just pick that as an average. If they retire
    tomorrow, their annuity is going to be somewhere around half
    that. Now these are people in their late 40's, early 50's.
    There is not much incentive to turn around and leave the kind
    of money on the table that they would be on the basis of a
    contract which, as I say, continues to increase and continues
    to benefit them. Our controllers are a very smart work group
    and I know they are going to sit down and do the math.

                                WRIGHT AMENDMENT

        Senator Bond. One final question. This committee has had
    some activities involving the Wright Amendment which limits
    flights from Love Field to Texas and now eight other States.
    One of the things that we hear is that DFW is the second
    busiest airport in the United States and the sixth busiest in
    the world. From an air traffic control standpoint, is there any
    reason why more flights should not come out of Love Field to
    lessen the congestion at Dallas? Does that cause any air
    traffic control problems?
        Ms. Blakey. This is something that we have looked at a
    couple of times and obviously it depends a little bit on what
    kind of traffic is planned and all of the specifics of that. So
    I will not put out any kind of blanket assertions.
        But I will say this. A while back we had Mitre, who does a
    lot of work for us in terms of air space analysis, look at it.
    And I think that the flights that, at that point, they analyzed
    could be handled. They are doing another study right now and I
    will have some results on that relatively shortly, which I
    would be very happy to share with the committee as soon as I
    have that.
        Senator Bond. Would you do that?
        Ms. Blakey. But the one that they did before was only a
    partial basis.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Bond. Thank you very much, and I think that we may
    have one or two more questions but we appreciate your time. And
    we thank you very much for being here, and Mr. Dobbs as well.
        [The following questions were not asked at the hearing, but
    were submitted to the agency for response subsequent to the
    hearing:]

                Questions Submitted by Senator Pete V. Domenici

           UNMANNED AERIAL VEHICLES AND THE NATIONAL AIRSPACE SYSTEM

        Question. What information or test data does your organization need
    to allow expanded UAV border security flights beyond Arizona's borders?
        Answer. The Federal Aviation Administration has not received a
    request for expanding border security flights along the southern border
    using Unmanned Aircraft Systems (UAS). However, the FAA is prepared to
    work with the Department of Homeland Security (DHS) if it requests to
    expand the critical mission of patrolling our borders. In the short-
    term, we will use Certificate of Authorizations and Temporary Flight
    Restrictions (TFRs) to meet mission needs. This will mitigate the risk
    to the public as we gain experience with UAS operations and develop
    standards for the necessary command, control, and communication systems
    and detect, sense, and avoid systems.
        UAS do not yet have proven levels of reliability that would provide
    an equivalent level of safety to today's aviation regulations contained
    in Title 14 of the Code of Federal Regulations (CFR 14). Compliance
    with the general operating rules, in CFR 14 part 91, would be
    especially difficult for this emerging technology's civil applications.
    Technology to solve critical functions, such as the ability to see and
    avoid other aircraft, does not yet exist. To mitigate this critical
    weakness in system development and to protect the flying public, the
    FAA established a TFR that extended over 340 miles in support of the
    DHS mission.
        Question. When do you expect to have a plan to allow UAVs to patrol
    the entire northern and southern international borders, and in
    particular New Mexico's southern border, where commercial flights are
    not routine?
        Answer. The Department of Homeland Security has not informed the
    Federal Aviation Administration of any plans or made any requests to
    expand its Unmanned Aircraft Systems (UAS) operations beyond the
    currently negotiated Temporary Flight Restriction (TFR).
        Although the impact to commercial traffic in this TFR may be
    minimal, it is likely the impact to general aviation (GA) aircraft will
    be significant. GA aircraft are not normally equipped with many of the
    safety features that are common on commercial aircraft, such as Traffic
    Collision and Avoidance System. Also, many of the GA aircraft operating
    in that area are not required to have an operating transponder, which
    makes them virtually invisible to ground-based and aircraft-based
    surveillance systems.
        Question. When do you expect to have a plan to allow UAVs to fly
    during and after national emergencies like Hurricane Katrina?
        Answer. The Federal Aviation Administration currently allows use of
    Unmanned Aircraft Systems (UAS) in response to national disasters
    through a Certificate of Authorization (COA) to the Northern Command
    Joint Forces Area Combatant Commander, signed on May 18, 2006. This
    COA, specifically for Department of Defense use in response to national
    disasters, allows deployment of Global Hawk or Predator UAS to the
    disaster area.
        Question. When do you expect to have a plan to allow UAVs to
    interoperate with manned aircraft in the National Airspace?
        Answer. The Federal Aviation Administration has processes that
    already allow many Unmanned Aircraft Systems (UAS) to operate in the
    National Airspace System (NAS). These processes, Certificates of
    Authorizations and Experimental Airworthiness Certificates, allow the
    FAA to set appropriate limitations to mitigate any technical risks in
    system design and operation while still maintaining the safety of the
    flying public.
        The FAA has tasked the Radio Technical Commission for Aeronautics
    (RTCA), an industry advisory committee, to develop regulatory standards
    in the areas of detect, sense and avoid and command, control and
    communication. The committee is expected to provide standards within 3
    to 5 years. Full integration of UAS into the NAS will require a
    significant effort in the areas of safety analysis, risk modeling,
    technology development, and policy changes. The FAA expects to complete
    a road map by the first quarter of 2007 that will outline, in detail,
    the work necessary for UAS to ``file and fly'' in the NAS.
                                     ______

                Questions Submitted by Senator Richard J. Durbin

        Question. Administrator Blakey, in 2000, Congress phased out the
    High Density Rule that slot-controlled O'Hare International Airport.
    The FAA has issued an NPRM that contemplates rules substantially
    similar to the HDR. When are you planning on coming back to the
    Congress to get authority to re-impose a slot system?
        Answer. The FAA has broad authority under 49 U.S.C. 40103 to
    regulate the use of the navigable airspace of the United States. This
    section authorizes the FAA to develop plans and policy for the use of
    navigable airspace and to assign the use that the FAA deems necessary
    to its safe and efficient utilization. It further directs the FAA to
    prescribe air traffic rules and regulations governing the efficient
    utilization of the navigable airspace.
        The proposed temporary rule is intended to relieve the substantial
    inconvenience to the traveling public caused by flight delays and
    congestion at O'Hare International Airport (O'Hare). After the phase-
    out of the HDR at O'Hare, carriers had the opportunity to add flights
    and adjust schedules as they saw appropriate, which resulted in
    extensive delays for all operators at O'Hare and wide-ranging effects
    on the National Airspace System (NAS).
        This proposed rule provides a temporary regulatory solution
    necessary to maintain an acceptable level of operations at O'Hare
    without congestion and delay impacting the entire NAS until additional
    capacity becomes available to meet the persistent demand at O'Hare.
    There are significant differences between the HDR and the proposed rule
    that reduce restrictions to the minimum levels needed to address
    congestion, improve the potential for greater competition and access by
    carriers, and permit an increase in hourly limits under the rule
    consistent with any realized capacity increases.
        Question. The existing temporary flight caps were targeted to
    reduce delays by 20 percent. In the city's original comments to the
    proposed flight reductions they stated that the arrival rate was too
    low and would leave capacity on the table. Now, the FAA's own data
    shows that the FAA has over shot the reduction goal by 20 percent to 35
    percent. In addition, one carrier, Independence Air, has ceased
    operations at the airport leaving 10 slots unused. Yet, the FAA has not
    granted the city request to not leave capacity on the table and
    increase the arrival rate. Why is the FAA allowing valuable capacity to
    remain unused and starving the economic engine of my State and the
    surrounding region?
        Answer. FAA explained in the March 13, 2006 show cause order, to
    extend the August 2004 order which caps Arrivals at O'Hare, the 10
    arrival authorizations previously operated by Independence Air are not
    excess capacity. The FAA does not consider Independence Air's arrival
    authorizations to be excess capacity, because when negotiating schedule
    reductions expecting the August 2004 order, the FAA had to allocate
    arrival authorizations in some peak afternoon and evening hours at
    levels that exceed the peak-hour target of 88 scheduled arrivals per
    hour. In addition, the number and timing of international flights by
    foreign air carriers has not been limited by the FAA's order and these
    flights are also operated above the hourly cap.
        The Independence Air arrival authorizations, particularly in the
    peak afternoon and evening hours, if unused, would help offset these
    periods of continued scheduling over the operational target. At the
    same time, the daily, average operational performance for O'Hare was
    better than modeled. This is due in part to some carriers not fully
    utilizing their authorized arrivals under the order. The current order,
    which limits flights at O'Hare, does not have a minimum usage
    requirement. However, the proposed rule considers implementing a usage
    requirement, as well as a method for reallocating any arrival
    authorizations that are not being utilized (e.g. Independence Air).
    Until currently authorized flights are better utilized, it may not be
    practical to significantly change the scheduling limits.
        However, it is possible that air traffic procedural changes or
    other enhancements will result in a limited increase in arrival
    capacity over the duration of the proposed rule. Therefore, the FAA
    proposes to periodically reexamine the level of available capacity at
    O'Hare. Under the proposed rule, every 6 months, the FAA would review
    the level and length of delays, operating conditions at the airport and
    other relevant factors to determine whether more arrivals can be
    allowed.
        Question. The proposed NPRM has a sunset provision in 2008. But,
    some of the text leaves doubt in my mind whether that is absolutely
    true. Will you state for the record that if the NPRM were implemented,
    that the rule would absolutely sunset in 2008?
        Answer. As stated in the NPRM, FAA proposes a 2008 sunset date for
    the temporary rule. The city of Chicago's O'Hare Modernization Program
    will adequately increase airport capacity and reduce levels of delay.
    The first phase of the O'Hare Modernization Program, a new north
    runway, is expected to come on line in late 2008. In addition, recent
    improvements to the Instrument Landing Systems for runways 27L and 27R
    will also improve performance in adverse weather conditions.
        The 2008 sunset date for the FAA's proposed rule would address the
    present conditions at O'Hare until the benefits of any interim capacity
    enhancements are realized.
        Question. I am very excited about some recently implemented and
    impending improvements to Chicago's Airspace. The implementation of
    Category II/III operations on Runways 27-left and 27-right at O'Hare,
    the new MACE Routes in Cleveland Center, the Airspace Flow Program, and
    the impending addition of two new eastbound departure routes out of
    O'Hare should all go a long way towards increasing airspace capacity
    for the Chicago region and the Nation. I'd like to thank the
    Administrator for the dedication to improving Chicago's airspace.
        With the airspace and procedural improvements that have been
    implemented in the last couple of years at O'Hare and the upcoming
    improvements, how does the FAA plan to deal with this increase in
    capacity?
        Answer. The changes referenced above will improve efficiency in the
    airspace surrounding the greater Chicago Metropolitan Area. Included in
    these changes is the Midwest Air Space Enhancement (MASE) routes,
    implemented on June 8, 2006; the Chicago Airspace Project, with planned
    implementation starting in early 2007; and other non-airspace projects
    such as AFP.
        These efficiency improvements focus on enhancing how the airspace
    is used to reduce delays and restrictions, but not necessarily changing
    the airport capacity. Airport capacity improvements are more closely
    tied to airfield programs, i.e. the O'Hare Modernization Plan (OMP).
        When implemented, the airspace design changes in the Chicago
    Airspace Project will have significant impact on the airspace capacity
    supporting the Chicago metropolitan area. The Chicago Airspace Project
    will implement new departure routes and sectors, and new arrival
    procedures to complement the planned OMP runways. The FAA projects that
    the Chicago Airspace Project will reduce delays by 20 percent as the
    result of new departure routes and sectors. Eventually, delays will be
    reduced by 65 percent with the addition of the first new runway and the
    associated arrival route changes.
                                     ______

                 Questions Submitted by Senator Byron L. Dorgan

        Question. When can Bismarck Airport expect its ASR-11 upgrade?
        Answer. A thorough study of ASR-8 lifecycle costs and upgrade
    benefits is underway to define the best value approach for continuing
    safe surveillance service at the 37 airports with ASR-8 radars,
    including Bismarck, ND. As directed by the Senate, FAA has thoroughly
    investigated the operational conditions at Bismarck Airport, and has
    concluded that there are no service or safety issues related to its
    current ASR-8 radar system. Given that, it is likely that deploying an
    ASR-11 radar at Bismarck may not be justified by the business case
    analysis. FAA expects to have final determination of what sites justify
    the significant expense of installing new ASR-11 radar systems by the
    end of fiscal year 2006.
        The ASR-8 radar system at Bismarck is performing well and provides
    safe surveillance service. Because the ASR-8 radar system is a good,
    highly reliable radar, it's likely the FAA will continue to rely on
    them at many airports for many years to come.
        Question. Are you ignoring this clear mandate from Congress by
    delaying the Bismarck upgrade?
        Answer. The FAA has ensured Bismarck continues to have safe and
    capable radar coverage. As stated in the previous response, the FAA is
    awaiting the results of the business case analysis for Bismarck. A
    thorough study of ASR-8 lifecycle costs and upgrade benefits is
    underway to define the best value approach for continuing safe
    surveillance service at the 37 existing ASR-8 radar sites, including
    Bismarck. The results are expected by the end of fiscal year 2006.
    Surveillance service safety will be maintained either through
    sustainment of the existing ASR-8 systems; installation of an ASR-11
    radar system if the benefits exceed the costs; or by using other
    technologies pending definition of the future architecture of ground
    based surveillance.
        The FAA has investigated the operational conditions at Bismarck
    Airport, including radar coverage provided by the existing ASR-8, and
    determined that there are no shortfalls in the air traffic service
    currently being provided.
        Question. What has the FAA done since this Congressional directive
    in fiscal year 2005 to move the Bismarck Airport closer to its ASR-11
    radar upgrade? Please provide me a detailed overview of your actions
    and communications with Bismarck Airport since the report language.
        Answer. The FAA has verified that safe surveillance services are
    currently being provided at Bismarck Airport. The FAA understands that
    the local landowner of the existing radar site and the airport wants to
    develop the land where the current ASR-8 radar system is located.
    Bismarck Airport is aware that the analysis is underway to determine
    which sites justify the expense of deploying new ASR-11 radar systems.
        While a detailed log of all communications between the FAA and the
    airport has not been maintained, the regional FAA representatives and
    the Bismarck Airport Manager have had numerous communications on this
    matter. The most significant of these communications are described
    below:
      --On 8/17/05, in response to an email inquiry, the FAA informed Mr.
            Greg Haug, Airport Manager, that an ASR-11 program reassessment
            was underway, and that Bismarck may not be approved for an ASR-
            11 radar system acquisition. The FAA also stated its intent to
            conduct further analyses to determine the business case for
            acquisition of additional ASR-11 radars.
      --On 10/6/05, in response to an email inquiry, the FAA informed Mr.
            Haug that the ASR-11 program rebaseline had been approved and
            Bismarck was not scheduled to receive an ASR-11 radar. The FAA
            also informed him that a business case analysis would be
            performed to determine need for additional ASR-11 radars and
            that the results would be expected by the end of fiscal year
            2006.
        Question. That said, is the FAA jeopardizing the safety of the
    American traveling public by not following through on its commitment on
    the Bismarck Airport radar upgrade?
        Answer. The ASR-8 provides safe, reliable coverage at Bismarck and
    36 other airports.
        Question. How long does the FAA expect to rely on ASR-8 radars? How
    long can we expect the ASR-8 radars to work without compromising
    safety?
        Answer. The decision whether to replace ASR-8 radars is expected by
    the end of fiscal year 2006. If the FAA decides it is cost-effective to
    continue using the ASR-8s, it will continue to ensure they provide safe
    surveillance service at those locations, including Bismarck. There are
    no service or safety issues related to Bismarck's current ASR-8 radar
    system. The overall class of ASR-8 radars has been exceeding the
    availability target goal of 99.5 percent. Bismarck specifically has
    achieved an availability target of 99.87 percent over the past 2\1/2\
    years. Only one unscheduled outage has occurred at Bismarck during that
    time, lasting approximately 4 hours.
        Question. Can you guarantee the safety and effectiveness of these
    aging ASR-8 radars by using parts cannibalized from decommissioned
    radars?
        Answer. The costs and risks associated with maintaining these
    radars are being considered as part of the ongoing business case
    analysis. If the decision is made to retain the ASR-8 radar systems,
    the FAA will continue to ensure they provide safe surveillance service
    at Bismarck Airport and other facilities where they are in use. The FAA
    expects the effectiveness of the ASR-8 radars to continue meeting the
    agency's availability standards. The overall class of ASR-8 radars, on
    average has been achieving a 99.67 percent availability in recent
    years. This exceeds the availability target metric of 99.5 percent.
    Using spare parts from radars in storage will support the further use
    of these radars if a decision is made to retain them.
        Question. When does the FAA expect all airplanes, including the
    ones that service Bismarck Airport, to be equipped with this
    technology?
        Answer. The current program schedule calls for a Notice of Proposed
    Rulemaking (NPRM), to identify equipment required to operate in a
    designated airspace, to be issued in 2007. The specific provisions of
    the NPRM are still under development. However, when the NPRM is
    published it will specify the exact date that all aircraft will have to
    be equipped.
        Question. Can you guarantee that the ADS-B transition won't be
    delayed and plagued by problems like you have experienced with the ASR-
    11 upgrade and many other FAA programs?
        Answer. The ADS-B management team has an integrated safety risk
    management program. It identifies risk at an early stage, and enables
    the FAA to implement a timely mitigation plan. The mitigation plan
    spells out the actions needed to minimize the potential adverse impacts
    that might delay the program.
        In addition, the ADS-B team will be developing and employing a
    detailed earned value management system. This system also supports the
    early identification of potential trouble spots and gives the
    management team an opportunity to implement solutions early enough to
    avoid major set backs.
        Question. Madam Administrator, in your letter dated April 24, you
    denied the National Air Traffic Controllers Association's formal
    request to reopen contract negotiations. You cited three reasons why a
    voluntary negotiated agreement could not be reached. These areas were
    reductions in new hire pay bands, performance-based compensation, and
    work rules. John Carr formally responded by offering `` . . . to meet
    you unconditionally at the bargaining table'' and that he would direct
    his contract team to ``bring you real and significant progress on these
    three important issues.'' If this is indeed the case, then why would
    you not make another attempt to negotiate an agreement at the
    bargaining table where this dispute should be solved?
        Answer. The Parties' negotiators made significant progress during
    the negotiations, especially in the area of work rules, where they
    reached a number of significant agreements, and I laud them for it. In
    the economic realm, however, the Parties were too far apart for further
    negotiations to be fruitful. The Parties began negotiations in July
    2005 and reached impasse in April 2006--a period of 9 full months. A
    mediator from the Federal Mediation and Conciliation Service (FMCS)
    assisted with the negotiations during the last 4 weeks. From the outset
    of negotiations, the FAA made clear to the Union the Agency's
    bargaining objectives: (1) meaningful reduction in new hire salaries;
    (2) introduction of a true performance-based compensation system; and
    (3) reform of work rules to allow the FAA to operate an efficient air
    traffic system. The FAA's negotiators communicated these objectives to
    the Union's negotiators at the bargaining table from the beginning and
    all of the agency's contract proposals reflected them. In addition, I
    reiterated these objectives publicly on numerous occasions. NATCA had 9
    months to make a serious, detailed proposal on compensation that
    addressed the agency's real needs. Instead the Union chose to wait
    until negotiations were almost over to do so and even then its final
    proposal did not result in a cost effective new hire pay structure.\1\
    Parties reach impasse when one has no more room to move on its
    proposals. The FAA reached that point in April 2006 and the Union did
    when it submitted the dispute to the Federal Service Impasses Panel
    (FSIP).\2\
    ---------------------------------------------------------------------------
        \1\ NATCA's final proposal was to raise the existing pay band
    minimums by 0.8 percent and then lower them by 3 percent, resulting in
    an effective decrease of only 2.2 percent, far short of what is needed
    to create a long-term, cost-effective, and fair new hire controller pay
    structure at the FAA.
        \2\ NATCA submitted the dispute to the Federal Service Impasses
    Panel (FSIP) for resolution on April 7, 2006, 2 days after impasse was
    declared. Presumably the Union would not have done so if it did not
    believe that the Parties were at impasse. The FAA's position is that
    the FSIP is not the proper forum for the dispute and argued to the FSIP
    that it did not have jurisdiction over the matter. The Parties are
    currently awaiting the FSIP's decision on jurisdiction. In a similar
    dispute in 2003 involving other NATCA bargaining units, the FSIP
    declined to assert jurisdiction.
    ---------------------------------------------------------------------------
        Returning to the bargaining table and delaying the implementation
    of the new contract would be extremely costly. Even a reasonably short
    delay--through January 2007--would cost American taxpayers an estimated
    $214 million and a continued delay beyond that would jeopardize the
    entire $1.9 billion in savings. Most of the $214 million relates to a
    pay increase that would take effect in January 2007, the costs
    associated with which would be locked in and compound over time with
    future locality pay, premiums, benefits and raises tied to a larger
    base salary. NATCA's demands to return to the bargaining table appear
    designed principally to perpetuate the current, costly agreement.
    NATCA's president admitted as much in a March 31, 2006, press release:
    ``There is absolutely no reason for NATCA to end talks. The current
    contract is better than our last, concession-laden contract proposal at
    the bargaining table, and our current contract stays in effect until
    there is a new contract. We could literally talk forever and continue
    to enjoy the contract we currently work under.'' NATCA has absolutely
    no incentive to conclude negotiations.
        Question. It is expected that 73 percent of the current air traffic
    controller workforce will be eligible to retire by 2015. In order to
    address this issue, the Federal Aviation Administration needs to hire
    11,500 air traffic controllers in the next decade. How do you expect to
    attract qualified candidates when you are proposing to create a lower
    pay scale for newly hired controllers that will limit their earning
    potential?
        Answer. The salaries provided for in the new pay system will be
    more than sufficient to attract and retain air traffic controllers in
    order to meet the FAA's staffing demands over the next decade. Under
    the new pay system, controllers hired in 2007 will earn an average of
    $93,400 in cash compensation by 2011 after 5 years on the job. Cash
    compensation includes base salary, locality pay, and premium pay such
    as overtime, Sunday pay, holiday pay, and night differential. In
    calculating the $93,400 average, the FAA used a system-wide average for
    locality and premium pay rates across all facilities. Applying actual
    locality and premium pay rates historically paid at specific facilities
    instead results in a higher weighted average cash compensation of
    $94,207 after 5 years. Regardless of the method used to calculate
    average cash compensation, under the FAA's new pay plan, air traffic
    controllers will continue to be one of the most highly compensated
    groups of employees in the Federal Government.

                             CONCLUSION OF HEARINGS

        Senator Bond. With that, this hearing is recessed.
        [Whereupon, at 11 a.m., Thursday, May 4, the hearings were
    concluded, and the subcommittee was recessed, to reconvene
    subject to the call of the Chair.]

      DEPARTMENTS OF TRANSPORTATION, TREASURY, THE JUDICIARY, HOUSING AND
    URBAN DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR
                                      2007

                                  ----------

                                           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, the Judiciary,
    Housing and Urban Development, and Related Agencies did not
    appear before the subcommittee this year. Chairman Bond
    requested these agencies to submit testimony in support of
    their fiscal year 2007 budget request. Those statements
    submitted by the chairman follow:]

     Prepared Statement of Honorable Julia S. Gibbons, Chair, Committee on
            the Budget, the Judicial Conference of the United States

                                  INTRODUCTION

        Chairman Bond, Senator Murray and members of the subcommittee, I am
    Judge Julia Gibbons of the Sixth Circuit Court of Appeals. Our court
    sits in Cincinnati, Ohio, and my resident chambers are in Memphis,
    Tennessee. As the Chair of the Judicial Conference Committee on the
    Budget, I present the following testimony on the judiciary's fiscal
    year 2007 appropriations requirements. In doing so, I will also apprise
    you of some of the challenges facing the Federal courts.
        At the outset I want to note that we have enjoyed a productive
    relationship with the subcommittee and its staff from the time the
    judiciary was placed within your jurisdiction last year. We are
    extremely appreciative that you made us a funding priority in the
    fiscal year 2006 appropriations process.

                          DIRECTOR MECHAM'S RETIREMENT

        Also submitting testimony today is Leonidas Ralph Mecham, Director
    of the Administrative Office of the United States Courts. This will be
    Director Mecham's final testimony before this subcommittee. After 21
    years at the helm of the Administrative Office, he is taking a well-
    deserved retirement. He is the longest-serving director of the
    Administrative Office and is only the sixth person to head that unique
    organization, which was established in 1939.
        Director Mecham led the Administrative Office during two decades of
    unprecedented change in the Federal courts. In 1985, when Director
    Mecham began his tenure, the Federal courts still relied on electric
    typewriters. The operating budgets for the nearly 400 court units
    across the 94 judicial districts were largely managed from Washington,
    DC Federal court facilities were in poor shape due to decades of
    neglect and deferred maintenance. And the Administrative Office itself
    was scattered in multiple locations across Washington, DC.
        Twenty years later, the picture is quite different. The use of
    information technology has fundamentally changed the way the courts
    operate. Today we have a judiciary-wide data communications network
    that provides a secure infrastructure for numerous systems and
    applications. The judiciary's case management/electronic case files
    system has been implemented in nearly all district and bankruptcy
    courts and is now moving into our appellate courts. Electronic
    courtroom technologies such as electronic presentation of evidence,
    digital court reporting, and videoconferencing are now routinely used.
        Today, under the judiciary's budget decentralization policy, courts
    have the flexibility to address their unique needs and priorities at
    the local level. Yet they are also accountable for managing these funds
    wisely.
        Under Director Mecham's leadership, 90 court building projects have
    been approved, providing space needed by the courts to house judges and
    support staff required to manage the judiciary's growing workload
    needs. The Administrative Office finally consolidated its scattered
    offices when it received its own building in 1992--the Thurgood
    Marshall Federal Judiciary Building--which, in addition to the
    Administrative Office, houses the Federal Judicial Center, and the
    United States Sentencing Commission.
        Director Mecham's superb leadership and vision have contributed
    significantly to the Federal judiciary's management progress. We in the
    Third Branch will miss his dedicated service to the courts.

                IMPROVED FISCAL YEAR 2006 OUTLOOK FOR THE COURTS

        As you may recall, last year at this time the courts were reeling
    from the steady downsizing of probation and clerks' office staff in the
    18-month period between October 2003 and March 2005, during which on-
    board court staffing levels declined by 1,800 positions, or 8 percent.
    The need to fund must-pay expenses such as judges' salaries and GSA
    rent, within the constrained appropriations provided to the judiciary
    in fiscal years 2004 and 2005, resulted in essentially flat funding for
    the courts in those years. In fiscal year 2004, the courts lost 1,350
    staff and in fiscal year 2005 additional positions were left vacant due
    to the delay and uncertainty surrounding the fiscal year 2006
    congressional budget. These funding constraints forced courts to fire
    and furlough staff, offer early retirements, and leave vacant positions
    unfilled in order to pay basic operating costs like telephone and
    electric bills. Unfortunately, these staffing reductions came at a time
    when the courts, especially those along the southwest border, were
    experiencing historically high workload levels.
        Now, a year later, I am happy to report that the financial outlook
    for the courts has improved. I raised our budget concerns with the
    subcommittee last year, and you responded by making the judiciary a
    high priority. We recognize that many agencies in your bill received
    little or no growth in fiscal year 2006, and yet you provided the
    courts' operating account with a 4.5 percent increase in appropriations
    for fiscal year 2006, after applying the government-wide 1 percent
    across-the-board rescission and excluding supplemental funding. This
    increase is consistent with those received in fiscal years 2004 and
    2005 of 4.7 percent and 4.3 percent, respectively, and approximates the
    minimum amount we required to maintain on-board staffing levels in
    fiscal year 2006.
        Fortunately, in addition to the appropriations provided by
    Congress, several other unanticipated factors made more funds available
    for the courts in fiscal year 2006. Actions outside the judiciary's
    control (e.g., fewer than anticipated judgeship confirmations), along
    with cost containment initiatives, such as the effort in New York to
    identify and recover GSA rental overcharges--which I will discuss in
    more detail later in my testimony--resulted in higher than anticipated
    carryover from fiscal year 2005 and reductions in fiscal year 2006
    must-pay requirements. These unanticipated, and likely one-time,
    factors resulted in the courts receiving an overall 6.9 percent
    increase in their funding allotments in fiscal year 2006, the first
    above-inflation increase for the courts since fiscal year 2002. This
    puts the courts in a position to backfill nearly half of the 1,500
    probation and clerks' office staff lost over the last 2 years.
        The favorable outlook for fiscal year 2006 requires some
    perspective and a word of caution, however. After several years of
    operating under extremely tight funding levels, an increase in fiscal
    year 2006 funding for the courts in real terms (above inflation) is
    considered a significant achievement. While the courts are in better
    shape financially than in recent years, court staffing is still well
    below the level needed to address all workload requirements imposed on
    the courts. In fact, even with the enhanced funding provided to the
    courts in fiscal year 2006, we still anticipate end-of-year staffing
    levels in probation and clerks' offices to be more than 800 positions
    below the benchmark of 22,372 staff that were on-board in October 2003,
    the level just prior to the courts having to downsize due to budget
    constraints. The emphasis placed on increased immigration enforcement
    efforts as well as other factors caused overall workload to increase 8
    percent during this same period.

                COURT STAFFING LEVELS LAG BEHIND WORKLOAD GROWTH

        Although caseload in the Federal courts has begun to stabilize, it
    nonetheless remains at historic highs in most categories. While
    caseload has grown sharply in recent years, not only have court
    staffing levels failed to keep pace with that workload growth, but the
    courts have, in fact, been falling farther behind. As illustrated in
    the following chart, from fiscal year 2001 to fiscal year 2005 the
    courts' aggregate workload increased 21 percent while on-board court
    staffing levels declined by a net 5 percent. The judiciary has made
    extensive use of electronic case management and case filing systems to
    make clerks' offices more efficient, but reduced staffing levels and
    budget constraints have resulted in 30 percent of our district and
    bankruptcy clerks' offices having to reduce the office hours they are
    open to the public.

        Reduced staffing levels have also changed the way probation
    officers do their work. Probation officers have had to prioritize their
    supervision caseload to focus on higher-risk supervision cases and
    reduce the amount of supervision they provide to lower-risk offenders.
    This may be impacting public safety, as evidenced by a recent review of
    national data which revealed that the number of removals from
    supervision due to new criminal conduct increased by 9.4 percent in
    fiscal year 2005 over the number in fiscal year 2004. We are very
    concerned that any continued decline in court staffing may harm the
    public.
        In evaluating our need for staff to accommodate workload growth, we
    have requested only the number of staff that can realistically be hired
    over the course of the year, not the number of staff that our workload
    statistics say we need. This is because we recognize that it takes more
    time to add staff than to reduce staff. Eliminating staff, while
    traumatic for managers and employees alike, can be done in a relatively
    short amount of time. Early retirement and buyout offers attract
    sizeable numbers of volunteers willing to leave the court rolls.
    Unfortunately, often these individuals are the most experienced and
    seasoned court employees. In other more difficult instances, staff have
    to be laid off due to funding constraints. For courts that are
    downsizing, staff need to be off the payroll early in the fiscal year
    in order to maximize budget savings. On the other hand, backfilling
    these positions takes much longer. With continuing resolutions and the
    hiring freezes that may accompany them, coupled with the lead-time it
    takes to advertise, interview, and make a selection, it can take
    months--and well into the fiscal year--to fill a vacancy. Candidates
    for probation officer positions require extensive background security
    checks and can take up to a year to bring on board.
        The judiciary's budget request includes funding for 464 new
    probation and clerks' office staff to address the immediate workload
    needs of the courts. A request based on the full requirements
    identified by our staffing formulas would have resulted in an increase
    of more than 2,000 staff in fiscal year 2007.
        It is vital that Congress understand that, while the courts require
    additional staff in order to perform their statutory duties, many have
    been reluctant to hire those staff for fear they will have to fire them
    almost immediately in fiscal year 2007. What the court community needs
    now is a clear message that, at the very least, funds will be available
    in fiscal year 2007 to maintain fiscal year 2006 year-end staffing
    levels and ultimately to address the recent workload growth that was
    not matched with additional staffing resources.

                             WORKLOAD IN THE COURTS

        As I just mentioned, after years of steady growth the workload in
    the courts has begun to stabilize. I would like to highlight some areas
    of the judiciary's workload for the subcommittee, but before I do so, I
    would like to discuss how judiciary work plays an indispensable role in
    our Nation's homeland security efforts.
    The Judiciary's Role in Homeland Security
        Actions taken by the Department of Homeland Security and the
    Department of Justice have a direct and immediate impact on the Federal
    courts. Whether it is costly high-profile terrorist cases or soaring
    increases in immigration cases and related appeals, this workload all
    ends up on court dockets, and sufficient resources are required in
    order to respond to it. In recent years, Congress and the
    administration have significantly increased spending for homeland
    security. Non-defense homeland security spending has more than tripled
    since 2001. In sharp contrast, appropriations for the courts' operating
    budget have increased by 29 percent and on-board court staffing levels
    have declined by 5 percent. Increased spending on homeland security is
    expected to continue, as evidenced by the President's fiscal year 2007
    budget, which includes an 8 percent increase in non-defense homeland
    security spending. The judiciary cannot absorb the additional workload
    generated by homeland security initiatives within current staffing and
    resource levels.
    Immigration Enforcement
        Funding for border security and immigration enforcement has nearly
    doubled since 2001, and we have seen a direct impact on our workload as
    a result. Since the September 11, 2001 terrorist attacks, nearly 1,200
    additional border patrol agents have been hired, and Congress recently
    funded an additional 1,500 agents. Furthermore, the President proposes
    to add 1,500 border patrol agents in fiscal year 2007 for a potential
    increase of more than 4,000 new agents since September 2001. This large
    influx of new border patrol agents has and will continue to generate
    considerable additional workload for judges and probation and clerks'
    offices, especially in the five judicial districts along the southwest
    border with Mexico. Costs in our Federal defender services program will
    increase as well. These southwest border courts currently account for
    nearly one-third of all criminal cases nationwide, up from 27 percent
    in 2001, and criminal immigration cases in these courts have increased
    by 68 percent since 2001.
        The immigration-related workload also affects other areas of the
    judiciary. Criminal appeals involving immigration issues increased 64
    percent from 2004 to 2005. Over this same period, nearly 12,000 appeals
    from decisions by the Department of Justice's Board of Immigration
    Appeals were filed in Federal courts of appeals, a 19 percent increase.
    Furthermore, these immigration appeals are up nearly 600 percent since
    2001. The President's fiscal year 2007 budget includes funding for the
    Department of Justice to increase the number of immigration judges and
    immigration appeal attorneys in order to adjudicate a larger percentage
    of detained immigrant cases and appeals. If funded, this will further
    increase the number of immigration appeals that will end up in the
    Federal courts.
    Bankruptcy Filings
        Passage of the Bankruptcy Abuse Prevention and Consumer Protection
    Act of 2005 resulted in a massive workload increase for bankruptcy
    courts as individuals rushed to file before the mid-October 2005
    effective date of the legislation. Fiscal year 2005 bankruptcy filings
    totaled 1,782,643, an all-time record and a 10 percent increase over
    fiscal year 2004. In October 2005 alone, more than 600,000 bankruptcy
    cases were filed nationwide; by comparison, filings in October 2004
    totaled 130,679. Managing this unprecedented level of filings required
    a truly Herculean effort on behalf of bankruptcy clerks offices around
    the country. There are countless examples of clerks' office staff
    working nearly around the clock to ensure that those wishing to file
    for bankruptcy before the new law took effect could do so.
        Given the landmark nature of this legislation, it is difficult to
    predict what filing patterns will emerge in 2006 and 2007. Bankruptcy
    filings are expected to decrease in the short-term, but the decline in
    filings will likely be due, in part, to the large number of people who
    filed just prior to the effective date of the new bankruptcy law.
    Filings are expected to return in significant numbers as attorneys and
    debtors become more familiar with the requirements of the new law. In
    addition, the new legislation creates additional duties for the
    bankruptcy courts. New duties were added in many areas including credit
    counseling, means testing, financial management, tax returns,
    reaffirmations, lease payments, and automatic discharges. Many of these
    areas have required the creation of new processes and operations in the
    clerks' offices. In addition, clerks' offices are experiencing a surge
    in motions and related activity and inquiries from the bar and public.
    As a result of the new demands imposed by the law on clerks' offices,
    it is unclear at this time whether reductions in bankruptcy filings
    will translate into reductions in workload and staff. Given these
    uncertainties, the fiscal year 2007 budget request does not include any
    change in bankruptcy clerks' office staffing levels.
    Booker/Fanfan--Sentencing Guidelines
        The judiciary is also facing the effect of the U.S. Supreme Court's
    decision in the consolidated cases, United States v. Booker and United
    States v. Fanfan. In fact, the courts began receiving increased filings
    almost 6 months before Booker was decided--immediately after the
    earlier Supreme Court decision in Washington v. Blakely. Since that
    decision in June 2004, the courts have received over 14,500 cases
    affected by issues raised in the Booker case, about 7,500 of these in
    the courts of appeals and the remaining 7,000 in the district courts,
    and the effects are not yet over. Habeas corpus petitions raising
    Booker issues filed between October 1, 2005 and January 12, 2006, when
    the statute of limitation for filing these petitions expired, are not
    yet reflected in the statistics. Nor do they include most Booker-
    related petitions that the Federal courts may receive from prisoners
    sentenced in the State courts, as those prisoners must first exhaust
    all options in the State courts before they can bring their cases to
    the Federal courts. The Federal courts will likely continue to receive
    an increased level of State habeas corpus petitions for the next 3 or
    more years.

                        FISCAL YEAR 2007 BUDGET REQUEST

        The Federal judiciary is approaching a crossroads in fiscal year
    2007 and Congress will determine which direction the courts take. It is
    imperative that Congress provide the courts with appropriations
    sufficient to build on the gains achieved in fiscal year 2006. It would
    be unfortunate to re-create the funding problems that the judiciary and
    Congress have worked so hard to remedy. We greatly appreciate that
    Congress made the Federal courts a high priority in fiscal year 2006
    and respectfully request that you continue to do so. An appropriations
    increase of 4 to 5 percent in fiscal year 2007--although consistent
    with recent increases--will not achieve that goal. In fact, such an
    increase will not provide for a current services operating level in
    fiscal year 2007 and would likely require the courts to return to their
    downsizing ways of the last 2 years. The reason for this is reflected
    in the following chart and discussion.

        The high carryforward balances utilized in the fiscal year 2006
    financial plan were, in part, the result of rent credits from GSA and
    other one-time windfalls outside the judiciary's control that will
    likely not be available to finance fiscal year 2007 requirements. A
    lower amount of non-appropriated sources of funding, from $401 million
    to a projected $286 million, means that the courts' Salaries and
    Expenses account requires a higher appropriation increase in fiscal
    year 2007 just to stay even--about 7.7 percent over fiscal year 2006 to
    maintain current services--and an increase of 8.3 percent to fund our
    full request.
        While the courts' Salaries and Expenses account requires an 8.3
    percent increase for fiscal year 2007, the judiciary is requesting a
    9.4 percent overall increase above fiscal year 2006 available
    appropriations. A summary table detailing fiscal year 2007 requirements
    by account is included at Appendix A. We believe this level of funding
    represents the minimum amount required to meet our constitutional and
    statutory responsibilities. While this may appear high in relation to
    the overall budget request put forth by the administration, the
    judiciary does not have the flexibility to eliminate or cut programs as
    the executive branch does to achieve budget savings. The judiciary's
    funding requirements essentially reflect basic operating costs which
    are predominantly for personnel and space requirements. Of the $540
    million increase being requested for fiscal year 2007:
      --$160 million of the requested increase is needed just to pay for
            standard pay and benefit increases for judges and staff. This
            does not pay for any new judges or staff but rather covers the
            annual pay adjustment and benefit increases (e.g., health
            benefits) for currently funded judiciary employees. The amount
            budgeted for the cost-of-living adjustment is 2.2 percent for
            2007.
      --$6 million is associated with increases in the number of active and
            senior Article III judges.
      --$140 million is a technical adjustment to cover the projected loss
            in non-appropriated sources of funding ($115 million of which
            is for the courts' salaries and expenses account). In addition
            to appropriations, the judiciary receives revenue from fees and
            other items that can be used to offset appropriation needs in
            the next fiscal year. Revenue not needed during the year
            collected may be carried over. As I mentioned, the high
            carryforward balance from fiscal year 2005 and the rent credits
            from GSA will likely not be available as financing sources in
            fiscal year 2007, so the judiciary requires appropriated funds
            to replace them. The projected 20 percent decline in filing fee
            revenue in fiscal year 2007 due to fewer projected bankruptcy
            filings is also reflected in this requested increase. We will
            keep the subcommittee apprised of any changes to these fee or
            carryforward projections as we move through fiscal year 2006.
      --$50 million is needed for space rental increases, including
            inflationary adjustments and new space delivery, and for court
            security costs associated with new space. An additional $7
            million is needed to pay for Federal Protective Service
            security equipment and building-specific surcharges for court
            facilities.
      --$43 million is required to support, maintain, and continue
            development of the judiciary's information technology program,
            which has allowed the courts to ``do more with less'' in
            absorbing workload increases while having to downsize staff.
      --$18 million is required to cover mandatory increases in
            contributions to the judiciary trust funds that finance benefit
            payments to retired bankruptcy, magistrate, and Court of
            Federal Claims judges, and spouses and dependent children of
            deceased judicial officers.
      --$14 million is necessary to pay costs associated with Criminal
            Justice Act representations. The Sixth Amendment to the
            Constitution guarantees that all criminal defendants have the
            right to counsel. The Criminal Justice Act provides that the
            courts shall appoint counsel for those persons who are
            financially unable to pay for their defense. The number of
            representations is expected to increase by 5,500 in fiscal year
            2007, as the number of defendants for whom appointed counsel is
            required increases. An additional $12 million will fund
            deferred panel attorney payments and shortfalls in fiscal year
            2006 requirements.
      --$12 million of the increase will provide for several smaller base
            adjustments such as continued investments in the Supreme Court
            building modernization program and general inflationary
            increases for judiciary programs.
        The increases described above total $462 million, or 86 percent of
    the requested increase, and represent must-pay items for which little
    to no flexibility exists. This leaves a much smaller increase of $78
    million to address workload increases and for other program
    enhancements. Of this amount:
      --$24 million is requested for additional staff and associated
            expenses. The bulk of this increase (464 positions) would fund
            the most critical and immediate workload needs of the courts,
            which as I previously noted, is primarily immigration-related
            workload along the southwest border where those five district
            courts currently account for nearly one-third of criminal cases
            nationwide. The judiciary uses statistically-based formulas to
            determine the number of positions needed to address adequately
            the workload of the courts. In an effort to hold down the
            required increase in staffing, the judiciary's cost-containment
            measures included a reduction to the formula-driven staffing
            levels. As a result of these efforts, the judiciary's
            calculations for full staffing requirements were lowered by
            nearly 900 positions, or 4 percent. Even after this adjustment,
            based on the courts' projected workload, the staffing formulas
            indicate more than 2,000 additional positions are needed in
            probation and clerks' offices over the level funded in fiscal
            year 2006. Recognizing that the courts would have great
            difficulty hiring that many new staff in a single year, the
            judiciary has reduced its staffing request to reflect a number
            that can realistically be hired in fiscal year 2007 (464) in
            order to address the most critical workload needs of the
            courts.
      --$24 million to increase the non-capital panel attorney rate to $113
            per hour. I will discuss this requested increase in more detail
            in a moment.
      --$23 million would provide for critical security-related
            requirements.
      --Of the remaining $7 million, $1.2 million would provide for three
            additional magistrate judges and associated staff, $2 million
            would fund information technology enhancements, and the
            remaining $3 million is for smaller requirements in other
            judiciary accounts.
        Appendix B includes an account-by-account description for accounts
    under the Courts of Appeals, District Courts and Other Judicial
    Services heading which includes Salaries and Expenses, Defender
    Services, Fees of Jurors, and Court Security.

                  INCREASE IN NON-CAPITAL PANEL ATTORNEY RATES

        We believe that one program enhancement in our budget request
    deserves strong consideration in order to ensure effective
    representation for indigent criminal defendants. We are requesting $24
    million to increase the non-capital panel attorney rate to $113 per
    hour effective January 2007. A panel attorney is a private attorney who
    serves on a panel of attorneys maintained by the district or appellate
    court and is assigned by the court to represent financially-eligible
    defendants in Federal court. These attorneys are compensated at an
    hourly rate of $92 for non-capital cases and up to $163 for capital
    cases.
        The judiciary requests annual cost-of-living adjustments--similar
    to the annual adjustments provided to Federal employees--for two
    reasons. First, cost-of-living adjustments allow the compensation paid
    to panel attorneys to keep pace with inflation and maintain its
    purchasing power and, in turn, enables the courts to attract and retain
    qualified attorneys to serve on their CJA panels. Second, regular
    annual adjustments eliminate the need to request large ``catch-up''
    increases in order to account for several years with no rate
    adjustments. The subcommittee has recognized the importance of annual
    cost-of-living adjustments by providing one to panel attorneys in
    fiscal year 2006, and we are very grateful for your help.
        Our request to increase the non-capital hourly rate amounts to a
    catch-up increase, which, as I just mentioned, we would prefer to
    avoid. The non-capital rate was increased to $90 in May 2002 (from $75
    per in-court hour and $55 per out-of-court hour in most districts) but
    no adjustments were made to that rate until this past January, when it
    was raised from $90 to $92. In comparison, since May 1, 2002, the
    Department of Justice has been paying $200 per hour to retain private
    attorneys with at least 5 years of experience to represent current or
    former Federal employees in civil, congressional, or criminal
    proceedings. There is a substantiated need for our requested increase
    for panel attorneys. In a 2004 survey of Federal judges, over half of
    them indicated that their courts were currently experiencing difficulty
    identifying enough qualified and experienced panel attorneys. In the
    first statistically valid, nationwide survey conducted of individual
    CJA panel attorneys in March 2005, a significant percentage (38
    percent) of the over 600 attorneys surveyed reported that since the
    hourly compensation rate had increased to $90 per hour in May 2002,
    they had nevertheless declined to accept a non-capital CJA appointment.
    The surveys also confirmed that panel attorneys are reluctant to accept
    appointments in complex, high-cost representations at the $90 rate.\1\
    Strikingly, after covering overhead costs for the predominantly solo
    and small-firm lawyers who take CJA cases, their net pre-tax income for
    non-capital CJA representations amounted to only about $26 per
    compensated hour. A large proportion (70 percent) of the CJA attorneys
    surveyed in March 2005 reported that an increase to the $90 hourly rate
    is needed for them to accept more non-capital cases.
    ---------------------------------------------------------------------------
        \1\ Although rates have been raised to $92 per hour since the
    survey was taken, this $2 per hour increase would not have materially
    affected the survey responses.
    ---------------------------------------------------------------------------
        The requested increase to $113 per hour reflects the amount the
    Judicial Conference believes is needed to attract qualified panel
    attorneys to provide the legal representation guaranteed by the Sixth
    Amendment. Indeed, $113 is the level that the judiciary was seeking in
    2002 when Congress increased the rate to $90. Recognizing fiscal
    realities, the $113 rate being requested is well below the $131 rate
    that a full catch-up increase would permit. I urge you to give this
    rate increase strong consideration.

                           SECURITY OF FEDERAL JUDGES

        Mr. Chairman, I would like to update you on an issue in which I
    know the subcommittee shares a strong interest: the security of Federal
    judges and their families. As you recall, in February 2005 a Federal
    district judge's husband and mother were killed in their Chicago home
    by a disappointed civil litigant. A month later, a judge, court
    reporter, and deputy were killed in the Fulton County, Georgia
    courthouse by a defendant in a criminal case. In response to this
    violence, Congress acted quickly and provided $11.9 million in fiscal
    year 2005 supplemental appropriations to the United States Marshals
    Service (USMS) for the installation of an intrusion detection system in
    the homes of all 2,200 Federal judges, and for additional positions in
    the USMS's Office of Protective Intelligence to improve the process of
    assessing potential threats against judges. Over 1,700 judges have
    indicated that they wish to participate in the Home Intrusion Detection
    System Program.
        In September 2005, Congress approved the USMS's financial plan for
    spending the $11.9 million, and in December 2005 the USMS awarded a
    contract to ADT to begin system installations. Subsequently, Congress
    approved an amended financial plan in which the USMS agreed to assume
    responsibility for the post-installation maintenance and monitoring of
    these systems. We are very appreciative of the efforts of John F.
    Clark, Director of the USMS, in moving this critically important
    project forward.

                          THE JUDICIARY'S RENT BURDEN

        I now turn to an issue that has been a concern of the Judicial
    Conference for over 15 years: the rent that the judiciary pays to GSA.
    Before I do so, I would like to take a moment on behalf of our courts
    along the Gulf Coast to thank GSA for its prompt action in helping
    those courts to recover from last year's hurricanes. The courts and GSA
    worked well together, and GSA's help was essential.
        While we appreciate GSA's hard work on our behalf, we do have
    serious concerns about its rental pricing policies for courthouses.
    Courthouses serve a critical role in our Nation's system of
    jurisprudence. They enable the Federal judiciary to ensure the swift,
    fair, and effective administration of justice, as is required by the
    Constitution. Our space needs are unique and unlike those of any other
    Federal entity. One of our primary concerns is that courthouses are
    currently treated as commercial office space by GSA for rent assessment
    purposes when, in reality, there is no building that is commercially
    equivalent to a Federal courthouse. The fact that the judiciary has
    added significantly to its space inventory over the last 10 years does
    not fully justify or explain our sharply escalating rent payments to
    GSA, which are expected to consume 20 percent of the courts' budget in
    fiscal year 2006 and will soon top $1 billion per year.
        The need to reduce the judiciary's enormous rent burden, which
    threatens judicial independence, is critical to the courts' financial
    well-being. Chief Justice John G. Roberts, Jr., in his ``2005 Year-End
    Report on the Federal Judiciary'', identified the GSA rent issue as one
    of ``. . . two areas of concern that have come to the fore and now
    warrant immediate attention and action.'' Despite numerous appeals, GSA
    has repeatedly declined to provide the judiciary with any measure of
    rent relief, although in 2005 it provided rent relief to 14 other
    Federal entities. As the Chief Justice stated, ``The disparity between
    the judiciary's rent and that of other government agencies, and between
    the cost to GSA of providing space and the amount charged to the
    judiciary, is unfair. The Federal judiciary cannot continue to serve as
    a profit center for GSA.''
        In the absence of any changes to GSA's current rent pricing
    structure for court-occupied space, the judiciary over the last year
    has been meeting with appropriations and authorizing committees in
    Congress to raise awareness of the detrimental impact GSA's rent
    pricing policies have had on the judiciary's core mission of
    administering justice. In those meetings, we have stressed that the
    judiciary's recent budget problems, particularly in 2004 where the
    courts lost 1,350 probation and clerks' office staff, were due at least
    in part to GSA's rent pricing policies that diverted to rent funds
    needed by the courts to perform their essential functions.
        In the absence of rent relief, the judiciary has assumed the burden
    of minimizing its rent payments to GSA by scrutinizing rent bills and
    identifying overcharges. In New York, court staff spent months
    examining GSA billings and identified space rent overcharges, the
    cumulative effect of which resulted in savings or cost avoidance over 3
    fiscal years totaling $30 million. GSA has corrected these errors
    through rebates and rent credits. This was a time-intensive effort by
    the New York courts that involved 2,000 staff hours--the equivalent of
    one person working full-time for a year. The real impact is that it
    took clerk's office staff away from core duties of processing the
    court's caseload in order to validate, and eventually correct, the
    billings from another Federal entity.
        Because these overcharges may be happening elsewhere, the judiciary
    is expanding its effort to identify billing errors and has launched a
    nationwide initiative to train clerks' office staff on how to research
    and detect errors. Again, this effort will come with a cost. It is
    estimated that this nationwide effort will require a minimum of 13,000
    staff hours--equivalent to six people working full-time for a year--in
    addition to $4.3 million for training, travel, and contractor support
    costs, including professional real estate appraisal services. This is
    not work that clerks' office staff should have to do, and surely
    Congress did not intend that we would have to devote scarce resources
    to finding rent overcharges. But we are left with no choice. Given the
    judiciary's austere budget situation, we must pursue savings and
    economies whenever possible, even if we have to divert valuable court
    resources in order to do so. I would conclude my remarks on this topic
    by again quoting Chief Justice Roberts who said in his year-end report
    ``. . . the judiciary must still find a long-term solution to the
    problem of ever-increasing rent payments that drain resources needed
    for the courts to fulfill their vital mission.'' The judiciary stands
    ready to work with Congress and the administration on this very
    important issue.

                  COST-CONTAINMENT STRATEGY FOR THE JUDICIARY

        The judiciary fully recognizes the fiscal situation facing the
    Congress and has made cost containment a major priority. As was
    reported to Congress last year, the Judicial Conference of the United
    States approved in September 2004 a cost-containment strategy of
    identifying and implementing measures to economize and reduce costs
    while not adversely affecting the delivery of justice. Director Mecham
    will be discussing cost-containment efforts in more detail in his
    testimony, but I would like to emphasize that these cost-containment
    efforts are having a real and immediate impact on our resource
    requirements. As an example, the fiscal year 2007 budget request was
    lowered by $80 million principally due to cost-containment efforts and
    productivity improvements in clerks' and probation and pretrial
    services offices. The judiciary is preparing a report, for release this
    spring, to update Congress on the status of various cost-containment
    initiatives.

               RESPONSE TO RECENT HURRICANES ALONG THE GULF COAST

        Director Mecham will be discussing emergency preparedness
    activities in his testimony today, but I would like to talk briefly
    about the recent hurricanes along the Gulf Coast and their impact on
    Federal court operations. First, and most importantly, I am happy to
    report that the Third Branch suffered no loss of life due to the
    hurricanes, although some judges and court staff did lose their homes
    in Hurricane Katrina. I would also like to thank you for the $18
    million in fiscal year 2006 supplemental appropriations that was
    provided to help the courts deal with the aftermath of these natural
    disasters. This funding has paid for travel and per diem expenses for
    judges, court staff, and their dependents who were displaced by the
    hurricanes as well as for security, furniture, and operating expenses
    for the affected courts. If Congress had not provided this emergency
    funding, the judiciary would have been forced to absorb these expenses
    which in turn would have reduced the funding available to the courts in
    fiscal year 2006 for court support staff.
        The hurricanes, particularly Katrina, caused significant disruption
    to court operations along the Gulf Coast. The damage caused by
    Hurricane Katrina forced the Fifth Circuit and its personnel to move to
    temporary duty locations in Houston, Texas, and Baton Rouge, Louisiana.
    District court personnel in the Eastern District of Louisiana were
    moved from New Orleans to temporary duty locations in Houma, Baton
    Rouge, and Lafayette, Louisiana, and in the Southern District of
    Mississippi, district court personnel were moved from Gulfport to
    temporary duty locations in Hattiesburg and Jackson, Mississippi.
    Hurricane Rita impacted court operations in the Eastern District of
    Texas. In that district, court personnel were moved from Beaumont to
    temporary space in Tyler and Lufkin, Texas. All of the courts affected
    by the hurricanes have resumed normal operations with the exception of
    the district court in Gulfport, which is expected to reopen in June
    2006. Of course, for those who lost their homes in the hurricanes, a
    return to normalcy may be delayed for some time.
        Quick action helped to minimize the cost of both bringing up court
    operations at the temporary locations and restoring operations at
    permanent locations. For example, court personnel in the Eastern
    District of Louisiana entered the courthouse in New Orleans soon after
    Hurricane Katrina hit and, under U.S. Marshals Service guard escort,
    retrieved computer and office equipment and transported it to temporary
    duty locations, thus reducing the need to replace equipment. GSA
    quickly moved into affected court facilities to repair damages and
    restore power and air conditioning. This saved millions of dollars that
    would have been needed to replace furnishings damaged by mold and
    mildew. After Hurricane Rita hit, courts around the country sent used
    computer equipment to the Eastern District of Texas district court for
    judges and staff to use at temporary duty locations, again minimizing
    the need to purchase new equipment.
        The disruption caused by the hurricanes--especially Katrina--
    presented unique challenges, particularly for probation officers who
    had to locate displaced offenders under their supervision. I would like
    to relate one story for you in particular that exemplifies the quick
    thinking and dedication of Federal probation officers across the
    country.
        Following Hurricane Katrina, probation officers in the Eastern
    District of Louisiana scrambled to locate all the offenders under their
    supervision, but gave special attention to convicted sex offenders. I
    am pleased to say that all were found and are again in treatment and
    under supervision. In one such case, however, an offender fled to his
    mother's house in Alabama, which happened to be next door to an
    elementary school. He did not contact his probation officer or local
    police as required of convicted sex offenders. He was found, however,
    thanks to the good work of a Federal probation officer from the
    Northern District of Alabama. That officer recalled having briefly
    supervised a serious sex offender from the Eastern District of
    Louisiana while that offender was in Alabama, and, on a hunch, took it
    upon herself to drive by the offender's mother's house. There in the
    driveway was a car registered to the offender. Along with another
    officer, she confronted the offender who admitted he had not registered
    as a sex offender and had not tried to call his Louisiana Eastern
    probation officer. The probation officer called local police who took
    the offender into custody for failing to register. The offender is now
    back in Louisiana in a community corrections center.
        This is only one of many stories I could give you that would
    demonstrate the commitment and dedication of our probation officers--
    not just during a crisis--but in the day-to-day conduct of their law
    enforcement duties.

                   CONTRIBUTIONS OF THE ADMINISTRATIVE OFFICE

        The Administrative Office (AO) of the United States Courts has
    served and supported the courts in an exemplary manner in a very
    difficult fiscal year. The more the courts have to do, and the fewer
    resources with which they have to do it, the more challenging is the
    job of the AO. With only a fraction (1.2 percent) of the resources that
    the courts have, the AO does a superb job of advising us and supporting
    our needs.
        The AO continues to serve as the central support agency for the
    Federal courts, with key responsibility for judicial administration,
    policy implementation, program management, and oversight. It performs
    important administrative functions, but also provides a broad range of
    legal, financial, management, program, and information technology
    services to the courts. None of these responsibilities has gone away
    and new ones are continually added, yet the AO staffing level has been
    essentially frozen for 10 years. Time spent on new initiatives and on
    assisting the courts in operating under fiscal constraints means basic
    support and infrastructure work has to be deferred.
        Last year was a particularly challenging one. In 2005, the AO
    played a central role in assisting the courts to implement the
    bankruptcy reform legislation, as well as in helping those courts
    affected by Hurricanes Katrina and Rita deal with the myriad of space,
    travel, technology, and personnel issues that had to be addressed. The
    commitment of significant resources to these and other initiatives over
    the last year further stretched the AO's already strained resources.
        In my role as Chair of the Judicial Conference Committee on the
    Budget, I have the opportunity to work with many staff throughout the
    AO. They are dedicated, hard working, and care deeply about their
    fundamental role in supporting this country's system of justice.
        The fiscal year 2007 budget request for the Administrative Office
    is $75.3 million, representing an increase of $5.8 million. All of the
    requested increase is necessary to support adjustments to base, mainly
    standard pay and general inflationary increases, as well as funding to
    replace the anticipated lower level of fee revenue and carryover with
    appropriated funds in fiscal year 2007.
        I urge the subcommittee to fund fully the Administrative Office's
    budget request. The increase in funding will ensure that the
    Administrative Office continues to provide program leadership and
    administrative support to the courts, and lead the efforts for them to
    operate more efficiently.

                  CONTRIBUTIONS OF THE FEDERAL JUDICIAL CENTER

        I also urge the subcommittee to approve full funding for the
    Federal Judicial Center's request, which is only 7.5 percent over its
    2006 level.
        The Center's director, Judge Barbara Rothstein, has laid out in
    greater detail what the Center needs and why it needs it in her written
    statement. I want to add that the Center plays a vital role in
    providing research and education to the courts. The Judicial Conference
    and its committees request and regularly rely on research projects by
    the Center. These provide solid empirical information on which the
    judges, the judiciary, and Congress and the public, depend in reaching
    important decisions relating to litigation and court operations.
    Likewise, the Center's educational program for judges and court staff
    are vital in preparing new judges and employees to do their jobs, and
    in keeping them current so that they can better deal with rapid changes
    in the law, and in tools--like technology--that courts rely on to do
    their work efficiently.
        The Center has made good use of its limited budget. It has made
    effective use of emerging technologies to deliver more information and
    education to more people, more quickly. The relatively small investment
    you make in the Center each year (less than one-half of 1 percent of
    the judiciary's budget) pays big dividends in terms of the effective,
    efficient fulfillment of the courts' mission.

                                   CONCLUSION

        Mr. Chairman, I hope that my testimony today provides you with a
    better appreciation of the challenges facing the Federal courts. I
    realize that fiscal year 2007 is going to be another tight budget year,
    perhaps the tightest ever. With the gains you helped us achieve in
    fiscal year 2006, we are on the brink of setting a new course that will
    restore the financial health of the Federal court system. But it will
    take the resources we seek in our fiscal year 2007 budget request to
    accomplish that goal and to avoid a repeat of the staffing losses that
    occurred in fiscal years 2004 and 2005. I know that you agree that a
    strong, independent judiciary is critical to our citizens, our economy,
    and our homeland security. I urge you to fund this request fully in
    order to enable us to maintain the high standards of the United States
    judiciary. Failure to do so could result in a significant loss of
    existing staff, dramatic cutbacks in the levels of service provided,
    and a diminishment in the administration of justice.
        I would be happy to answer any questions the subcommittee may have.

                                   APPENDIX A

                                             JUDICIARY APPROPRIATION FUNDING
                                                 [Dollars in thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                                                                      Percent Change
                                                       Fiscal Year                    Change Fiscal     Fiscal Year
                 Appropriation Account               2006 Available    Fiscal Year    Year 2007 vs.      2007 vs.
                                                           \1\        2007 Request     Fiscal Year      Fiscal Year
                                                                                           2006            2006
    ----------------------------------------------------------------------------------------------------------------
    U.S. Supreme Court:
        Salaries & Expenses........................         $60,143         $63,405          $3,262              5.4
        Care of Building and Grounds...............           5,568          12,959           7,391            132.7
                                                    ----------------------------------------------------------------
          Total....................................          65,711          76,364          10,653             16.2
                                                    ================================================================
    U.S. Court of Appeals for the Federal Circuit..          23,783          26,300           2,517             10.6
    U.S. Court of International Trade..............          15,342          16,182             840              5.5
    Courts of Appeals, District Courts & Other
     Judicial Services:
        Salaries & Expenses:
            Direct.................................       4,308,395       4,687,244         378,849   ..............
            Supplemental...........................          18,000  ..............         (18,000)  ..............
            Vaccine Injury Trust Fund..............           3,795           3,952             157   ..............
                                                    ----------------------------------------------------------------
              Total................................       4,330,190       4,691,196         361,006              8.3
                                                    ----------------------------------------------------------------
        Defender Services..........................         709,830         803,879          94,049             13.3
        Fees of Jurors & Commissioners.............          60,705          63,079           2,374              3.9
        Court Security.............................         368,280         410,334          42,054             11.4
                                                    ----------------------------------------------------------------
          Subtotal.................................       5,469,005       5,968,488         499,483              9.1
                                                    ================================================================
    Administrative Office of the U.S. Courts.......          69,559          75,333           5,774              8.3
    Federal Judicial Center........................          22,127          23,787           1,660              7.5
    Judiciary Retirement Funds.....................          40,600          58,300          17,700             43.6
    U.S. Sentencing Commission.....................          14,256          15,740           1,484             10.4
                                                    ----------------------------------------------------------------
          Direct...................................       5,698,588       6,256,542         557,954   ..............
    Supplemental...................................          18,000  ..............         (18,000)  ..............
    Vaccine Injury Trust Fund......................           3,795           3,952             157   ..............
                                                    ----------------------------------------------------------------
          Total....................................       5,720,383       6,260,494         540,111              9.4
    ----------------------------------------------------------------------------------------------------------------
    \1\ Fiscal year 2006 appropriated funds include the effect of the 1 percent across-the-board discretionary
      rescission where applicable (Public Law 109-148).

                              appendix b--summary
        The fiscal year 2007 appropriation request for the Courts of
    Appeals, District Courts, and Other Judicial Services totals
    $5,968,488,000, an increase of $499,483,000, or 9.1 percent, over
    fiscal year 2006 available appropriations. In addition to appropriated
    funds, the judiciary utilizes other funding sources to supplement our
    appropriations including fee collections, carry forward of fee balances
    from a prior year, and the use of no-year funds. When all sources of
    funds are considered, the increase in obligations for fiscal year 2007
    is $362,506,000 or 6.2 percent.
        Of the $499,483,000 increase in appropriations, 85 percent
    ($425,742,000) is adjustments to the fiscal year 2006 base associated
    with standard pay and other inflationary increases as well as other
    adjustments that will allow the courts to maintain current services in
    fiscal year 2007. The remaining 15 percent ($73,741,000) is needed to
    respond to increased requirements for magistrate judges, Federal
    defender offices, an increase in panel attorney non-capital rate
    increases, court security systems and equipment, digital video
    equipment in all new courthouses, information technology upgrades and
    to fund additional court staff required to handle the most critical
    workload, particularly along the southwest border.
        The requests for the principal programs are summarized below.
    Salaries and Expenses
        The salaries and expenses of circuit, district, and bankruptcy
    courts and probation and pretrial services offices account for most of
    our request. A total of $4,691,196,000 in appropriations is required
    for this account, including funding for the Vaccine Injury program, an
    increase of $361,006,000 above the fiscal year 2006 available
    appropriation. Funding totaling $285,892,000 is expected to be
    available from other sources, including fee collections and
    carryforward balances to fund Salaries and Expenses requirements.
    Combined with our appropriations request, this results in obligations
    of $4,977,088,000.
        Of the $361,006,000 increase in appropriations, 93 percent
    ($335,553,000) is needed to fund adjustments to the fiscal year 2006
    base including: pay and benefit increases for judges and chambers staff
    ($13,168,000); increase in the number of senior, Article III, and
    magistrate judges and associated staff ($5,771,000); pay and benefits
    for court personnel and programs ($106,694,000); GSA space rental and
    related services ($46,886,000); information technology related
    adjustments ($42,595,000); financing adjustments to replace non-
    appropriated sources of funds with appropriated funds ($115,082,000);
    and other operations and maintenance costs that are uncontrollable in
    nature ($5,357,000).
        The remaining 7 percent ($25,453,000) will fund 3 additional
    magistrate judges and their staff to help Article III judges handle
    civil cases and the record number of criminal cases facing the courts
    ($1,282,000); 257 court support FTE to address fiscal year 2007
    workload requirements ($22,109,000); and increases to support new
    information technology projects and upgrades ($2,062,000).
    Defender Services
        An appropriation of $803,879,000 is required for the Defender
    Services program to provide representation for eligible criminal
    defendants in fiscal year 2007. This is an increase of $94,049,000
    above the fiscal year 2006 available appropriation.
        Of this increase, 74 percent ($69,133,000) is needed for
    adjustments to the fiscal year 2006 base for inflationary and workload
    increases. Included in these adjustments are standard pay and inflation
    increases for Federal defender organizations ($19,310,000); a cost-of-
    living adjustment to the capital and non-capital panel attorney rates
    ($1,717,000) and annualization costs of the 2006 panel attorney non-
    capital and capital rate adjustments ($1,535,000); and other
    inflationary increases ($2,849,000); increase in the projected number
    of representations ($14,214,000); funding adjustments to replace
    carryforward funding with appropriated funds ($17,644,000); funding for
    deferred panel attorney payments from fiscal year 2006 and unfunded
    fiscal year 2006 base requirements ($12,464,000); and a reduction in
    non-recurring costs (-$600,000).
        Twenty-five percent ($23,676,000) is requested to provide funding
    for the costs associated with increasing the panel attorney non-capital
    rate to $113 per hour, effective January 1, 2007.
        The remaining increase of 1 percent ($1,240,000) will fund an
    increase for six new positions at the Administrative Office ($640,000);
    and start-up costs of two new Federal defender organizations expected
    to be opened in fiscal year 2007 ($600,000).
    Fees of Jurors and Commissioners
        For the Fees of Jurors program, an appropriation of $63,079,000 is
    required, an increase of $2,374,000 from the fiscal year 2006 available
    appropriation. The Fees of Jurors request is a current services budget
    for fiscal year 2007 with no program increases. The adjustments to the
    fiscal year 2006 base include a net decrease in the projected number of
    juror days (-$722,000); an inflationary adjustment ($832,000); and a
    financing adjustment to replace carryforward funding with appropriated
    funds ($2,264,000).
    Court Security
        For the Court Security program, an appropriation of $410,334,000 is
    required, which is an increase of $42,054,000 above the fiscal year
    2006 available appropriation. Of this increase, 44 percent
    ($18,682,000) is for adjustments to base including an increase for
    standard pay and benefit increases ($292,000); a fiscal year 2007
    Department of Labor wage rate adjustment for court security officers
    (CSOs) ($10,250,000); annualization costs for 37 new fiscal year 2006
    CSOs ($889,000); 34 additional CSOs for new and existing space
    ($2,626,000); inflationary adjustments ($1,200,000); an increase for
    Federal Protective Service security charges ($7,371,000); and a
    reduction for non-recurring security systems and equipment
    (-$3,946,000).
        The remaining increase of 56 percent ($23,372,000) will fund
    security systems and equipment enhancements ($16,778,000); the
    installation of digital video recorders ($6,569,000); and a United
    States Marshals Service server replacement initiative ($25,000).
                                     ______

     Prepared Statement of Leonidas Ralph Mecham, Director, Administrative
                           Office of the U.S. Courts

                                  INTRODUCTION

        Chairman Bond, Senator Murray, and members of the subcommittee, I
    am pleased to present my final testimony before the Senate in support
    of the fiscal year 2007 budget request for the Administrative Office of
    the United States Courts (AO). I will soon be retiring as Director of
    the Administrative Office. I have served three Chief Justices,
    thousands of judges and court staff, and directed the AO during two
    decades of unprecedented change. I have worked closely with members and
    staff of the various committees of Congress with jurisdiction over the
    judiciary and am extremely proud of what we have accomplished together.
    I am grateful for the opportunity afforded me to head what I believe is
    the finest agency in the Federal Government.
        I especially want to thank you and your committee for the support
    provided to the judiciary during our first year under the purview of
    this subcommittee. Only weeks after the Appropriations Committee
    reorganization last year, you supported emergency supplemental funding
    to enhance the protection of judges in their homes, and language
    ensuring sufficient fees would be available to support the judiciary's
    implementation of the new Bankruptcy law. Then, during consideration of
    the fiscal year 2006 Transportation-Treasury Appropriations Act, you
    made funding for the judiciary a priority, recognizing the
    uncontrollable nature of the workload in our Nation's courts. And, as
    the year drew to a close, you supported emergency supplemental funding
    to assist Gulf Coast courts in their recovery efforts in the aftermath
    of Hurricanes Katrina, Rita, and Wilma. Your leadership in support of
    the Judicial Branch during these times of tremendous budget pressures
    is deeply appreciated.

                      CONTAINING COSTS THROUGH RENT RELIEF

        As you may recall from my visit with you last year, I am deeply
    concerned about the adverse impact the judiciary's rent bill has had on
    court operations. As Chief Justice John Roberts stated in his 2005
    Year-End Report, ``The Federal judiciary cannot continue to serve as a
    profit center for GSA.'' While the judiciary has taken steps of its own
    to control its rent bill by undertaking a comprehensive review of its
    courthouse construction program, including a moratorium on new
    construction projects, it is the so-called ``market-based'' or
    commercially equivalent rent we are paying for existing facilities that
    is exacerbating our budget difficulties.
        During the 18-month period from October 2003 through March 2005,
    budget shortfalls and delayed appropriations forced the judiciary to
    reduce court staffing by 8 percent or 1,800 employees. Yet, during this
    same time period, the rent bill paid to GSA increased and was paid in
    full. Faced with the choice of paying an even higher rent bill or
    firing additional court employees, all during a period of historically
    high workload, the judiciary tried unsuccessfully to seek a rent
    exemption from the GSA--similar to those the GSA provided at the same
    time to 14 other executive branch entities. Each request by the
    judiciary was turned down or GSA offered alternatives that, in the long
    term, would not save money. Unable to sustain any further staffing
    reductions, and without cooperation from GSA, the judiciary had no
    choice but to engage in a detailed, and costly, technical review of
    rent bills at the local level to try to identify rent discrepancies
    that would result in a lower rent bill.
        Judge Gibbons describes this effort in her testimony and shares the
    success we have had in identifying inaccuracies and errors in the rent
    bills for the Northern and Southern Districts of New York, which
    resulted in a savings of $30 million to the judiciary through rebates
    and rent credits. Certainly we are pleased with this result as the
    unanticipated return of funds has helped to offset the impact of the 1
    percent across-the-board rescission to our fiscal year 2006
    appropriation. But, the rebates provide only short-term rent relief. As
    Chief Justice Roberts stated in his 2005 Year-End Report, ``. . . the
    judiciary must still find a long-term solution to the problem of ever-
    increasing rent payments that drain resources needed for the courts to
    fulfill their vital mission.'' Unless judiciary appropriations keep
    pace with the increase in our rent bills, we will be unable to sustain
    the staffing levels necessary to carry out the mission of the Judicial
    Branch. Despite the aforementioned rebates, rent paid to GSA in fiscal
    year 2006 is expected to consume over 20 percent--nearly $1 billion--of
    the courts' operating budget. In contrast, the Executive Branch as a
    whole spends less than two-tenths of 1 percent of its budget on GSA
    rent--in part because many agencies have managed to become totally
    independent of the GSA.
        On February 8, 2006, Congressman Sensenbrenner introduced H.R.
    4710, the Judiciary Rent Reform Act of 2006. A similar bill, S. 2292,
    was introduced in the Senate by Senator Specter on February 16, 2006.
    The purpose of this bipartisan legislation is to ensure that the rent
    paid by the Federal judiciary is fair and equitable, and is related to
    the actual costs of providing court facilities. Enactment of the
    legislation would change existing practice by requiring the judiciary
    to pay only for the GSA's direct expenses associated with the operation
    and maintenance of federally-owned space occupied by the courts, as
    well as applicable indirect GSA expenses, which principally entail
    GSA's administrative overhead at the field office, regional and central
    office levels. The judiciary would be required to pay only the
    underlying contract rent for any court-occupied leased space and would
    be exempt from paying for components of GSA's current pricing policy,
    which are above and beyond its actual costs of operating and
    maintaining federally-owned space.
        With regard to future courthouse construction or major repair and
    alteration projects undertaken by GSA on behalf of the judiciary, under
    this proposed legislation, the judiciary would request appropriations
    directly from Congress and transfer appropriations approved by Congress
    to GSA for deposit into the Federal Buildings Fund. The amounts
    transferred would be designated specifically for those projects. This
    legislation will not change the current congressional process for
    authorizing new courthouse construction and repair and alteration
    projects, nor will it change appropriations subcommittee jurisdiction.
    It simply will ensure that the judiciary pays a fair and equitable
    amount to GSA to lease, operate, and maintain court facilities.
    Furthermore, it will ensure that all funding deposited in the Federal
    Buildings Fund by the judiciary is used to support and build judiciary
    facilities, and is not used by the administration to fund Executive
    Branch projects instead.
        Modifying the funding mechanism for judiciary facilities will
    improve the process for both the judiciary and Congress, and will
    preclude the situation the judiciary finds itself with respect to
    fiscal year 2007 and, in fact, 5 of the past 10 years. The Judicial
    Conference has identified to GSA and the administration the need for
    five courthouse projects, at a cost of $307 million for fiscal year
    2007. The President's budget has included no funds whatsoever for
    courthouse construction projects. OMB has included no funds for
    projects funded out of the Federal Buildings Fund. Yet, the judiciary
    will pay approximately $1 billion in rent to GSA in fiscal year 2007,
    which is about $500 million more than is needed to pay for the cost to
    lease and operate court facilities. While there is $148.6 million in
    the fiscal year 2007 request for three courthouse Repair and Alteration
    projects, the vast majority of the ``rent profit'' realized by GSA from
    the judiciary goes to support Executive Branch projects.
        Mr. Chairman and members of the subcommittee, I hope you will
    support the judiciary's efforts to address the burden that excessive
    rent costs are placing on the judiciary by co-sponsoring S. 2292.
    Especially during these times of limited resources, I fear that our
    ability to carry out the basic functions of the judicial branch are at
    stake if rent relief is not obtained.

                       ROLE OF THE ADMINISTRATIVE OFFICE

        The Administrative Office of the U.S. Courts was created by an Act
    of Congress in 1939 and is devoted to helping the courts fulfill the
    judiciary's mission--administering justice to the citizens of this
    country. Neither the Executive Branch nor the Legislative Branch has a
    comparable organization that provides the broad range of services and
    functions that the Administrative Office does for the Judicial Branch.
    My successor will be only the seventh Director of this unique
    institution in almost 70 years.
        The AO provides administrative, legal, financial, management,
    program, security, and information technology services to the Federal
    courts. It provides support and staff counsel to the Judicial
    Conference of the United States and its 25 committees, and it helps
    implement Judicial Conference policies as well as applicable Federal
    statutes and regulations. The AO is also the focal point for judiciary
    communication, information, program leadership, and administrative
    reform. Our administrators, accountants, systems engineers, analysts,
    architects, lawyers, statisticians, and other staff provide
    professional services to meet the needs of judges and staff working in
    the Federal courts nationwide. The AO staff also responds to
    Congressional inquiries, providing information on pending legislation
    and congressionally mandated reports.
        As I prepare to retire from this extraordinary organization, I want
    to take this last opportunity to appeal for sufficient resources to
    sustain the AO's staffing level, which has not been increased in over
    10 years despite many new work demands. In the past few years, we have
    been forced to maintain high vacancy rates due to funding shortages. I
    hope the following examples of recent challenges and achievements will
    illustrate the critical role the employees of the Administrative Office
    play in supporting the Federal judiciary.
    Implementing the Bankruptcy Abuse Prevention and Consumer Protection
            Act of 2005
        The most sweeping changes to bankruptcy law in the past 20 years
    were enacted on April 20, 2005, with the signing of the Bankruptcy
    Abuse Prevention and Consumer Protection Act of 2005 (Public Law 109-
    8). The Act's impact on judiciary resources, including AO and court
    staff, has been monumental. The 500-page Act made many substantive
    changes to the Bankruptcy Code that required significant amendments to
    the judiciary's bankruptcy rules and forms. It also established a host
    of new procedures and proceedings that are adding to the work of
    bankruptcy judges, bankruptcy clerks, bankruptcy administrators, and
    staff here at the AO. Most of the Act's provisions took effect October
    17, 2005, just 180 days after enactment, requiring the AO, Judicial
    Conference committees, and the bankruptcy courts to undertake an
    enormous effort to meet the tight deadline. Moreover, implementing the
    Act required the AO to quickly develop a new version of CM/ECF, the
    case management and electronic filing system, used by the courts.
        To coordinate the AO's national implementation of the Act, I formed
    a Bankruptcy Act Implementation Working Group, which met three times a
    month to identify all implementation tasks and issues and to coordinate
    all phases of implementation of the provisions of the Act. Over 100
    employees representing a minimum of 15 program offices at the AO were
    involved in this tremendous effort--all of which had other principal
    duties.
        I also approved the creation of a Bankruptcy Legislation Working
    Group, comprising judges, unit executives, and deputy clerks, who
    worked many hours, in conjunction with my staff, to address many of the
    new issues raised in the Reform Act. This Group created a ``grid'' of
    information, addressing various areas of the law, including means
    testing, credit counseling, and tax returns. This grid, which included
    procedural and legal guidance, statutory cites, and CM/ECF information,
    proved an invaluable resource for the courts as they prepared to
    implement the new law.
        In addition, the Advisory Committee on Bankruptcy Rules, the
    Committee on the Administration of the Bankruptcy System, and court
    working groups devoted substantial hours and effort to ensure
    compliance with the Act. Beginning with an organizational meeting the
    day after enactment of the law, the Advisory Committee conducted more
    than 20 conference calls, held three subcommittee meetings, and two
    full committee meetings. Members of the Committee, the Committee's
    consultants--four law professors--and AO staff spent countless hours
    conferring, drafting, and redrafting the new and revised rules and
    forms. As a result of this work, on August 11, 2005, the Executive
    Committee of the Judicial Conference approved eight new rules,
    amendments to 35 existing rules, amendments to 33 existing forms, and
    nine new official forms, and authorized the distribution to the courts
    of interim rules with the recommendation that the courts adopt them by
    local order. In the meantime, the Standing Rules Committee is
    proceeding with permanent changes to the Federal Rules of Bankruptcy
    Procedure, following the normal procedures of the Rules Enabling Act.
        Administrative Office staff posted these Interim Rules and official
    forms on the judiciary's internet website. From October 2005 to January
    2006, the new forms had nearly 362,000 visitors and the interim rules
    had almost 100,000 visitors. AO staff have responded to thousands of
    inquiries about the rules and forms, the new procedures and the amended
    Bankruptcy Code in general, and have participated in many meetings on
    the interim rules and amended forms, including dozens of national and
    local seminars and teleconferences, and a satellite broadcast with
    bankruptcy judges, clerks, and other court staff.
        AO staff also completed major revisions to the case management
    software, the courts' electronic docket and case management system, to
    incorporate the many procedural changes in bankruptcy cases and
    proceedings that took effect on October 17. This updated version of the
    software enabled the courts to comply with the means test, as well as
    the new noticing requirements. Currently, AO staff are working on the
    development of a new statistical database and analysis system to enable
    the courts to meet the Act's data reporting requirements, which will
    become effective 18 months after the enactment. The enhanced
    statistical infrastructure needed to produce the new statistics will be
    in place by October 1, 2006.
        Later in my statement, I will discuss the overall impact our
    electronic case management system has had on the courts, but I would
    like to point out here that without this system, the bankruptcy courts
    would have been paralyzed during the period preceding the October 17,
    2005, effective date. During the 16 days preceding the Act's effective
    date, over 625,000 bankruptcy cases were filed, more than would
    normally be expected over a 5-month period. In paper form, if an
    average no-asset Chapter 7 case file measures three-eighths of 1 inch
    thick, then those 625,000 cases would have required a shelf almost 4
    miles long, to support a weight of 208 tons. With a lot of hard work
    and overtime, and with the incredible performance of CM/ECF, our
    bankruptcy clerks were able to begin processing this avalanche of
    cases--which are still in progress--with minimal adverse impact on the
    courts.
    Disaster Response--Hurricane Recovery Efforts
        In 2001, after the terrorist attacks of 9/11, I created a Judiciary
    Emergency Preparedness Office at the AO to ensure that the courts have
    the capability to perform essential activities and function without
    extended delays in the event of natural disasters, terrorist attacks,
    or civil emergencies. It is led and staffed by individuals who have
    other duties during non-emergency periods. The AO's leadership role for
    the judiciary in disaster response was demonstrated and tested during
    the hurricanes of 2005. The staff of the AO met the challenge with
    commitment, dedication, expertise, and above all--success.
        In the wake of Hurricane Katrina, the AO launched an immediate and
    intensive effort to assure that judges, court staff, and their families
    were safe, and to return court operations to normal as quickly as
    possible. Seventy court units from Houston to Miami experienced some
    break in telecommunications and more than 1,500 court employees were
    affected. Here in Washington, AO staff from 18 program offices formed
    the Judiciary Emergency Response Team (JERT) to coordinate information
    and assistance to the affected courts in the areas of procurement,
    space and facilities, technology, travel, finance, human resources,
    legislative affairs, public affairs, and legal counsel. The JERT met
    for nearly 7 weeks to assess the situation and provide advice and
    assistance to the courts, to include site visits to the affected areas.
        Staff contacted banks in Louisiana and Mississippi to ensure
    paychecks were received and processed, negotiated with benefit
    providers to expedite payments, and made available phone and electronic
    communication services for courts unable to access their long-distance
    carriers. At the direction of the Judicial Conference, legislation was
    pursued by the AO and quickly enacted to allow courts to convene
    outside their regional jurisdiction during times of emergency.
    Memoranda were also issued to affected judges and court unit executives
    addressing areas of key concern such as: relocating judges and court
    employees; providing guidance on temporary duty travel and related
    expense reimbursement; allocating funds to cover disaster expenses;
    delegating certain procurement authority for the immediate replacement
    of furniture, supplies, and equipment; and reestablishing information
    technology systems.
        Throughout September, teams of experts from the AO were deployed to
    Jackson in the Southern District of Mississippi, Baton Rouge, Houma,
    and Lafayette in the Eastern and Western Districts of Louisiana, and to
    the Hurricane Rita-impacted Southern and Eastern Districts of Texas.
    The AO staff provided on-site assistance in human resources management,
    temporary duty travel, information technology, procurement, space and
    leasing, security, and coordination with other assisting government
    agencies.
        Court operations are running fairly well in the districts affected
    by the hurricanes of 2005. Mr. Chairman, we owe a debt to you and your
    subcommittee, which was especially supportive of our emergency
    supplemental request. Our funding needs were primarily to recover costs
    associated with per diem, travel expenses, and replacing lost
    equipment. Fortunately, through quick action and the personal
    dedication of our court staff, we were able to avoid hundreds of
    thousands of dollars in equipment replacement costs. I am proud of the
    work of the AO's Judiciary Emergency Preparedness Office, and the
    judiciary employees across the country who were instrumental in the
    judiciary's swift recovery from these natural disasters.
    Continuity of Operations Plans (COOPs)
        Since its creation, a principal focus of the AO's Judiciary
    Emergency Preparedness Office has been to assist each court in the
    development of continuity of operations plans (COOPs). During the last
    several years, courts have been testing and validating their COOPs.
        Before Katrina hit, and throughout the disaster recovery period,
    the affected courts used their Continuity of Operations Plans to
    safeguard staff, court files, and property. At both the circuit and the
    district court levels, the intensive efforts to develop and test COOPs
    paid off in the aftermath of Katrina. Court employees knew their space
    and equipment requirements, knew which employees were critical to the
    resumption of operations, and the employees themselves knew their
    roles. Ten days after Katrina hit, the courts affected felt that they
    were much further ahead than they would have been if Hurricane Katrina
    had struck 4 years ago.
    Cost-containment Initiatives
        Supporting the judiciary's overall cost-containment initiatives has
    been a top priority of the AO during the past year. Led by Judicial
    Conference Committees, and working closely with court advisors, AO
    staff is currently engaged in more than 50 cost-containment initiatives
    related to space and facilities cost control, workforce efficiency,
    review of compensation costs, effective uses of technology, program
    changes in defender services, court security, and law enforcement, and
    adjustments to fees. To date, initiatives that have already yielded
    savings include the moratoria on space projects, reductions to
    probation and pretrial services work requirements, reductions and
    elimination of Federal Protective Service contract guard services that
    were deemed to be redundant and/or unnecessary, and productivity
    adjustments to court staffing formulas.
        The AO is also leading by example. During 2005, the AO continued
    implementation of internal cost-control measures--staffing vacancies
    were closely monitored and controlled. Because of funding limitations,
    the AO maintained a vacancy rate of nearly 10 percent also, all
    operations, projects, and functions were closely examined to identify
    cost reduction opportunities. Only limited travel and training were
    allowed, and orders for all other contracts, services, supplies, and
    equipment were restricted to those essential to basic operations and to
    supporting Judicial Conference committees, continuing court operations,
    and implementing information technology projects previously approved.
    While such restrictions may be acceptable for a short period, over the
    longer term, they begin to adversely affect the AO's ability to support
    the courts. For example, having a properly trained workforce is
    absolutely critical to maintaining legal, financial, human resources,
    and technology support for the courts. It is also necessary to maintain
    up-to-date information technology and office equipment if we are to
    communicate with the courts effectively. Lastly, it is essential that
    AO staff travel to the courts in order to perform program reviews and
    audits, and to assist in the implementation of more cost-effective
    practices which will benefit the taxpayers in the long run. Later, I
    will discuss how our fiscal year 2007 budget request will meet these
    needs.
        We also sought and secured, thanks to your subcommittee, changes to
    judiciary procurement authorities which will allow us to enter into
    multi-year contracts that are more competitive and cost-efficient. The
    Executive Branch already had these authorities and we appreciate your
    extending them to the judiciary as part of the fiscal year 2006
    appropriations act.

     INCREASING PRODUCTIVITY IN THE COURTS THROUGH INFORMATION TECHNOLOGY
                                    SYSTEMS

        Another key AO responsibility is to lead and manage the
    development, implementation, and support of new information technology
    systems that will enhance the management and processing of information
    and the performance of court business functions. During 2005, the AO
    focused on continuing to strengthen the judiciary's information
    technology infrastructure.
    Electronic Case Filing
        By the end of 2005, the Federal courts' Case Management-Electronic
    Case Files (CM/ECF) system was operating in virtually all district and
    bankruptcy courts. The prototype system was launched in 1995 when a
    team from the AO helped the U.S. District Court in the Northern
    District of Ohio cope with more than 5,000 document-intensive maritime
    asbestos cases. That court faced up to 10,000 new pleadings a week, and
    a workload that quickly became unmanageable. Together, the team
    developed a system that allowed attorneys to file and retrieve
    documents and receive official notices electronically. A year later,
    the Bankruptcy Court in the Southern District of New York began live
    operations with a similar system that the AO had tailored for
    bankruptcy court needs. That court faced some of the early mega-
    bankruptcies, and was drowning in paper. Since those early efforts, the
    system has processed more than 24 million Federal court cases and
    served hundreds of thousands of attorneys and litigants nationwide.
        The implementation of CM/ECF is the largest system development and
    implementation effort ever undertaken in the judiciary. Virtually all
    bankruptcy and district courts are now using this system, and the
    appellate courts are testing a version for deployment later this year.
    The reach of the project is almost staggering. More than 400,000
    attorneys have registered and been trained in CM/ECF and in 1 month
    alone--August 2005--4.6 million docket entries were made using CM/ECF.
    In coordination with the Public Access to Court Electronic Records
    System (PACER), it provides lawyers, the media, and any interested
    party with access to important case documents from anywhere, at any
    time, and replaces what had previously been a burdensome, labor- and
    paper-intensive responsibility. Attorneys have praised the systems,
    noting that they are easy to use, reduce their service and copying
    expenses, and provide quick notice of actions.
    Bankruptcy Noticing Center
        The AO's Bankruptcy Noticing Center (BNC) electronically retrieves
    data from bankruptcy courts' case management systems and prints,
    addresses, batches, and mails the resulting notices. The Bankruptcy
    Code and Federal Rules of Bankruptcy Procedure require bankruptcy
    courts to send these notices to all interested parties in a bankruptcy
    case. The BNC not only eliminates local preparation and mailing of
    notices by deputy clerks, it also generates notices in a fraction of
    the time and at a far lower cost than local noticing. The BNC, now in
    its eighth year, is estimated to have saved nearly $36 million for the
    judiciary since its inception.
        As bankruptcy courts across the country handled long lines of
    bankruptcy filers, the Bankruptcy Noticing Center also was generating a
    flood of notices. In the weeks prior to and immediately after October
    17, 2005--the law's effective date--the BNC produced up to 1.7 million
    individual notices per day, over triple its normal workflow. By the end
    of October, the BNC was still churning out over 1 million notices a
    day.
    Probation and Pretrial Services Automated Case Tracking System
        The Probation and Pretrial Services Automated Case Tracking System
    (PACTS) is a case tracking and case management tool that demonstrated
    its value in the days and weeks that followed the destruction on the
    Gulf Coast. PACTS collects case-related information, produces
    statistical and workload reports, and provides efficient retrieval of
    case information by probation and pretrial services officers. An
    interface between PACTS and personal digital assistants (PDAs)--as well
    as laptop computers--allows officers field access to information in all
    districts. The system is now implemented in all 94 districts and in the
    aftermath of the hurricanes, we are working to provide PDAs to as many
    officers as possible.
        Without access to their offices, and in many cases, computers of
    any kind, probation officers were able to use their PDAs and PACTS to
    locate and check-up on supervised offenders who were displaced from
    their homes after the hurricanes hit. One particular lesson learned in
    our disaster recovery is the need to expedite the provision of PDAs to
    all probation officers nationwide. At your direction, funding in the
    Courts' fiscal year 2006 financial plan will allow us to do that.

                      ADMINISTRATIVE OFFICE BUDGET REQUEST

        The fiscal year 2007 appropriations request for the Administrative
    Office of the U.S. Courts is $75,333,000, representing an increase of
    $5,774,000, or 8.3 percent, over fiscal year 2006 available
    appropriations. While the percentage increase in appropriations we are
    seeking may appear significant, overall it represents a current
    services budget request. The primary reason for this large increase in
    appropriations is to replace non-appropriated funds (fee/carryover)
    that were used to finance the fiscal year 2006 financial plan, but
    which are expected to decline in fiscal year 2007.
        Specifically, the increases needed to maintain current services
    include $1.1 million for standard pay and other inflationary increases
    and a $4.7 million financing adjustment associated with a projected
    decline in fees and carryforward in fiscal year 2007 from what was
    available in fiscal year 2006. Should our current declining fee and
    carryover projections come to pass, and they are not replaced with
    direct appropriated funds, we will be forced to reduce current on-board
    staffing. This will adversely affect our ability to serve the courts.
    We will, of course, keep you apprised of actual fee collections and
    carryover estimates as the year progresses. Should collections surpass
    our estimates, the amount we are requesting could be reduced.

                        AO RESOURCES ARE STRETCHED THIN

        The AO's funding situation is extremely tight. Without enough funds
    to maintain a full complement of staff, the agency and its managers and
    staff are under enormous strain. As demonstrated by some of my earlier
    examples, unanticipated events over the past several years have
    required us to provide greater support to the courts in the areas of
    security, emergency preparedness and disaster recovery, financial
    management and planning, technology, and the development and
    implementation of new business practices resulting from changes in
    Federal law. Without adequate staff resources, the AO struggles to meet
    these challenges head on--we have been forced to pull people away from
    their daily duties to handle the crises as they arise but cannot
    continue to do this on a long term basis.
        As illustrated in the following graph, staffing levels at the AO
    have actually declined since fiscal year 1995, while during the same
    time period, the number of judges and court staff being supported by
    the AO have grown by 22 percent. This widening disparity between
    staffing and support of the courts has been a hardship for the AO and
    could be crippling in fiscal year 2007 if the non-appropriated sources
    of funding available to the AO in fiscal year 2006 are not replaced
    with direct appropriations.

                                   CONCLUSION

        Chairman Bond, Senator Murray, members of the subcommittee, I hope
    that I have conveyed the wide array of responsibilities vested in the
    AO and the seriousness with which we undertake them. For every issue
    that affects the judiciary, every new piece of legislation that expands
    or alters Federal jurisdiction, every administration initiative that
    impacts Federal law enforcement, every congressional request for
    information, personnel at the AO must quickly master the subject area
    and render expert advice and support to the courts.
        During these times of fiscal constraint and limited discretionary
    spending, the AO takes the lead in assisting the courts in developing
    new, innovative, and cost-effective ways to carry out the business of
    the judiciary. I am proud of the AO's record of service to the courts
    in this regard and know that the staff will continue to work tirelessly
    to ensure the administration of justice is able to be carried out
    efficiently and effectively. While I recognize that fiscal year 2007
    will be another difficult year for you and your colleagues as you
    struggle to meet the funding needs of the agencies and programs under
    your purview, I urge you to consider the significant role the AO plays
    in supporting the courts and the mission of the judiciary. Once again,
    our budget request is one that will require the staff at the AO to do
    more with less--it does not seek new resources for additional staff or
    programs. I hope you will support it.
        Thank you again for the opportunity to be here today. It has been a
    privilege for me to serve the Federal courts for the past 21 years. I
    have particularly enjoyed working with the Appropriations Committee.
        I would be pleased to answer your questions.
                                     ______

         Prepared Statement of the United States Sentencing Commission

        Chairman Bond, Ranking Member Murray, members of the committee, the
    United States Sentencing Commission thanks you for the opportunity to
    submit this statement in support of the Commission's appropriations
    request for fiscal year 2007.
        In the Commission's statements in support of its fiscal year 2005
    and 2006 appropriations requests, the Commission detailed for the
    committee the impact the Supreme Court's decisions in Blakely v.
    Washington \1\ and United States v. Booker \2\ were having not only on
    the Commission, but the entire criminal justice community. The
    Commission continues to feel the impact of these decisions but remains
    firmly committed to meeting all of its statutory obligations.
    ---------------------------------------------------------------------------
        \1\ 542 U.S. 296 (2004).
        \2\ 543 U.S. 220, 125 S. Ct. 738 (2005).
    ---------------------------------------------------------------------------
        The Commission continues to be the central agency for the
    collection, analysis, and reporting of Federal sentencing statistics
    and trends, and it is dedicated to continuing this critical role. The
    Commission also continues to develop appropriate guideline penalties
    for a vast array of new and existing crimes, respond to Congressional
    directives and inquiries regarding sentencing policy generally, provide
    education on sentencing issues to the judiciary and other participants
    in the criminal justice community, and conduct research activities that
    help to shape the future of sentencing policy.
        The preceding fiscal years have been extraordinarily busy for the
    Commission, and it anticipates that fiscal year 2007 will be equally
    so. Full funding of its fiscal year 2007 request will ensure that the
    Commission can continue to meet all of its statutory obligations and,
    most importantly, continue to provide the criminal justice community
    with the most comprehensive and timely sentencing information
    available.

                              RESOURCES REQUESTED

        The Commission is requesting $15,740,000 for fiscal year 2007,
    representing a 9 percent increase over allotted funding for fiscal year
    2006. The Commission recognizes that the fiscal year 2007 budget cycle
    is extraordinarily tight, and it does not seek this increase lightly.
    The Commission's request is backed by significant resource demands,
    including increased demand for Commission work product.

              JUSTIFICATION FOR COMMISSION'S APPROPRIATION REQUEST

        The statutory duties of the Commission include, but are not limited
    to: (1) promulgating sentencing guidelines to be considered,
    determined, and calculated in all Federal cases; (2) collecting
    sentencing data systematically to detect new criminal trends, determine
    if Federal crime policies are achieving their goals, and serve as a
    clearinghouse for Federal sentencing statistics; (3) conducting
    research on sentencing issues and serving as an information center for
    the collection, preparation, and dissemination of information on
    Federal sentencing practices; and (4) providing training to judges,
    prosecutors, probation officers, the defense bar, and other members of
    the criminal justice community in the application of the guidelines.
        The Booker decision had a dramatic impact on the Federal sentencing
    system, but it did not change these core missions. In fact, the Supreme
    Court reaffirmed these statutory obligations by explaining that the
    Commission's post-Booker mission remained ``writing Guidelines,
    collecting information about district court sentencing decisions,
    undertaking research, and revising the Guidelines accordingly.''
    Sentencing Policy Development and Guideline Promulgation
        The Commission has maintained an active policy cycle in the wake of
    Blakely and Booker, despite the resource drain responding and adapting
    to these cases has caused. In fiscal year 2006, for example, the
    Commission has promulgated proposed amendments and issues for comment
    in 14 areas of criminal law, including: immigration, steroids,
    terrorism, transportation, and firearms offenses. With regard to
    immigration offenses which now make up almost one-quarter of the entire
    Federal caseload--the Commission has held one round table discussion
    (in Washington, DC) and two regional hearings (one in San Antonio,
    Texas and one in San Diego, California) at which it received expert
    testimony from judges, prosecutors, defense attorneys, probation
    officers, and others about issues related to immigration offenses. The
    Commission also met with key congressional staff to advise them of the
    Commission's findings and actions, and provided them with a detailed
    staff report on immigration reform and the Federal sentencing
    guidelines.
        The Commission took a similar approach with regard to its
    consideration of steroids offenses. The Commission held a roundtable in
    Washington, DC that brought in practitioners, scientists, and other
    academics to discuss these offenses and their associated harms.
    Commission staff also met with congressional staff and worked with
    staff from the Government Accountability Office on this very important
    topic. As part of its amendment process, the Commission also produced a
    detailed report on steroids use and abuse.
        The Commission anticipates another active amendment cycle in fiscal
    year 2007. In addition to its own policy priorities (which it
    identifies each spring and finalizes each fall), the Commission expects
    to address issues related to terrorism, transportation, sex offenses,
    and drug offenses, as well as implementation of other pending crime
    legislation from the 109th Congress warranting a Commission response.
    The Commission believes that the multi-faceted approach it took with
    regard to its consideration of immigration and steroids offenses should
    continue to be the model for its future amendment cycles. As such, the
    Commission will have to devote more staff (and Commissioner) resources
    to the planning and execution of this type of outreach, including
    associated travel costs. This approach to the amendment process also
    will require greater resources to synthesize the information received
    into meaningful sentencing policy. Full funding of our fiscal year 2007
    request will allow the Commission to meet this key statutory obligation
    in the most complete manner possible.
    Collecting, Analyzing, and Reporting Sentencing Data
        As detailed previously, recent Supreme Court activity has had a
    major impact on the Commission's workload, primarily in the area of
    data collection, analysis, and reporting. Immediately after Blakely and
    Booker, the Commission realized that the most critical role it could
    play as the criminal justice community assessed the impact of these
    decisions was the reporting of the most timely and accurate sentencing
    data available.
        The Commission extracts information from five documents--in every
    Federal case--that the courts are required to send to the Commission
    under the 2003 PROTECT Act. On average, the Commission receives 70,000
    cases annually, so the number of documents and pages that must be
    collected, analyzed, and then reported by the Commission is voluminous.
    Beginning in fiscal year 2005, the Commission refined its entire data
    collection and reporting process so that it could provide ``real time''
    data about the effects of Booker on national sentencing to the criminal
    justice community. The Commission now reports national sentencing data
    on an almost monthly basis, a monumental task for any Federal agency,
    let alone an agency as small as the Commission. This refinement of our
    data collection and reporting efforts has resulted in very significant
    demands on the Commission's resources, particularly personnel. The
    Commission's fiscal year 2007 funding request is designed to increase
    personnel in the key areas of data collection and analysis, and
    research. Increased funding during fiscal year 2007 also will allow the
    Commission to keep up with both the time and volume demands on its data
    collection and analysis resources it now faces.
                Information Technology Issues Associated With Data
                        Collection, Analysis, and Reporting
        As important as meeting the Commission's personnel needs in the
    area of data collection and analysis, full funding will allow the
    Commission to continue moving forward with its plans to collect,
    analyze, and report data in an all-electronic format. Proceeding with
    these efforts will allow the Commission to work with members of the
    criminal justice community to gather information efficiently and in a
    manner that promotes cooperation and efficiency, avoids unnecessary
    duplication of efforts, and ensures that the entire criminal justice
    system is operating at optimum levels.
        To enhance the Commission's ability to process cases in a quick and
    cost-efficient manner, it has developed and implemented an electronic
    document submission system that enables sentencing courts to submit
    electronically the five required sentencing documents directly to the
    Commission, as opposed to having to spend court resources on copying,
    bundling, and mailing hard copies. Currently, 64 districts are using
    the electronic document submission system. The Commission anticipates
    that all 94 districts will be using the system by the end of fiscal
    year 2007.
        The Commission also is moving to a fully automated document
    collection and data analysis system so that by the end of fiscal year
    2007, all document receipt and data extraction and analysis will be
    done electronically. The Commission has spent the last several months
    building the foundation of this process and expects to have a completed
    system running by the end of fiscal year 2007. Becoming fully automated
    is critical to the success of the Commission's statutory missions and
    offers significant benefits to the entire criminal justice community.
    First, our electronic document submission system already has reduced
    personnel and resource burdens on the courts and probation offices, and
    updating this system so that all aspects are automated will allow for
    even more efficiencies. Second, by becoming fully automated, the
    Commission anticipates being able to provide even more detailed and
    accurate data on national sentencing trends to the criminal justice
    community at an even more expedited pace. Third, a fully automated
    system will allow the Commission to work closely with members of the
    criminal justice community in creating an unparalleled system of
    document receipt and data reporting that avoids unwarranted duplication
    of efforts and promotes best practices throughout the system. Finally,
    by increasing internal efficiencies, the Commission will be able to
    dedicate more resources to research-oriented tasks that, in the
    preceding fiscal years, have been curtailed.
        Full funding of the Commission's fiscal year 2007 request will
    ensure that the Commission can meet its information technology needs
    and continue to work with members of the criminal justice community in
    a technologically efficient, non-duplicative manner.
                Increased Demands for Commission Work Product from Congress
        In addition to the new demands for national data placed on the
    Commission by the Booker decision, the Commission also is experiencing
    increased demands for work product from Congress. In addition to
    providing its monthly reports on national sentencing practices, the
    Commission is required to assist Congress in assessing the impact
    proposed crime legislation will have on the Federal prison population.
    These assessments often are complex, time-sensitive, and require highly
    specialized Commission resources. In addition, in fiscal year 2005 and
    2006, the Commission responded to a number of more general requests
    from Congress on issues such as gangs, drugs, immigration, and sex
    offenses. These requests are not expected to diminish during fiscal
    year 2007, and the Commission must ensure that it has adequate
    resources to address the needs of Congress.
    Conducting Research
        Research is a critical part of the Commission's overall mission. As
    such, the Commission has undertaken in fiscal year 2006 to prepare a
    number of internal and external reports that provide a detailed
    examination of key policy areas such as immigration, drugs, and
    firearms offenses. These reports are crucial to the Commission's
    overall objective of promulgating reasoned and well-informed guideline
    and policy statement amendments. Also during fiscal year 2006, the
    Commission released a detailed report on the Booker decision and its
    impact on national sentencing.
        The Commission anticipates undertaking a number of new research
    projects in fiscal year 2007. In addition to reports associated with
    its policy work, the Commission expects to continue its comprehensive
    review of recidivism. The Commission is in the midst of a multi-part
    series on recidivism in the Federal system that is the most
    comprehensive study of its kind to be undertaken. The Commission also
    anticipates undertaking other coding projects and research initiatives
    of interest to the criminal justice community. Full funding of its
    fiscal year 2007 request will allow the Commission to devote the
    resources necessary to accomplish its research mission.
    Training and Outreach
        The Commission continues its commitment to providing specialized
    guideline training and technical assistance to Federal judges,
    prosecutors, defense attorneys, probation officers, staff attorneys,
    and law clerks. The Commission provides intensive training sessions
    throughout the year, and has increased its efforts since the Booker
    decision. In calendar year 2005, the Commission trained over 9,700
    people. Commissioners and staff traveled to, and provided training in,
    59 districts and all 12 circuits. Commissioners and staff also
    participated in numerous academic programs and symposia across the
    country as part of the ongoing debate about the future of Federal
    sentencing. Commission representatives also attended a number of
    circuit court conferences, meetings of the Criminal Law Committee of
    the Judicial Conference of the United States, and the judiciary's
    National Sentencing Institute. The Commission also held its own annual
    national training seminar with over 500 representatives of the criminal
    justice community in attendance.
        The Commission expects its training and outreach efforts to
    continue at this accelerated pace in fiscal year 2007. As a result, the
    Commission will continue to incur increased personnel and travel
    demands, including more demands on Commissioners to travel. Full
    funding of the Commission's request will ensure that these increased
    demands can be met.

                                    SUMMARY

        The Commission is uniquely positioned to assist all three branches
    of government in ensuring the continued security of the public while
    providing fair and just sentences. An independent agency housed in the
    Judicial branch, the Commission is an expert bipartisan body of Federal
    judges, individuals with varied experience in the Federal criminal
    justice system, and ex-officio representatives of the Executive Branch.
    In short, the Commission is at the crossroads of where the three
    branches of government intersect to determine Federal sentencing
    policy.
        The Commission has worked hard and performed well with the
    resources available, and it appreciates the funding efforts of this
    committee. Meeting the Commission's fiscal year 2007 funding request
    will ensure that the Commission continues to: develop aggressive and
    timely policy agendas; collect, analyze, and report accurate and
    comprehensive sentencing data; train members of the criminal justice
    community; and engage in meaningful research projects. The Commission
    urges Congress to support fully our fiscal year 2007 appropriation
    request of $15,740,000 so that it can continue its role as a leader in
    Federal sentencing policy.
                                     ______

      Prepared Statement of Hon. Barbara J. Rothstein, Director, Federal
                                Judicial Center

        I am Barbara Rothstein. I have been the Center's director since
    2003, and a district judge since 1980. I am pleased to submit the
    Center's 2007 budget request on behalf of the Center's Board, which the
    Chief Justice chairs, and which approved this request.
        Our 2007 request is for $23,787,000, a $1,660,000, or 7.5 percent
    increase, over 2006. The increase includes $868,000 for standard
    adjustments to base, and $792,000 for 9 full-time equivalent positions
    (12 positions for 9 months).
        Before providing more detail on this request, let me provide you
    with a little background on the Center and its activities. I hope to
    convey to you the important contribution that the Center makes to the
    effective and efficient functioning of the Federal courts; the Center's
    careful, cost-effective use of the money Congress has provided us; and
    my concern about the effects of having received less than full
    adjustments to base for 9 of the last 10 years.

                    THE CENTER'S CONTRIBUTION TO THE COURTS

        Speaking not only as the Center's director but also as a judge, I
    can attest to the importance of the Center to the courts. The Center's
    mission is to provide objective, well-grounded empirical research and
    balanced, effective educational programs for the courts.
        The courts, and particularly the Judicial Conference of the United
    States, as well as Congress and the public, are regular consumers of
    the Center's research projects. They rely on the Center for thorough,
    unbiased, well-documented research. Examples include: examining the
    impact of the Class Action Fairness Act of 2005 on the resources of the
    Federal courts; providing information to assist judges in handling
    capital cases; surveying the use of visiting judges that resulted in a
    guide on how to make effective use of this cost-efficient judicial
    resource. Not only do projects such as these help judges decide cases
    efficiently and fairly, they also help the judiciary and Congress make
    better informed decisions about policies and procedures affecting the
    courts.
        Center education programs are vital to judges and court staff. For
    new judges, orientation programs enable them to assume their new
    responsibilities quickly. Continuing education programs bring judges
    up-to-date on topics ranging from case-management techniques to new
    statutes and case law. (For example, last year the Center produced for
    judges and court staff 11 different programs on the Bankruptcy Abuse
    Prevention and Consumer Protection Act of 2005, using in-person
    workshops, satellite and video-streaming television programs, and audio
    conferences. We also posted dozens of summaries, reports, articles, and
    analyses on the Act on our intranet site.)
        Court staff, who play a critical role in supporting judges and
    ensuring the efficient operation of the courts, rely on the Center for
    educational programs and materials that help them do their jobs better,
    for example, integrating new technologies and executing cost-
    containment strategies. The Center's Professional Education Institute,
    which provides basic and advanced programs on leadership and management
    for managers and supervisors at all levels in the courts, is a key
    component of court staff training.
        The Center uses a wide range of tools to deliver education. One
    reality of the information age is that people can (and expect to)
    receive information in many different ways. Twenty years ago the Center
    relied almost exclusively on in-person programs, audiotapes, and hard-
    copy publications to reach judges and court staff. Around 10 years ago
    we were expanding into satellite television broadcasting,
    teleconferencing, and use of the Internet and the courts' intranet. In
    just the last 3 years we have moved into web-conferencing and streaming
    video. And all the while we kept--and enhanced--all the earlier modes
    of delivery. All these delivery means are needed to meet the diverse
    needs of a diverse population of judges, managers, and staff.
        The importance of the Center's educational programs is reflected in
    their use by the courts. All Center training is voluntary; large
    numbers of judges and court staff choose to participate in Center
    programs and use its services because they know the Center's products
    will help them do their jobs better. In 2005, nearly 11,500 employees
    of the courts (including over 2,000 judges) attended Center programs in
    person--over 60 percent of these did so in their own districts. Another
    4,000 participated in Center video, audio, and web conferences.
    Thousands more watched Center television programs, downloaded materials
    from the Center's intranet site, and used Center publications.

              THE CENTER HAS MANAGED ITS APPROPRIATION RESPONSIBLY

        Understanding the need for fiscal responsibility, the Center has
    made careful use of its appropriation each year. As I noted earlier, we
    use a wide variety of cost-effective delivery tools to provide
    education and information to judges and staff efficiently. The various
    delivery tools we use have enabled us to reach a larger and larger
    audience for far less money than we could with only one or two of these
    media--but they also require a highly professional staff with diverse
    skills in order to take full advantage of these media and to identify
    and implement newer technologies as they emerge.
        In-person programs remain a vital part of our education efforts.
    Here we economize in several ways. Most staff training (and some judge
    education) is done by bringing faculty to the courts for local
    training. Most programs to which participants must travel are conducted
    in hotels in large cities where we can negotiate reasonable rates and
    take advantage of competitive airfares. We also conduct smaller
    seminars in collaboration with several outstanding law schools,
    enabling us to avoid faculty and overhead costs.
        We also stretch our appropriation by working closely with our
    sister agencies, the Administrative Office of the U.S. Courts and the
    U.S. Sentencing Commission. We regularly consult with them to avoid
    duplicative efforts, and we often provide them an opportunity to convey
    their information to the courts at Center-sponsored programs.
        Internally, the Center held to a hard hiring freeze for over 3
    years: 22 full-time employees retired or left the Center in 2003-2005
    without a single replacement, reducing our staffing level from 147 to
    125. We can no longer sustain this attrition, and in late 2005 we hired
    two full-time employees to fill key vacancies. We will continue to fill
    only selected vacancies.
        Since 2002, the Center has closely controlled pay raises and
    bonuses for staff. While we have followed the Executive Branch and the
    rest of the courts in granting the annual ECI and locality pay
    increases, we have limited additional pay raises each year to 1 percent
    of total Center salaries, and bonuses to one-quarter of 1 percent of
    total Center salaries, each year. While this has helped to control
    costs, it causes us concern over our competitiveness with public and
    private employers in hiring and retention.

       BUDGET SHORTFALLS WILL ADVERSELY AFFECT OUR SERVICE FOR THE COURTS

        The Center is grateful for the efforts of Congress to provide
    $903,000 in adjustments to its 2006 base. After the application of the
    1 percent rescission, however, the Center was again, as in prior years,
    forced to absorb $223,500 (25 percent) of those important funding
    dollars. As I mentioned earlier, the Center has suffered shortfalls in
    its adjustments to base in all but 1 of the last 10 years. This has
    effectively reduced our spending power by 17 percent. As described
    above, in the past 3 years alone, we have had to compensate for
    shortfalls by not filling 22 positions that became vacant during that
    time, thus reducing our staffing level from 147 to 125. Even as the
    Center's staff has declined by 15 percent during that time, the courts'
    needs for its services have continued to grow.
        The continued shortfall in our appropriation will erode our ability
    to provide the quality education and research that the courts need. The
    tools we have used the last several years--a hiring freeze, salary
    limits, and other reductions in spending--cannot go on indefinitely
    without degrading the quality and quantity of work we can perform.

                     THE CENTER'S FISCAL YEAR 2007 REQUEST

        Our request for 2007 is modest--standard adjustments to our 2006
    base and a small amount to enable us to fill 12 of the most necessary
    of the 22 vacancies (6 devoted to our education and distance learning
    efforts; 3 to our ever-increasing number of research projects; and 3 to
    our automation and technology function). These few positions will
    return the Center to its fiscal year 2005 staffing level of 134. That
    is still far below the 158 staff employed by the Center in the early
    1990's, but with these resources we can continue to help the courts
    prepare for and meet the many substantive, procedural, and operational
    challenges they face.
        Thank you for your careful consideration of our request. I would be
    pleased to respond to any questions you may have.
                                     ______

    Prepared Statement of Paul R. Michel, Chief Judge, United States Court
                       of Appeals for the Federal Circuit

        Mr. Chairman, thank you for allowing me to submit my statement
    supporting the United States Court of Appeals for the Federal Circuit's
    fiscal year 2007 budget request.
        Our request totals $26,300,000, an increase of $2,517,000 over the
    fiscal year 2006 approved appropriation of $23,783,000, after a 1
    percent across-the-board rescission. Although this represents an
    overall increase of 10.6 percent, 63 percent of that increase,
    $1,591,000, is for necessary adjustments to the base appropriation. The
    remaining $926,000 (37 percent of the requested increase) is for
    funding for information technology security upgrades, development and
    maintenance of a disaster recovery plan for electronic information, and
    courtroom technology implementation.
        Along with the mandatory adjustments, we have included in our base
    request $496,000 for off-site leased space for senior judges and their
    staffs. The court has one judge who took senior status in February 2006
    and four other judges who currently are eligible for senior status. The
    court has no additional space in the courthouse for chambers for these
    judges when they take senior status as they are expected to do. Keeping
    these judges working is essential in order to keep up with the caseload
    handled by the judges of this court which nearly has doubled since its
    creation in 1982. In the last month the Administrative Office of the
    United States Courts has directed GSA to begin to negotiate a lease for
    off-site space for the senior judges.
        The $926,000 requested for program increases includes the following
    three items previously requested:
      --(1) Information technology upgrades account for $87,000 of that
            amount to provide the computer security software and hardware
            required for the detection and prevention of electronic
            computer attacks and intrusions into the court's network
            computers and data. This equipment is necessary to provide a
            secure computer environment which we now lack. For example,
            court data stolen from unsecured equipment could greatly affect
            stock market prices of corporate securities if obtained before
            the court's decisions are made public.
      --(2) Disaster recovery of information accounts for $255,000 of the
            requested increase to cover the cost of establishing a
            telecommunications infrastructure and client computer equipment
            to connect to appropriate services to overcome destruction of
            the court's electronic communications systems. This would
            include remote dial-in access; file backup and restoration; and
            electronic database support, among other emergency access
            services that would be needed in the event of a disaster at the
            courthouse.
      --(3) The remaining $584,000 requested covers the large, nonrecurring
            start-up cost of providing for modern video conferencing
            technology in two of our three courtrooms. As you know, the
            judiciary has adopted information technology initiatives for
            reducing the reliance on paper, achieving economy in its
            business processes, and providing better service to citizens at
            locations around the country. This is especially critical to
            our court because of its Nation-wide jurisdiction. The court
            requests this funding to implement this program. The amount
            requested is based on recommendations from the Administrative
            Office of the United States Courts to provide two-way video and
            audio transmission between the court and remote sites. We have
            begun this process in one of our courtrooms by reprogramming
            money from last year's appropriation as the subcommittee
            suggested. Further such reprogramming would, however,
            compromise core court functions. This funding will enable us to
            proceed with the upgrades in the remaining two courtrooms.
        I would be pleased, Mr. Chairman, to answer any questions the
    committee may have or to meet with the committee members or staff about
    our budget request.
        Thank you.
                                     ______

    Prepared Statement of Jane A. Restani, Chief Judge, United States Court
                             of International Trade

        Mr. Chairman, members of the committee, I would like to once again
    thank you for providing me the opportunity to submit this statement on
    behalf of the United States Court of International Trade, which is
    established under Article III of the Constitution with exclusive
    nationwide jurisdiction over civil actions pertaining to matters
    arising out of the administration and enforcement of the customs and
    international trade laws of the United States.
        The Court's budget request for fiscal year 2007 is $16,182,000,
    which is $840,000 or 5.5 percent over the fiscal year 2006 available
    appropriation of $15,342,000. This request will enable the Court to
    maintain current services and provide for standard pay and other
    inflationary adjustments to base. The request also includes funds to
    pay for increases in costs paid to GSA for rent and to the Federal
    Protective Service for building basic and building-specific security
    surcharges. These surcharges provide for the Court's pro-rata share of
    installing, operating and maintaining the systems for the critical and
    necessary security of the Federal Complex in lower Manhattan. The Court
    continues, as it has done for the past 12 years, to budget
    conservatively and request funds that will provide for mandatory
    increases in pay, benefits and other inflationary factors, as well as
    to fund the essential on-going operations and initiatives of the Court.
        Within the funds requested, the Court continues to meet the
    objectives set forth in its Long-Range Plan through the use of its
    annual appropriation and the Judiciary Information Technology Fund
    (JITF). These objectives promote access to the Court through the
    effective and efficient delivery of services and information to
    litigants, bar, public, judges and staff. As a national court, this
    access is critical in realizing the Court's mission to resolve disputes
    by: (1) providing cost-effective, courteous and timely service by those
    affected by the judicial process; (2) providing independent,
    consistent, fair and impartial interpretation and application of the
    customs and international trade laws; and (3) fostering improvements in
    customs and international trade law and practice and improvements in
    the administration of justice.
        Technology is a critical component of the Court's commitment to
    service delivery to its varied constituencies. As such, in fiscal year
    2005, the Court: (1) purchased new servers for and upgraded the
    database used in connection with the Federal Judiciary's Case
    Management/Electronic Case Files (CM/ECF) System; (2) cyclically
    upgraded, replaced and supported desktop computers and vital existing
    software applications; (3) purchased new software applications that
    enhance computer security and ensure the efficient deployment of
    software updates to all computer systems at the Court; and (4)
    purchased a fire wall server and software to ensure the security of the
    Court's network and help build a secure identity management system.
    Additionally, in fiscal year 2005, the Court continued its cyclical
    maintenance program by refurbishing its trial courtrooms, robing rooms
    and jury rooms, and replacing aging furniture.
        For fiscal year 2006, the Court plans to expend funds to: (1)
    implement the new operating system for the CM/ECF System and migrate
    the attendant database; (2) continue the support of its upgraded data
    network and voice connections and Virtual Private Network (VPN) System;
    (3) replace the servers for the Court's library on-line cataloguing and
    acquisition system and for the Court's Internet web site; (4) replace
    desktop computer systems, laptops and printers in accordance with the
    Judiciary's extended cyclical replacement program; (5) upgrade and
    support existing software applications; (6) purchase new software
    applications to ensure the continued operational efficiency of the
    Court; (7) support Court equipment by the purchase of yearly
    maintenance agreements; and (8) upgrade the Court's digital recording
    equipment. Additionally, the Court will expand its efforts to provide
    the developmental and educational programs for staff in the areas of
    job-related skills and technology. In the same vein, the Court will
    further its work with bar associations and law schools to provide
    continuing legal education programming to raise the quality of practice
    in the area of customs and international trade law.
        In carrying out its mission in fiscal year 2007, the Court remains
    committed to enhancing the administration of justice to the litigants,
    bar, Court family and public. In so doing, the Court will continue its
    information technology initiatives. Among the technology projects to be
    supported by the Court's fiscal year 2007 budget request and the carry-
    forward balance from its JITF are: (1) continuing the deployment of its
    CM/ECF System and training the bar in its use; (2) supporting and
    maintaining all technical equipment and systems; (3) supporting new
    software applications that enable judges and staff to view
    instructional videos at individual workstations and integrates the
    Federal Judiciary's Training Network with the Court's local area
    network; and (4) upgrading the Court's wiring closets with switches and
    fiber modules.
        Additionally, the Court intends to continue its cyclical
    replacement and maintenance program for equipment, furniture and
    building maintenance. This program not only ensures the integrity of
    equipment and furnishings, but maximizes the use and functionality of
    the internal space of the Courthouse. Moreover, the fiscal year 2007
    request includes funds for the support and maintenance of the upgraded
    security systems implemented by the Court in fiscal years 1999 through
    2005, and the Court's COOP. Lastly, the Court again will participate in
    efforts to address the educational needs of the bar and the Court
    staff.
        As I stated last year, maintaining security systems and ensuring
    the protection of those who work in and visit the Courthouse continue
    to be top priorities. In July 2005, GSA received Senate approval for
    fiscal year 2006 funding for the construction of a security pavilion
    for entry into the Courthouse. The Court is working closely with GSA in
    the design and construction of this entrance pavilion. To that end, the
    Court, in fiscal year 2005, entered into a Reimburseable Work
    Authorization with GSA for a non-prospectus project for replacing the
    present entrance doors to the Courthouse with blast resistant glass and
    for installing video-surveillance cameras in strategic locations in the
    new pavilion that will further secure the Courthouse and its environs.
    GSA expects construction of the new pavilion to begin in the fourth
    quarter of fiscal year 2006. The Court will continue to work in full
    partnership with GSA to ensure the success of the security pavilion
    project.
        I would like to emphasize that the Court remains committed, as it
    has in the past, to an approach of conservatively managing its
    financial resources through sound fiscal, procurement and personnel
    practices. As a matter of internal operating principles, the Court
    routinely has engaged in cost-containment strategies in keeping with
    the overall administrative policies and practices of the Judicial
    Conference, particularly regarding rent, security costs, equipment
    costs, technology, contractual obligations and personnel. I can assure
    you that this management approach with respect to the Court's financial
    affairs will continue into fiscal year 2007 and beyond.
        The Court's ``General Statement and Information'' and
    ``Justification of Changes,'' which provide more detailed descriptions
    of each line item adjustment, were submitted previously. If the
    committee requires any additional information, we will be pleased to
    submit it.
                                     ______

    Prepared Statement of Marilyn L. Glynn, Acting Director, U.S. Office of
                               Government Ethics

        Thank you for the opportunity to present this statement in support
    of the request of the U.S. Office of Government Ethics (OGE) for fiscal
    year 2007 resources of $11,489,000 and 80 FTEs. This request, as
    reflected in the President's fiscal year 2007 budget, represents a 3
    percent increase over the amount appropriated for fiscal year 2006.
        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. While each executive
    branch agency is responsible for carrying out many of the day-to-day
    functions of the program, OGE's specific role includes: reviewing and
    certifying the financial disclosure forms filed by Presidential
    nominees requiring Senate confirmation; reviewing and certifying annual
    financial disclosure reports filed by senior executive branch
    employees; serving as the primary authority on executive branch conduct
    and financial disclosure issues; conducting evaluations of agency
    ethics programs; training agency ethics officials and developing
    employee training materials used by agencies in their ethics training;
    offering direct support to agencies through a desk officer program,
    under which OGE staff serve as ethics liaison to executive branch
    departments and agencies; and providing interpretative guidance on the
    criminal conflict of interest laws.
        The ethics program that OGE directs is part of the basic
    infrastructure that supports good governance within the executive
    branch of the Federal Government. The resources expended by OGE to help
    promote integrity and prevent conflicts of interest are small compared
    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 government resources
    through inadvertent or deliberate misuse. We believe the resources we
    have requested are those necessary to support a strong ethics program.

                                FISCAL YEAR 2007

        In order to enhance our ethics program and continue to foster
    public confidence in government programs and operations, OGE
    established three strategic goals as outlined in our new strategic plan
    for fiscal years 2007-2011. OGE's three strategic goals are: (1)
    strengthening the ethical culture, and promoting an ethical workplace
    within the executive branch, (2) preventing conflicts of interest, and
    (3) promoting good governance. What follows is a summary of the major
    programs OGE is planning to implement to achieve these goals during
    fiscal year 2007.
        OGE expects that there will continue to be a significant number of
    Presidential nominees to positions requiring Senate confirmation during
    the third year of the current administration. OGE performs a key role
    in clearing these nominees, a process which is designed to help them
    understand the application of the conflict of interest requirements to
    their government service and to secure their agreement to take the
    necessary steps to resolve potential conflicts of interest. Our goal is
    to review nominee financial disclosure statements in a timely manner to
    avoid any unnecessary delay in the nomination and confirmation process.
    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, over 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.
        Through the use of improved technology OGE will enhance the
    financial disclosure reporting and review process by developing a
    confidential financial disclosure form that can be filed
    electronically. In addition, OGE will modify the confidential financial
    disclosure form in order to make the reporting process more streamlined
    and user friendly. OGE will also partner with the Department of the
    Army to develop an electronic filing system for public financial
    disclosure filers. During fiscal year 2007, this electronic filing
    system will be available to those agencies within the Department of
    Defense that meet the web-based security requirements set by the
    Department of the Army. OGE will continue to partner with the
    Department of the Army in an attempt to make the electronic filing of
    public financial disclosure forms more widely available.
        OGE prepared and submitted two reports to Congress in fiscal years
    2005 and 2006 pursuant to the Intelligence Reform and Terrorism
    Prevention Act of 2004 (Public Law 108-458). The first report, which
    was delivered in March 2005, evaluated the executive branch financial
    disclosure requirements. The second report, which OGE compiled in
    consultation with the Department of Justice, and delivered in January
    2006, examined the criminal conflict of interest laws as they pertain
    to the executive branch. OGE will work with the Office of Management
    and Budget and the Congress on any Congressional efforts to consider
    and implement any changes identified by these two reports. OGE will
    take the necessary steps to revise its financial disclosure forms and
    regulations to implement any changes in existing law. In addition to
    implementing any changes in legislative mandates, OGE also plans to
    improve the effectiveness of ethics policy by publishing a proposed
    regulation revising the Standards of Conduct for Executive Branch
    Employees.
        OGE expects to purchase some new computer hardware and software.
    This includes security software to protect our network and keep it
    FISMA compliant, software necessary to keep our network up to date, and
    hardware to replace computers that fail. In addition, OGE will
    implement a comprehensive update to its web site making the information
    contained on the site more accessible to a variety of users including,
    designated agency ethics officials, Congress, the media, and the
    public.
        OGE will continue to provide international technical assistance in
    the areas of anti-corruption and good governance programs in support of
    international agreements and regional initiatives of the United States
    in general and the Departments of State and Justice in particular. For
    example, during the fiscal year, OGE will, as a principal member of the
    U.S. delegation, represent the United States before the Group of States
    Against Corruption (GRECO) in the plenary discussion and adoption of a
    report on GRECO's evaluation of the U.S. adherence to certain of the
    adopted Guiding Principles in the Fight Against Corruption. OGE will
    also assist the State Department in the mutual evaluation mechanism
    that is a follow-up to the Inter-American Convention Against Corruption
    and with regional good governance/anti-corruption initiatives such as
    Good Governance for Development for the Middle East and North Africa
    states (MENA) and the Asian Pacific Economic Cooperation (APEC).
    Primarily at the request of the State Department, OGE continues to
    provide briefings to about 40 foreign delegations visiting Washington
    each year.
        As part of our ongoing education and training efforts, OGE will
    prepare and conduct ethics training for agency ethics officials. To
    reach ethics officials outside the Washington area, OGE plans to offer
    three regional symposia. In addition, OGE will hold the fifteenth
    National Government Ethics Conference for approximately 700 ethics
    practitioners. These events provide an introduction to the ethics rules
    and laws for new agency officials and advanced updates and refresher
    sessions for those who are more experienced. Attendees will include
    ethics practitioners, trainers, counselors, financial disclosure
    reviewers, and enforcement officials. In addition, we also plan to
    develop a 2-day orientation program for new ethics officials and offer
    the program at OGE headquarters as well as on a regional basis as
    needed.
        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, as well as provide OGE with
    an early warning that an agency ethics program is deficient or has
    problems that require specialized attention. OGE plans to conduct
    employee surveys regarding individual agency ethics programs, and the
    information gathered through these surveys provides OGE with a better
    basis on which to judge the effectiveness of the individual agency
    programs under review and of the overall ethics program. We also plan
    to conduct ethics program evaluations in 35 Federal agencies, regional
    offices and military commands. In addition, OGE will develop a program
    of self-assessment for agencies to use in years that OGE is not
    scheduled to perform a program review.
        OGE also plans to increase the effectiveness of our support to
    agencies' ethics programs by raising awareness of ethical issues
    arising from the presence of contractors in the Federal work place. For
    example, during fiscal year 2006, OGE participated in and contributed
    to a National Academy of Public Administration working group on the
    issues presented by the multi-sector workforce. We will continue to
    expand our outreach activities to Federal agencies and contractors by
    providing educational materials and presentations on ethics issues that
    arise when contractors work side-by-side with Federal employees.
    Finally, we will also expand our educational and outreach activities to
    Federal agency procurement officials in order to increase their
    awareness of various ethical issues that arise from interacting with
    contractors.
        The programs and activities we have described are just some of
    those envisioned for fiscal year 2007. 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.
                                     ______

     Prepared Statement of John E. Potter, Postmaster General/CEO, United
                             States Postal Service

        Good morning, Mr. Chairman, and members of the subcommittee. I am
    pleased to be with you today as we discuss the United States Postal
    Service, its achievements, its challenges, its opportunities, and our
    appropriations request for fiscal year 2007.
        I know this subcommittee shares our mutual goal of protecting
    affordable, universal service for every American household and business
    for many, many years to come.
        Since it was created by reform legislation in 1970, the Postal
    Service has demonstrated a remarkable ability to transform itself from
    a traditional government agency to a customer-focused, business-driven
    organization--one that has realized outstanding results. For the
    greater part of three decades, this success was supported by a business
    model that made it possible to balance the costs of an ever-expanding
    delivery network with revenue from continuing growth in mail volume,
    particularly high-contribution First-Class Mail.
        Over the last decade, it has become clear that this model would be
    unsustainable for the long term. The explosive expansion of electronic
    communications and, to a lesser extent, intense competition for package
    and document delivery, has had profound effects on mail volume growth,
    upsetting the delicate balance that is at the heart of our 36-year-old
    business model.
        Against this background, the Postal Service took decisive steps to
    stabilize finances, increase efficiency, improve performance, and
    pursue growth by making mail a better value than ever. Our 2002
    Transformation Plan defined specific strategies to help us achieve
    these goals.
        The results speak for themselves. We ended 2001 with outstanding
    debt of $11.3 billion. By 2006, that debt was completely retired,
    reducing interest costs on borrowings from more than $300 million per
    year to only $2 million in 2005.
        We committed to removing $5 billion in costs from our system by the
    end of 2006. We achieved that goal 1 year ahead of time. Cumulatively,
    our Transformation Plan savings have reached $17 billion.
        By the end of 2005, we achieved a record sixth consecutive year of
    productivity gains, helping to offset a portion of inflationary cost
    growth over the same period. Since 2000, our annual productivity gains
    have, on average, been almost six times higher than those achieved
    annually from 1972 through 1999. This progress was not a given. It is
    the result of sound governance, focused management, engaged employees
    and the effective use of technology, both in operations and
    administrative activities.
        Total revenue of $70 billion in 2005 was up from $66.7 billion in
    2002. This is a positive reflection of our efforts to drive growth by
    adding value to the mail by adding products, services and features that
    meet the needs of our customers, and by expanding access, making it
    easier than ever for all mailers to do business with the Postal
    Service. Significantly, our customers experienced a full 3\1/2\ years
    of rate stability during this period.
        Our focus on the bottom line was matched by a focus on service. We
    closed fiscal year 2005 with 11 straight quarters of 95 percent or
    better on-time delivery of First-Class Mail with an overnight service
    commitment. Similarly, customer satisfaction continued to maintain
    record levels.
        Through the dedication and performance of the 700,000 men and women
    of the Postal Service, we have sustained our historic mission to bind
    the Nation together and we remain a vital part of American commerce and
    American life.
        And yet, the challenges we face have never been greater.
        While we had record volume of 212 billion pieces in 2005, this was
    marked by a challenging trend in the mix of mail entering our system.
    For the first time in our history, Standard Mail, primarily catalogs
    and advertising mail, has exceeded First-Class Mail volume; it is now
    our largest volume category.
        At the same time, First-Class Mail growth was essentially flat,
    with a 4 percent decline in single piece First-Class Mail offset by
    growth of just below 4 percent in workshare First-Class Mail.
        Single piece First-Class Mail is most vulnerable to electronic
    diversion, and we expect its continued decline as businesses,
    organizations, governments, and consumers increasingly shift
    transactions from the mail to the Internet. Since 1998, the volume of
    single piece First-Class letters has declined by 20 percent--11 billion
    pieces--representing a revenue loss of $3 billion. From a revenue
    perspective, it takes two to three pieces of Standard Mail to make the
    same contribution to system overhead as just one piece of First-Class
    Mail.
        While 2005's total mail volume set a new record of 212 billion
    pieces, the shifting mix of the mail has affected revenues
    substantially. At 2005 postage rates, the lower volume and the specific
    mail mix of 2000 would have generated $3.3 billion more in revenue.
        We are also challenged by continued growth in our delivery network,
    which must expand to serve about 2 million additional homes and
    businesses every year. The costs of this expansion, coupled with the
    financial effects of the changes in the mail mix, have resulted in a
    continued decline in revenue per carrier delivery.
        And we are faced with steady increases in costs over which we have
    little or no control. Every 1 cent increase in the cost of gasoline
    adds $8 million to our costs. Last year alone, our transportation costs
    increased by $468 million, due primarily to higher fuel costs.
        Despite significant reductions to our workforce, the cost of health
    benefits for current employees has doubled since 2001, reaching $5.1
    billion in 2005. Over the same period, retiree health benefits have
    grown from $858 million to $1.5 billion. Overall, retirement and health
    benefits for active and retired Postal Service employees, most of which
    are statutorily mandated, accounted for $14 billion last year, fully 20
    percent of all Postal Service costs, and an increase of almost $1
    billion from 2004.
        Looking ahead, we are concerned by a sluggish economy. For the
    fourth quarter of 2005, the Gross Domestic Product increased by only 1
    percent. This was reflected in the Postal Service's first quarter
    results, with First-Class Mail volume down by 3.8 percent, compared to
    the same period last year, producing a $415 million revenue decline.
    This was only partially offset by growth of 0.5 percent in Standard
    Mail volume, representing a revenue increase of just $30 million.
    Clearly, this is a trend that is unsustainable in the long term.
        It is our experience that mail use is an indicator of general
    economic activity. Quarter 1 results suggest that customers are
    changing their mailing behavior in response to the economy. We are
    monitoring this situation carefully and we will continue to do
    everything we can to increase efficiency to help offset any continued
    volume decline.
        Our focused transformation efforts since 2002, coupled with the
    limited-term financial relief provided by the Postal Civil Service
    Retirement System Funding Reform Act of 2003, Public Law 108-18, have
    made it possible for us to absorb rising costs without the need to
    raise rates to meet increased operational costs since June, 2002.
        The recent 5.4 percent across-the-board postage increase was
    implemented solely to meet the $3.1 billion escrow payment required
    this year by Public Law 108-18. None of the revenue from the new rates
    is available to offset other costs as they continue to rise over the
    coming months and years. As a result, we are projecting a loss of up to
    $2 billion this year.
        Reluctantly, we have concluded that it will be necessary to ask the
    Governors of the Postal Service to file a rate case in the near future.
    While we have not determined when the filing will occur, we are working
    closely with the Governors as we prepare for this action. This would
    represent the first adjustment in the price of postage since mid-2002
    to address operational cost increases.
        As I mentioned, the Postal Service and its customers have benefited
    from our strategy of pursuing increased productivity. In just the last
    year, this has resulted in the equivalent of more than $700 million in
    cost savings. Looking forward, we must do everything possible to
    support continued productivity growth.
        Building on the momentum of our original Transformation Plan, our
    Strategic Transformation Plan 2006-2010, is keeping us focused on our
    core business and the strategies we know produce results. We will
    promote growth by continuing to create more value for every customer.
    We will continue to reduce costs by improving efficiency in all of our
    operational and business processes. We will bring service performance
    to even higher levels. And we will achieve these results with an
    energized, customer-focused workforce.
        Our transformation goals, and the methods we will use to achieve
    them, were developed to help us push the limits of business
    effectiveness and operational efficiency. They represent a sound
    approach to a dynamic business environment. They are effective. We
    believe they have the potential to be even more effective when applied
    to a business model that addresses the challenges of a new century.
        I am also here today with more immediate needs--our appropriations
    request for fiscal year 2007. This request covers funding for revenue
    forgone and free and reduced rate mail. Our request differs from the
    amounts recommended by the administration's fiscal year 2007 budget in
    several ways.
        Our first request is for $29 million for revenue forgone
    reimbursements. The administration's budget does not include funding
    for the Federal Government's own debt to the Postal Service for
    services required by statute. In accordance with the Revenue Forgone
    Reform Act of 1993, the Postal Service is to receive $29 million
    annually through 2035. This payment covers the cost of services we were
    required to provide in fiscal years 1991 through 1993, but for which
    there were insufficient amounts appropriated. It also covers payment
    for services provided from fiscal year 1994 through 1998.
        For two decades after the creation of the Postal Service, Congress
    continued to fund reduced postage rates for certain categories of mail
    and mailers through the so-called ``revenue forgone'' appropriations.
    Congress required that the Postal Service provide reduced postage rates
    as well as free mail for purposes which Congress considers to be in the
    public interest. These favored types of mail included reduced-rate bulk
    standard mail advertising sent by qualified non-profit organizations,
    and in-county mailings of local newspapers. These appropriations were
    devoted entirely to the benefit of these historically-favored mailers,
    and did not financially benefit the Postal Service.
        Under the provisions of the Revenue Forgone Reform Act of 1993,
    approximately half of the former taxpayer subsidy to non-profit mailers
    was transferred to regular-rate postal customers, and that portion of
    the ``revenue forgone'' subsidy was ended. In this same legislation,
    Congress authorized a series of 42 annual appropriations of $29
    million, without interest, as reimbursement for $1.2 billion in costs
    incurred by the Postal Service ($515 million in past under-funding of
    revenue forgone plus the cost of phasing reduced postage rates to
    higher levels over 5 years, under the Revenue Forgone Reform Act). The
    outstanding balance on this debt is approximately $840 million. This
    year's appropriation would be the fourteenth in the series of 42 annual
    payments to reimburse the Postal Service the $1.2 billion owed for
    these purposes. Failure to fund this authorized appropriation places
    the remaining debt of nearly $840 million at risk of nonpayment.
        As the Postal Service continues to responsibly address its long-
    term obligations, it is counter-productive to increase those costs
    through non-payment of a debt already deferred by interest-free
    installment payments spread over a period of 42 years.
        The second part of our request is for $123.7 million in payment for
    costs imposed on the Postal Service by statute. This $123.7 million is
    for current year costs of $80.127 million and a $43.608 million
    reconciliation adjustment for prior years. This appropriation
    reimburses the Postal Service for the statutory obligations to provide
    free mail for the blind and others who cannot use or read
    conventionally printed materials, the mailing of 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
    election officials.
        This request differs from the administration's budget
    recommendation of $79.915 million. The administration provides $60.725
    million for current year costs plus a $19.190 million reconciliation
    adjustment. The administration's proposal not only provides an amount
    less than that requested, but also continues an ``advance funding''
    process adopted in recent years of deferring actual payment of the
    recommended funding until the following fiscal year.
        Although this approach provides limited funding for these services,
    these funds are only made available long after the service has been
    delivered. These actions place the postage ratepayer at a greater risk
    of absorbing a social service cost beyond the mission of the Postal
    Service. The Postal Service does not have the authority to control or
    limit these mailings to reduce the funding needed. And we have no way
    to mitigate the shortfall in funding. Providing less than the requested
    amount will continue to compound the financial burden caused by the
    current ``advance'' funding.
        I should note that the Postal Service takes great pride in its
    success in funding postal operations solely through the sale of postal
    products and services. While we are authorized by statute to request a
    public service appropriation every year for costs incurred in providing
    effective and regular postal services nationwide, even in communities
    where Post Offices may not be deemed self-sustaining, we have operated
    without this appropriation since fiscal year 1982, saving the American
    taxpayers more than $11 billion. Again, for fiscal year 2007, we are
    not requesting an appropriation for public service.
        In closing, I would like to take this opportunity to acknowledge
    the hard work and dedication of the men and women of the Postal
    Service. They are at the heart of our success. They are valued and
    trusted members of every community they serve.
        Thank you, Mr. Chairman and members of the subcommittee for the
    opportunity to discuss our fiscal year 2007 appropriations request. I
    would be pleased to respond to any questions at this time.
                                     ______

               Prepared Statement of the United States Tax Court

        The United States Tax Court provides a national forum for the
    resolution of disputes between taxpayers and the Internal Revenue
    Service (IRS). As such, the U.S. Tax Court handles over 95 percent of
    Federal tax cases.
        The Tax Court is uniquely able to deal with disputes arising under
    the Nation's tax laws. As the largest Federal trial court, we receive
    and close approximately 23,000 cases each year. The Court maintains
    numerous courtroom facilities and conducts hundreds of weeks of trial
    sessions in 77 cities across the United States. The Court accomplishes
    this mammoth task with less than 300 employees, including the judges
    and their staffs.

                          TAX COURT CASES AND WORKLOAD

        Significantly, the Tax Court has no control over the type or volume
    of cases that are docketed. Congress, through legislation; the Internal
    Revenue Service, through its audit and enforcement activity, and
    taxpayers by their choice of forum determines our caseload.
        Deficiency cases comprise 90 percent of the current caseload. The
    remaining 10 percent of cases include: administrative costs, abatement,
    employment classification, lien/levy, Tax Equity and Fiscal
    Responsibility Act of 1982 (TEFRA) partnership, declaratory judgment,
    and section 6015 (stand alone, innocent spouse) cases. The Court's
    pending caseload increased by 4 percent in fiscal year 2005. The
    largest increase was in deficiency cases.
        The Tax Court's fiscal year 2007 budget request anticipates a
    moderate increase in cases of all types. The estimated caseload in
    fiscal year 2007 is in part, based on the increase in audit and
    enforcement activity projected by the IRS.

                        FISCAL YEAR 2007 BUDGET REQUEST

    Staffing Needs
        The Tax Court studied caseload data and projections of IRS audit
    and enforcement activity and determined that it could lower the number
    of funded vacancies from 40 to 15. Maintaining these positions provides
    the Court the flexibility to promptly address increases in caseload.
    The requested positions allow the Court to make contingency plans for
    changes in workload. With no control over the flow of cases into the
    Court, it is prudent to maintain the flexibility to respond to
    increases in workload.
        The Court expects to have a stable staffing pattern in fiscal year
    2007. However, the Court, as of June 1, 2006, will have only 17 of 19
    of its presidentially appointed judges on board. Funding for two
    additional presidentially appointed judges and staff is included in the
    Court's request.
    Training
        As mentioned in the fiscal year 2007 budget request, the training
    program for Court employees is ongoing. The program, begun in 2005,
    focuses on improving employees' job-related skills and helping them
    become eligible for greater responsibility as part of the Court's
    succession plan.
        The Tax Court has a large number of employees eligible to retire. A
    total of 43.2 percent of the Court's staff can retire over the next 5
    years. Of the total eligible to retire, 19.7 percent are eligible now.
    The training program is a key part of the Court's succession plan. The
    Court is identifying and training employees, so they are ready to fill
    positions of increased responsibility or areas where the Court lacks
    sufficiently trained staff.
        Training is provided consistent with guidelines for employee
    training contained in 5 C.F.R. Part 410. The Court maximizes its
    training dollars by providing on-site group training where possible.
    Modular Furniture
        In 2005, the Court initiated a project to replace a large inventory
    of outmoded wooden desks purchased in 1985, with modular furniture. The
    modular or systems furniture more suitably accommodates today's office
    technology by providing built-in electrical outlets and wiring raceways
    for computer and printer equipment. It provides a further advantage
    over the traditional desk configuration by offering better space
    economy and the flexibility to reconfigure workspace to meet the
    requirements of workload and corresponding staffing changes. To date,
    using modular furniture has allowed the Court to more efficiently use
    the space in its headquarters.
        The fiscal year 2007 budget request builds on this replacement
    project. Fiscal year 2007 is the final year for replacing old,
    traditional office furniture with new, efficient modular furniture. The
    Tax Court is establishing a cyclical replacement program to ensure
    cost-effective use and replacement of furniture in the future.
    Field Courtroom Restoration
        In fiscal year 2006, the Court initiated a multi-year effort to
    survey, renovate and refurnish, as needed, its field courtroom
    inventory. The Court's national jurisdiction requires its judges to
    travel to over 70 cities providing litigants with a geographically
    convenient forum. The Court leases courtroom and chambers space in 35
    of these cities. Many of these leased sites have not been refurnished
    or refurbished in 20 years. Several of these facilities are in dire
    need of new furniture to replace worn 25-year-old equipment. Several
    facilities are in need of new carpet and paint, and a handful will
    undergo minor remodeling to correct deficiencies.
        We are also installing technology systems cabling in all of the
    leased field courtroom and chambers to facilitate networking
    capabilities with headquarters. Judges and Court personnel will have
    secure electronic access to the Court's network and their case files.
    All of the Court's case information is now electronically stored and
    must be accessible by the judges and staff when they are hearing cases
    across the country.
        We expect to spend approximately $1 million in our field courtroom
    renovation project in fiscal year 2006. This effort will address, at a
    minimum, the problems in one-third of the Court's leased space
    inventory. The fiscal year 2007 request contains funding to accomplish
    needed upgrades in another one-third of field courtrooms. We anticipate
    requesting funds for the final one-third of needed renovations for
    fiscal year 2008.
    Technology Upgrades
        The Court's fiscal year 2007 budget request continues the cyclical
    replacement of technology begun in the fiscal year 2006 budget. In
    addition to replacing or upgrading technology at the Court, we have
    been engaged in a comprehensive review of our operating procedures in
    an effort to enhance our services to the tax bar and the taxpayers we
    serve. This comprehensive evaluation is intended to result in the
    application of technological tools, such as automated master
    calendaring, comprehensive document imaging and RFID (radio frequency
    identification) enabled records tracking, to improve the quality of
    service and the speed at which it is delivered. We expect to continue
    these improvements within the funding levels requested in the fiscal
    year 2007 budget.
        The Tax Court implemented a new telephone system in February 2006.
    The Court is now using a voice-over-internet protocol for its phone
    service. This technology allows Court judges and employees who travel
    to retrieve voice mail wherever they are by phone or through a web
    portal. This technology provides faster, less expensive, and more
    efficient communication between Headquarters staff and traveling judges
    and employees. The Court also purchased and installed a server that
    runs SQL software, allowing us to implement improvements in our
    accounting, purchasing, payroll and human resources systems. The Tax
    Court appreciates the subcommittee's support for these projects that
    will make the Tax Court more efficient in accomplishing its mission.
        The Tax Court is launching an e-filing pilot project this year that
    will be ready for beta testing in fiscal year 2007. In connection with
    this, the Court is currently reprogramming its case management database
    and ancillary systems from a legacy language to a sequel medium to
    permit them to operate on a SQL server. As a result, the Court will be
    able to receive and process electronically delivered case documents. In
    advance of implementation, we will update our attorney admissions and
    enrollment database and will be training, late this fiscal year or
    early in fiscal year 2007, the enrollees in the selected e-filing pilot
    group on the e-filing program. In addition to facilitating access to
    case data, the Court expects electronic filing will save time for the
    parties and reduce their document processing expenses.
    Tax Court Independent Counsel Fund
        The Tax Court independent counsel fund is established by IRC
    section 7475. The Tax Court uses the fund to retain counsel to assist
    the Court in its attorney disciplinary process, for example,
    investigations of alleged misconduct.
        The monies in the independent counsel fund are derived from fees
    charged to individuals who wish to practice before the Court. The
    current balance in the independent counsel fund is $404,239.18.
        The Tax Court Modernization Act, S. 661, would expand the Court's
    authority to use the fund to provide more services for pro se
    taxpayers.
    The Judges' Survivors Annuity Fund (JSAF)
        The Judges' Survivors Annuity Fund was statutorily created to
    provide survivor benefits for the spouses and eligible children of
    presidentially-appointed Tax Court Judges. The Judges' Survivors
    Annuity (trust) Fund is funded with approximately $8.5 million. The
    majority of the funds are invested in Treasury securities with a
    portion held aside to pay current annuitants. In addition to income
    from interest payments, judges contribute 3.5 percent of their salary
    or retired pay to the fund. The JSAF is voluntary. Of the 32 judicial
    officers of the Tax Court, 21 participate in and contribute to the
    JSAF. Additional funds, subject to a maximum of 11 percent of the
    participating judges' salaries and based on an annual actuarial study,
    are paid into the fund from the Tax Court's annual appropriation to
    ensure that the JSAF is actuarially sound. The fiscal year 2006
    liability for survivorship annuity payments is $511,911.
        For fiscal year 2007, the Tax Court is requesting budget authority
    of $1 million in order to make payments to the annuitants of the JSAF.

                   OTHER MATTERS OF CONCERN TO THE TAX COURT

        The following matters are of concern to the Tax Court. The Court is
    not asking the subcommittee for any funds in its fiscal year 2007
    budget to address these concerns. These matters are being brought to
    the subcommittee's attention because of their possible impact on future
    budget requests by the Court.
    Security
        Unlike other Federal judicial officers, the U.S. Tax Court Judges
    are not protected by the United States Marshals Service (USMS). While
    Tax Court Judges do not hear criminal matters, they are involved with
    tax protesters and other individuals who wish to express their
    opposition to the United States Government. The Marshals Service is not
    always available to provide courtroom security for Tax Court Judges.
    They do not provide any security directly to the Tax Court in its
    Washington, DC Courthouse and offices. The Tax Court has a contractual
    agreement with the Marshals Service to provide special security
    officers for the Tax Court building in Washington, DC. The USMS has
    informed the Tax Court that the Court will have to bear more of the
    cost of providing courthouse security in Washington, DC, as well as in
    each of the cities in which we conduct trial sessions. The USMS also
    has informed the Court that they are not legally required to provide
    outside-of-the-courthouse security to our Court.
        The Tax Court believes that the security needs of its judicial
    officers require the same level of attention as provided for the safety
    and security of judicial officers in other Federal courts. The Tax
    Court will continue to work with the Marshals Service and Congress to
    ensure the security of its judges.
    Leased Space
        The Tax Court holds trial sessions in over 70 cities. The Court
    currently leases courtroom and chambers space in 35 cities. As noted in
    our fiscal year 2006 budget, the Court reviewed its space usage and was
    able to reduce some of its leased space. We continue to monitor our
    space needs and work with the General Services Administration (GSA) to
    obtain the space we need to serve the taxpayers.
        In the cities in which the Court does not lease space, it must try
    to borrow space in Federal courthouses and other Federal buildings. The
    Court finds it increasingly difficult to borrow suitable space in which
    to hold trial sessions. We are working with GSA to lease space in
    Seattle, Washington; Nashville, Tennessee; and Columbia, South
    Carolina, as we have been unable to borrow space from other courts in
    these cities. The Court continues to work with other Federal courts to
    obtain space when needed in order to conduct sessions throughout the
    country. Because the Tax Court must provide a convenient Nation-wide
    litigation forum, it cannot reduce its space budget at this time.
        The Tax Court remits it annual rental payments to GSA. The rental
    payments made to GSA are approximately 20 percent of the Court's
    operating budget.

                                   CONCLUSION

        The Court is carefully monitoring its use of resources. The Court
    also tries to use technology wherever possible to help reduce the cost
    of service delivery. Substantially all of the Court's budget is non-
    discretionary--spent for salaries, courtroom space rental, and travel
    and transportation. The Tax Court also pays for its retired judges from
    its appropriation, a practice that does not exist in most Federal
    agencies.
        We have one program--managing docketed cases and providing a trial
    forum for those cases that are not settled prior to trial. In a large
    agency, a rescission or budget cut might be absorbed by reducing or
    eliminating one of several programs. With only one program or mission
    and no discretion over the volume or type of cases the Tax Court
    receives, we cannot easily absorb reductions to our budget.
        However, the Court's ongoing efforts to control costs, improve the
    Tax Court's infrastructure, and efficiently manage the Court's business
    resulted in a $888,000 reduction to the overall budget request for
    fiscal year 2007.
        The Court is committed to being an effective steward of its
    resources while meeting its responsibilities to carry out its mission.
    The Tax Court's fiscal year 2007 request was designed to address the
    Court's needs and those of the government and taxpayers who appear
    before the Court. Thank you for your consideration of our fiscal year
    2007 request.
                                     ______

       Prepared Statement of the Honorable Hal Stratton, Chairman, U.S.
                       Consumer Product Safety Commission

        I appreciate this opportunity to present to the subcommittee the
    appropriation request for the U.S. Consumer Product Safety Commission
    (CPSC) for fiscal year 2007. CPSC is an independent, bipartisan agency
    charged with protecting children and families from unreasonable risks
    of serious injury or death from more than 15,000 categories of consumer
    products under the agency's jurisdiction. Since its inception, CPSC has
    delivered critical safety benefits to America's families and has made
    significant contributions to the 30 percent decline in the rates of
    injuries and deaths related to hazardous consumer products.
        While we are proud of these achievements, there still remains an
    average of over 25,000 deaths and 33 million injuries every year from
    consumer product incidents. These injuries and deaths and property
    damage cost the Nation more than $700 billion annually. Because new
    products, new trends and new technologies are continuously being
    introduced into the marketplace, and subsequently into the American
    home, improving consumer product safety is never a completed task but
    always an ongoing process of research, standards development,
    enforcement and public education.
        The CPSC appropriation request for fiscal year 2007 is $62,370,000.
    This is the same funding level as the agency's final 2006
    appropriation. To manage this funding projection for 2007, staff levels
    at the agency are again being reduced through natural attrition and
    incentives, such as ``early outs'' and ``buy outs.'' Such actions will
    allow the agency to meet the increased costs of salaries and increased
    costs related to infrastructure that supports the agency's mission.
        CPSC is a staff intensive organization with 80 percent of its
    funding going to staff salaries. Primarily as a result of the proposed
    2.2 percent Federal pay increase for 2007 and other compensation costs,
    we estimate that the cost of staff will increase in the new fiscal year
    by $2 million. To achieve the necessary savings to pay this increase,
    CPSC's staffing level for fiscal year 2007 is targeted to be 420 FTEs,
    a decrease of 20 FTEs from the current fiscal year and a decrease of 51
    FTEs from fiscal year 2005. This represents a decrease in our FTE
    ceiling during these 2 fiscal years of over 10 percent.
        We estimate that non-salary costs such as service contracts, IT
    equipment and software maintenance will also increase. For example,
    over the past few years we have been required to implement several new
    operating systems, purchase IT infrastructure improvements, and provide
    increased building and information technology security enhancements.
    These system startups and enhancements all have recurring annual
    maintenance charges and cost increases.
        Additionally, we foresee an increase in the cost of operation of
    our most important data source, the National Electronic Injury
    Surveillance System (NEISS), an internationally-recognized hospital
    emergency room injury reporting system which provides national
    estimates for injuries related to consumer products. CPSC staff
    annually reviews about 360,000 product-related injuries reported by
    NEISS.
        Because quality data is central to the execution of CPSC's mission
    and lays the groundwork for the agency's standards setting and related
    hazard reduction activities, continuously maintaining and improving the
    overall quality of NEISS and other CPSC data is critical. Data
    collection is the foundation of the agency's early warning system that
    identifies hazardous products, injury patterns, and causes of deaths
    and injuries. Early identification of product hazards by our Office of
    Hazard Identification and Reduction allows CPSC to take prompt action
    to prevent and reduce injuries and deaths. This information is the
    underpinning of the agency's decision-making process as it relates to
    voluntary standards development, compliance, consumer education,
    product labeling, and rulemaking initiatives.
        One example of a CPSC rulemaking that relied on the quality of our
    data is the new open-flame flammability standard for mattresses that
    was promulgated earlier this year. This is one of the most important
    safety standards ever adopted by the agency; it is estimated that when
    fully effective, the new standard will save over 250 lives per year. As
    with all Federal standards, its success and effectiveness rely on the
    accuracy, precision and soundness of the data that was used to develop
    it.
        CPSC's mandatory safety standards are enforced by our Office of
    Compliance. In fact, whenever potential product hazards are identified,
    the Compliance staff conducts investigations to determine whether
    corrective action is required. In addition to monitoring compliance
    with safety standards by conducting field inspections of manufacturing
    facilities and distribution centers and making purchases at retail
    establishments or via the internet, CPSC Compliance staff also conducts
    surveillance and sampling of imported products at the Nation's ports of
    entry.
        In 2005, CPSC staff conducted over 250 seizures and detentions
    involving almost 4 million units of imported products at the ports
    because of possible safety hazards. Examples of these products included
    over 240,000 units of hazardous toys and other children's products and
    over 1.3 million non-complying fireworks devices.
        Our governing statutes also permit the Commission to assess civil
    penalties. Due to aggressive enforcement of our safety laws, 2005 set a
    new record with civil penalty assessments of $8.8 million including the
    largest civil penalty ever issued by the agency against a company that
    failed to report some 12 million products that posed a danger to young
    children. (All of these amounts are paid to the U.S. Treasury and none
    are retained by CPSC.) In addition, staff assisted in securing criminal
    convictions for violations of the Federal Hazardous Substances Act.
        In 2005, CPSC announced 398 cooperative recalls, also an all-time
    record for the agency, involving a wide range of products that included
    defective bicycles, cribs, all-terrain vehicles, gas grills and
    pacifiers. Over 100 of these recalls were for toys and other children's
    products involving nearly 16 million production units.
        A key element of any recall is the targeted public notice that goes
    out to alert owners of the product to the hazard and to the remedies
    that are available to them. This effort is led by CPSC's Office of
    Information and Public Affairs which uses numerous outlets to publicize
    the recall.
        In 2005 Public Affairs staff informed the public of hazardous
    products through 383 press releases and recall alerts, 1.2 million
    distributed publications (in English and in Spanish), numerous
    appearances on network television, and through CPSC's consumer hotline
    and website that had an increase in consumer ``hits'' from 200,000 in
    1997 to 13.7 million in 2005. Staff also placed a number of video news
    releases that reached an audience of over 85 million viewers and
    conducted national public awareness campaigns throughout the year on
    critical issues such as swimming pool safety.
        As noted earlier, one of the major challenges facing the agency is
    the surge in imported consumer products. In addition to our activities
    at the ports-of-entry, the Office of International Programs and
    Intergovernmental Affairs has been expanded to focus on this challenge.
    Through this office CPSC has established working relationships with our
    counterparts in other countries through the execution of formal
    memoranda of understanding with 11 foreign governments including major
    trading partners such as China, Mexico, Canada, and the European Union.
        As I stated last year, China is the No. 1 toy-producing country and
    the United States is the No. 1 toy-consuming country in the world. It
    is critical that we work to make certain these imported products are
    safe for American families before they are ever put on a ship bound for
    an American port.
        CPSC is a small agency with a big mission. By any measure, each
    year CPSC saves the Nation many times the agency's annual budget.
    Through our standards work, compliance efforts, industry and consumer
    partnerships, and education programs, the agency contributes to
    substantial reductions in deaths and injuries from a wide variety of
    hazards. Notable CPSC ``success stories'' include significant death and
    injury reduction over the years from residential fires, electrocutions,
    carbon monoxide poisonings, and child poisonings. In fact, consumer
    product-related deaths in these hazard areas decreased by almost 500
    deaths per year by the end of the period covered by our first Strategic
    Plan.
        We have worked diligently to generate savings and implement
    efficiencies to offset the cost increases that we confront. We have
    achieved substantial cost savings in the past with such efforts as
    replacing regional offices with field telecommuting.
        In 2005, we began the process of reducing our FTE ceiling from 471
    to 440. We achieved those staff reductions, primarily, by focusing on
    administrative efficiencies. With expected 2006 attrition, by offering
    ``early outs'' and ``buy outs'', and by careful attention to filling
    only critical vacancies, the agency plans to achieve the necessary 420
    FTE staff level by the start of 2007. Our goal is to carefully adjust
    our activities to this reduced resource level in such a manner that the
    remaining programs continue to adequately protect American families.
        I appreciate the committee's continued interest in our work, and I
    want to assure the senators that we at the CPSC remain committed to our
    mission to reduce product hazards and to assure the safety of the
    consumer products that are used in our homes, backyards and playgrounds
    across the Nation.
                                     ______

    Prepared Statement of Patricia Black, Deputy Inspector General, Office
          of Inspector General, Federal Deposit Insurance Corporation

        Mr. Chairman and members of the subcommittee, I am pleased to
    present the fiscal year 2007 budget request totaling $26.3 million, or
    $4.4 million less than fiscal year 2006 (including a 1 percent
    rescission) for the Office of Inspector General (OIG) at the Federal
    Deposit Insurance Corporation (FDIC). This budget has been possible
    because of the improved health of the banking industry since the early
    1990's, the continued staff downsizing at the FDIC and within the OIG,
    and our internal efforts to improve our performance and productivity
    even with reduced budgets.
        As you know, the FDIC was established by the Congress in 1933,
    during the Great Depression, to maintain stability and public
    confidence in the Nation's banking system. Our Nation has weathered
    several economic downturns since that era without the severe panic and
    loss of life savings unfortunately experienced in those times. The
    Federal deposit insurance offered by the FDIC is designed to protect
    depositors from losses due to failures of insured commercial banks and
    thrifts. While the basic insurance coverage of individual deposits
    remains at $100,000, as of April 1, 2006 the FDIC raised the deposit
    insurance coverage on certain retirement accounts to $250,000 from
    $100,000. As of December 31, 2005, the FDIC insured $3.893 trillion in
    deposits for 8,845 institutions, of which the FDIC supervised 5,245.
    The FDIC also promotes the safety and soundness of these institutions
    by identifying, monitoring, and addressing risks to which they are
    exposed.
        The Corporation reports that financial institutions have recently
    had record earnings. The rate of bank and thrift failures has remained
    at a relatively low level over the past 10 years, and the Corporation
    has substantially reduced its estimates of future losses from failures.
    In fact, 2005 was the first year in the FDIC's history where no
    institution has failed, nor has 2006 seen any failures to date. Assets
    held in receiverships following bank failures are at comparatively low
    levels, and significant progress has been made in closing older
    receiverships. These are important indicators of a healthy banking
    system, and the Corporation can take pride in its positive
    contributions in these areas.
        The FDIC OIG is an independent and objective unit established under
    the Inspector General Act of 1978, as amended (IG Act). The OIG's
    mission is to promote the economy, efficiency, and effectiveness of
    FDIC programs and operations, and protect against fraud, waste, and
    abuse to assist and augment the FDIC's contribution to stability and
    public confidence in the Nation's financial system.
        As the Deputy Inspector General, I have led the office since
    January 2005 (when Gaston L. Gianni, Jr. retired). I will continue to
    dedicate myself to carrying out the mission of the OIG until an
    Inspector General is confirmed. In this capacity, I will support the
    Congress, the FDIC Chairman, and other corporate management in meeting
    current and future challenges facing the FDIC and the banking industry.
        I am proud of the work the OIG accomplished this past fiscal year.
    This statement discusses the fiscal year 2005 accomplishments, our
    assistance to FDIC management, internal management and operational
    initiatives to improve the OIG, and our new ``2006 Business Plan''. I
    am also providing additional details about our fiscal year 2007 budget
    and how it will be spent.

          A REVIEW OF THE FDIC OIG'S FISCAL YEAR 2005 ACCOMPLISHMENTS

        As in past years, during fiscal year 2005, our work resulted in a
    number of major achievements, as follows:
      --$42.4 million in actual and potential monetary benefits;
      --76 non-monetary recommendations to FDIC management;
      --42 referrals to the Department of Justice;
      --36 indictments/informations;
      --27 convictions; and
      --3 employee/disciplinary actions.
        More specifically, our accomplishments included 38 completed
    investigations that led to the above indictments and convictions as
    well as fines, court-ordered restitution, and recoveries that
    constitute slightly over $29.5 million in actual and potential monetary
    benefits from our work. Also, we issued a total of 40 audit and
    evaluation reports, which included about $3.3 million in questioned
    costs and $9.5 million in recommendations that funds be put to better
    use. The audit reports contained 76 non-monetary recommendations to
    improve FDIC policies, operations, and controls that ultimately are
    designed to improve FDIC's ability to effectively and efficiently
    accomplish its mission. A number of these recommendations addressed
    important cross-cutting corporate issues, e.g., the corporate planning
    process, the use of consultants, and human capital.
        Further, the OIG accomplished many of its organizational goals
    during the fiscal year as outlined in our annual performance plan. Our
    2005 Performance Report shows that we met or substantially met 31 of
    our 37 goals, or 84 percent. This compares to 76 percent met or
    substantially met in 2004. In a measurable way, this achievement shows
    the progress we continue to make in adding value to the Corporation
    with our audits, investigations, and evaluations in terms of impact,
    quality, productivity, and timeliness.
        Examples of the OIG's audit, investigation, and evaluation work
    that contributed to these accomplishments follow:
    Bank Fraud in Connection with BestBank Failure
        After a 3-week trial in the U.S. District Court, District of
    Colorado, a jury found the owners of Century Financial Services, Inc.
    and its successor Century Financial Group, Inc. (Century), guilty on
    charges of conspiracy, bank fraud, wire fraud, and operating a
    continuing financial crimes enterprise that contributed to the 1998
    failure of BestBank in Boulder, Colorado.
        By way of background, the owners owned and operated Century, a
    company that marketed and sold travel club memberships to subprime
    borrowers. Subprime credit card borrowers are high-risk borrowers with
    poor credit histories. The subprime borrower would finance a membership
    by charging it to a new BestBank unsecured VISA card. In 1998, the
    largest asset of the bank was the portfolio of subprime credit card
    accounts containing more than 500,000 credit card accounts with a
    reported value of more than $200 million.
        From 1996 through July 1998, the defendants, through Century,
    applied $20 credits to the accounts of numerous cardholders who did not
    pay their credit card bill and whose accounts otherwise would have
    grown increasingly delinquent. These payments made the portfolio appear
    to be performing better than it was. During this same period of time,
    BestBank continued to fund the growing credit card portfolio with
    insured deposits. In July 1998, the Colorado State Banking Commissioner
    and the FDIC determined that the value of the subprime credit card
    portfolio, the primary asset of BestBank, was overstated because
    delinquent loans were fraudulently made to appear current. BestBank was
    found to be severely undercapitalized, with losses exceeding $200
    million, resulting in one of the largest adverse impacts to the Bank
    Insurance Fund in the last 10 years.
        While Century earned in excess of $460 million in gross receipts,
    the owners each derived more than $11 million from the offenses. Each
    of them faces a possible mandatory minimum sentence of 10 years to life
    in Federal prison and fines of up to twice the amount gained from
    committing the offenses. Sentencing has not yet been scheduled by the
    Court.
        Also charged in the same indictment for offenses relating to the
    failure of BestBank are the dissolved bank's Chief Executive Officer
    and Chairman of the Board, the Chief Financial Officer, and the
    President. The jury trial against the remaining three defendants is
    scheduled to begin in July 2006.
        We investigated the case jointly with the FBI and the IRS Criminal
    Investigative Division. The U.S. Attorney's Office for the District of
    Colorado and the U.S. Department of Justice are prosecuting the case.
    Investigation Into Misapplication of Bank Funds at Connecticut Bank of
            Commerce
        The former chairman of the board of directors of Connecticut Bank
    of Commerce was sentenced in January 2005, to 51 months' incarceration
    and 36 months' supervised release after pleading guilty to one count of
    misapplication of bank funds. No criminal restitution was ordered by
    the court because the parties agreed that the former chairman's payment
    of $8.5 million to the FDIC, as part of his settlement of the agency's
    administrative charges, satisfied all losses directly related to his
    criminal conduct.
        We conducted this investigation jointly with the FBI. The U.S.
    Attorney's Office for the District of Connecticut prosecuted the case.
    FDIC's Supervision of an Institution's Compliance With the Bank Secrecy
            Act (BSA)
        We conducted this audit in response to a congressional request for
    our independent assessment of the circumstances related to an
    institution's BSA violations. We reported that responsibilities to
    ensure compliance with BSA were not adequately fulfilled by either
    institution management or the FDIC. In addition, FDIC examinations
    lacked sufficient follow-up on corrective measures to address BSA
    violations. Further, the FDIC needed to more thoroughly consider the
    impact of BSA compliance violations when qualifying potential acquirers
    of a failed institution. As a result of our recommendations and its own
    initiatives, the FDIC has made significant improvements in, and is
    devoting substantially more resources to, its supervision of
    institution BSA compliance programs.
    FDIC's Investment Policies
        We issued a report on the results of an audit conducted by
    PricewaterhouseCoopers, LLP to determine whether the FDIC's investment
    strategy and portfolio management procedures provided the highest
    possible investment returns for the FDIC. This audit concluded that the
    FDIC's Division of Finance performed well in managing the FDIC's
    investment portfolio in the context of the applicable legal and
    regulatory framework, stated investment strategy, interest rate
    environment, and assessment of certain insured institutions undergoing
    financial stress.
        The audit identified opportunities for the FDIC to improve the
    return on its investments through two broad courses of action. First,
    in certain market environments, the FDIC should decrease holdings in
    overnight certificates and increase holdings in longer-maturity
    securities. Second, the FDIC should explore the possibility of changes
    in its investment approach, such as expanding the universe of allowable
    investments. We recommended that the Corporation perform an internal
    review of its investment policies, adopt certain performance measures
    and goals, and obtain periodic independent reviews of the investment
    program. All recommendations in the report were resolved.
        Our semiannual reports to the Congress provide many other examples
    of OIG work that has contributed to fiscal year 2005 accomplishments.
    These reports can be found on our Web page at http://fdicig.gov or
    obtained by contacting our office.

                         ASSISTANCE TO FDIC MANAGEMENT

        In addition to 2005 audits, investigations, and evaluations, the
    OIG made contributions to the FDIC in several other ways. We strive to
    work in partnership with Corporation management to share our expertise
    and perspective in certain areas where management is seeking to make
    improvements. Among these contributions were the following activities:
      --Reviewed 35 proposed corporate policies and offered comments and
            suggestions when appropriate.
      --Provided advisory comments on the FDIC's 2005 Annual Performance
            Plan and 2005 Annual Report.
      --Participated in division-level conferences and meetings to
            communicate our audit and investigation work and processes.
      --Provided technical assistance and advice to several FDIC groups
            working on information technology issues, including
            participating at the FDIC's information technology security
            meetings. We also participated in an advisory capacity on the
            Information Technology Subcommittee of the Audit Committee.

                   OIG MANAGEMENT AND OPERATIONAL INITIATIVES

        An important part of our stewardship over the funding we receive
    includes our continuous efforts to improve OIG performance and plans.
    We provide objective, fact-based information and analysis to the
    Congress, the FDIC Chairman, other FDIC officials, and the Department
    of Justice. Our key efforts typically involve our audits, evaluations,
    or criminal investigations conducted pursuant to the IG Act and in
    accordance with applicable professional standards. We also make
    contributions to the FDIC in other ways, such as reviewing and
    commenting on proposed corporate policies and draft legislation and
    regulations; participating in joint projects with management; providing
    technical assistance and advice on various issues such as information
    technology, strategic planning, risk management, and human capital; and
    participating in internal FDIC conferences and seminars.
        The OIG has continued to downsize with the Corporation through
    reorganization, closing two field audit offices, and offering buyouts
    and retirement incentives to impacted employees under an FDIC-wide
    program. The OIG will continue to carry out several key initiatives to
    implement our human capital strategic plan and ensure that the OIG is a
    results-oriented high-performance organization. Many of the planned
    initiatives relate to staff development and include: the establishment
    of a mentoring program; providing training and development related to
    the OIG core competencies and business knowledge needs; and developing
    a strategy to improve the supervisor-staff feedback process.
        Other internal initiatives included our hosting an interagency
    symposium on the Federal Information Security Management Act (FISMA) of
    2002. Representatives from more than 18 Federal agencies attended the
    symposium to share information, ideas, and best practices related to
    the implementation of FISMA. The OIG also hosted an ``Emerging Issues''
    conference with participants from other OIGs of financial regulatory
    agencies, GAO, regulatory agency officials, and congressional staff.
    The conference brought together distinguished speakers who shared their
    perspectives on the banking and financial services community with
    Inspector General staff in the interest of enhancing the value that
    OIGs can add to their agencies by successfully addressing risk areas.
    We also sponsored the annual conference of the Federal Audit Executive
    Council, a working group comprised of the heads of Federal audit
    organizations. This forum helps ensure that Federal audit organizations
    keep current with auditing standards, practices, priorities, and issues
    of concern.

                                 BUSINESS PLAN

        The OIG developed a new business plan that explains what we are
    about, what we want to accomplish, and how we will get there. It also
    provides a means to assess our performance. Our ``2006 Business Plan''
    represents the results of concerted efforts over time, especially
    during the past year, to improve our planning process and demonstrate
    the value added by our office to sound FDIC governance and to executive
    and legislative branch decision-makers.
        The ``2006 Business Plan'' combines the OIG Strategic Plan and
    Performance Plans. This plan contains six strategic goals to help
    accomplish our mission. In carrying out the key efforts of our plan, we
    will strive to demonstrate to the Congress, the public, the FDIC, and
    the banking industry that the OIG is doing the right things and
    generating results that are a worthy return on the investment made in
    us.
        The complete ``2006 Business Plan'' is available at www.fdicig.gov.
    We have begun the process for developing performance goals and key
    efforts for fiscal year 2007, which will continue building on this
    strategic framework. Our six 2006 strategic goals and selected key
    efforts follow:
    Strategic Goal 1.--Assist the FDIC to Ensure the Nation's Banks Operate
            Safely and Soundly
        Bank supervision is a cornerstone of the FDIC's efforts to ensure
    stability and public confidence in the Nation's financial system. The
    OIG's role under this strategic goal is targeting audits and
    evaluations that review the effectiveness of various FDIC programs
    aimed at providing continued stability to the Nation's banks. The OIG
    also conducts investigations of fraud at FDIC-supervised institutions,
    fraud by bank officers, directors, or other insiders; obstruction of
    bank examinations; fraud leading to the failure of an institution;
    fraud impacting multiple institutions; and fraud involving monetary
    losses that could significantly impact the institution. Below are
    selected key efforts representing ongoing work or work envisioned in
    support of this goal.
      --Conduct material loss reviews of failed banks, as needed;
      --Review bank examination procedures for addressing bank sensitivity
            to interest rate risks;
      --Investigate criminal obstruction of bank examinations;
      --Review bank examination procedures for addressing electronic
            banking risks;
      --Review whether bank examinations adequately consider the
            reliability of property appraisals;
      --Investigate financial institution fraud;
      --Review the FDIC's use of the Financial Crimes Enforcement Network
            (FinCEN); and,
      --Review the use of Bank Secrecy Act examinations for foreign
            transactions.
    Strategic Goal 2.--Help the FDIC Maintain the Viability of the Deposit
            Insurance Funds
        FDIC deposit insurance remains a central component of the Federal
    Government's assurance to the public that it can be confident in the
    stability of the Nation's banks and savings associations. Since its
    establishment in 1933, the FDIC has insured deposits up to the legally
    authorized threshold, which historically was at $100,000. For almost
    two decades following bank crises in the late 1980's and early 1990's,
    the FDIC has managed two deposit insurance funds--one for banks with
    about $35 billion, and one for savings and loans with about $13
    billion. These funds, which are primarily an accumulation of premiums
    that insured depository institutions have paid the FDIC and interested
    earned, have been used to pay FDIC operating expenses and insured
    depositors, as necessary. On February 1, 2006, the Congress enacted
    deposit reform legislation that will create a deposit insurance system
    that is more focused on risk and better able to adapt to rapidly
    changing industry. The new deposit insurance reform legislation:
      --Merges the two deposit insurance funds into a single Deposit
            Insurance Fund.
      --Maintains deposit insurance coverage for individual accounts at
            $100,000, but provides for indexing for inflation every 5 years
            beginning in 2010.
      --Increases deposit insurance coverage for retirement accounts to
            $250,000 and provides for indexing for inflation every 5 years
            beginning in 2010.
      --Replaces the current Designated Reserve Ratio of 1.25 percent of
            estimated insured deposits by permitting the reserve ratio to
            move within a range of 1.15 percent to 1.50 percent of
            estimated insured deposits.
      --Requires the FDIC to provide cash rebates in amount equaling 50
            percent of the amount in excess of the amount required to
            maintain the reserve ratio at 1.35 percent. Requires the FDIC
            to provide cash rebates in amount equaling the total amount in
            excess of the amount required to maintain the reserve ratio at
            1.50 percent.
      --Provides financial institutions with a one-time transitional
            premium assessment credit based on the assessment base of the
            institution on 12/31/96 as compared to the combined aggregate
            assessment base of all eligible depository institutions.
        The Corporation has begun the process for implementing the
    provisions of the new legislation. To date, the FDIC has merged the two
    deposit insurance funds into a single Deposit Insurance Fund and raised
    the deposit insurance coverage on certain retirement accounts to
    $250,000 from $100,000. As insurer, the FDIC must evaluate and
    effectively manage how changes in the economy, the financial markets,
    and the banking system affect the adequacy and the viability of the
    deposit insurance funds. The OIG has a responsibility to evaluate the
    FDIC's programs and operations to ensure that the agency has adequate
    information to gauge the risks inherent as financial institutions
    consolidate, enter into new business areas, and become more global. In
    support of this goal, we have planned the following key efforts.
      --Review the FDIC's approach to risks posed by large or multiple bank
            failures;
      --Review the FDIC's risk-based premium program;
      --Review the insurance application process for industrial loan
            companies (ILCs); and,
      --Review FDIC methods for maintaining adequate insurance fund
            reserves.
    Strategic Goal 3.--Assist the FDIC to Protect Consumer Rights and
            Ensure Community Reinvestment
        The FDIC oversees statutory and regulatory requirements aimed at
    protecting consumers from unfair and unscrupulous banking practices.
    The FDIC has recognized the importance of its role in this regard by
    establishing its own strategic goal to ensure that consumers' rights
    are protected and supervised institutions invest in their communities.
    The FDIC's bank examiners conduct examinations in FDIC-supervised banks
    on a scheduled basis to determine the institutions' compliance with
    laws and regulations governing consumer protection, unfair lending, and
    community investment. When problem institutions are identified,
    primarily through the examination process, the FDIC attempts using
    reason and moral suasion to bring about corrective actions; however,
    the Corporation possesses broad enforcement powers to correct
    situations that threaten an institution's compliance with applicable
    laws. The OIG's role under this strategic goal is targeting audits and
    evaluations that review the effectiveness of various FDIC programs
    aimed at protecting consumers, fair lending, and community investment.
    Additionally, the OIG's investigative authorities are used to identify,
    target, disrupt, and dismantle criminal organizations and individual
    operations engaged in fraud schemes that target our financial
    institutions. Our planned 2006 work towards this goal includes the
    following key efforts:
      --Investigate misrepresentations of deposit insurance coverage;
      --Work with Congress and FDIC management to strengthen enforcement
            against misrepresentations of deposit insurance;
      --Investigate ``phishing,'' ``pharming,'' and other identity theft
            schemes;
      --Review multiple FDIC efforts to ensure financial data privacy;
      --Evaluate the FDIC's approach to examining fair lending and
            community reinvestment;
      --Review risks posed to institutions and the FDIC by predatory
            lending;
      --Assess how the FDIC makes use of data required by the Home Mortgage
            Disclosure Act; and,
      --Review how the FDIC addresses deficiencies reported in compliance
            examinations.
    Strategic Goal 4.--Help Ensure That the FDIC is Ready to Resolve Failed
            Banks and Effectively Manages Receiverships
        When a bank that offers Federal deposit insurance fails, the FDIC
    fulfills its role as insurer by either facilitating the transfer of the
    institution's insured deposits to an assuming institution or by paying
    insured depositors directly. Although there have been far fewer
    failures in recent years than occurred during the years of crisis in
    the banking industry, the FDIC's responsibility for resolving troubled
    institutions remains a challenge. The FDIC reports that failures in
    today's economy would differ in nature, size, and cost from the record
    failures of the 1980's and early 1990's. Nonetheless, the FDIC could
    potentially have to handle a failing institution with a significantly
    larger number of insured deposits than it has had to deal with in the
    past or have to handle multiple failures caused by a single
    catastrophic event.
        The OIG's role under this strategic goal is targeting audits and
    evaluations that assess the effectiveness of the FDIC's various
    programs designed to ensure that the FDIC is ready to and does respond
    promptly, efficiently, and effectively to financial institution
    closings. Additionally, the OIG investigative authorities are used to
    pursue instances where fraud is committed to avoid paying the FDIC
    civil settlements, court-ordered restitution, and other payments as the
    institution receiver. Our office is focusing on the following key
    efforts.
      --Assess the FDIC's planning for large or multiple bank failures;
      --Review the recovery of unclaimed deposits in failed banks;
      --Review the development framework for a new technology-driven asset
            servicing project; and,
      --Identify and investigate instances of assets fraudulently concealed
            from the FDIC.
    Strategic Goal 5.--Promote Sound Governance and Effective Stewardship
            of Financial, Human, Information Technology, and Procurement
            Resources
        The FDIC must effectively manage and utilize a number of critical
    strategic resources in order to carry out its mission successfully,
    particularly its financial, human, information technology (IT), and
    procurement resources. Financial resources are but one aspect of the
    FDIC's critical assets. The Corporation's human capital is also vital
    to its success. The FDIC appreciates the importance of its people, with
    four of its six values, integrity, competence, team work, and fairness
    specifically referencing the workforce.
        Information technology drives and supports the manner in which the
    public and private sector conduct their work. At the FDIC, the
    Corporation seeks to leverage IT to support its business goals in
    insurance, supervision, consumer protection, and receivership
    management, and to improve the operational efficiency of its business
    processes. Along with the positive benefits that IT offers comes a
    certain degree of risk. In that regard, information security has been a
    long-standing and widely acknowledged concern among Federal agencies. A
    key effort for all agencies must be the establishment of effective
    information security programs.
        The OIG's role in this strategic goal is to perform audits,
    evaluations, and investigations that identify opportunities for more
    economical, efficient, and effective corporate expenditures of funds;
    recommend actions for more effective governance and risk management
    practices; foster corporate human capital strategies that benefit
    employees, strengthen employees' knowledge, skills, and abilities;
    ensure employee and contract integrity; inspire employees to perform to
    their maximum capacity; help the Corporation to leverage the value of
    technology in accomplishing the corporate mission; promote the security
    of both IT and human resources; and ensure that procurement practices
    are fair, efficient, effective, and economical. The key efforts below
    are some of the ongoing work or work to be undertaken in support of
    this goal.
      --Evaluate selected FDIC efforts to operate efficiently, effectively,
            and economically;
      --Review the FDIC's personnel discrimination complaint tracking
            system;
      --Investigate FDIC employee or contractor misconduct, as needed;
      --Review succession planning initiatives;
      --Review safeguards over sensitive employee information;
      --Review the FDIC's information security, privacy, and data
            protection programs; and,
      --Review selected procurement practices.
    Strategic Goal 6.--Continuously Enhance the OIG's Business and
            Management Processes
        The OIG's final strategic goal has an internal focus on continuous
    improvement. Our aim under this goal is to:
      --Enhance our own business and management practices;
      --Enhance strategic and annual planning and performance measurement;
      --Strengthen human capital management;
      --Ensure the continued quality and efficiency of audits and
            investigations; and,
      --Foster good relationships with clients, stakeholders, and OIG
            staff.

                   THE OIG'S FISCAL YEAR 2007 BUDGET REQUEST

        The proposed fiscal year 2007 OIG budget includes funding in the
    amount of $26,256,000, or $4,434,000 less than fiscal year 2006 (after
    a 1 percent rescission). This budget will support an authorized
    staffing level of 130--a 19 percent reduction from the 160 staff
    authorized in fiscal year 2006. The FDIC has continued a downsizing
    effort over several years in response to changes in the banking
    industry, information technology, and fewer bank failures.
    Consequently, we have conducted a thorough review of our workload and
    determined that we can reduce the number of audits to be performed and
    some other aspects of our workload because of certain decreased
    elements of risk, fewer assets under FDIC receivership management, and
    fewer bank failures experienced and anticipated. However, the OIG's
    investigative workload is increasing, with a substantial caseload of
    financial institution fraud because Federal Bureau of Investigation
    resources have been redirected to the war on terrorism.
        The FDIC OIG has been operating under an appropriated budget since
    fiscal year 1998 in accordance with Section 1105(a) of Title 31, United
    States Code, which provides for ``a separate appropriation account for
    appropriations for each Office of Inspector General of an establishment
    defined under Section 11(2) of the Inspector General Act of 1978.'' The
    FDIC OIG is the only appropriated entity in the FDIC, and this funding
    approach is part of the statutory protection of the OIG's independence.
    As in past years, the funds for the OIG budget would be derived from
    deposit insurance funds and the FSLIC Resolution Fund. The insurance
    funds are funded by assessments on deposits held by insured banks and
    thrifts and from the interest on the required investment of fund
    reserves held in government securities. These funds are the ones used
    to pay for other FDIC operating expenses.

                           BUDGET BY STRATEGIC GOALS

        For fiscal year 2007, the OIG developed the budget based on the six
    strategic goals that I discussed earlier. The six strategic goals,
    along with their associated portion of budget dollars follow:

      --Strategic Goal 1.--Assist the FDIC to Ensure the Nation's Banks
            Operate Safely and Soundly;
      --Strategic Goal 2.--Help the FDIC Maintain the Viability of Deposit
            Insurance Funds;
      --Strategic Goal 3.--Assist the FDIC to Protect Consumer Rights and
            Ensure Community Reinvestment;
      --Strategic Goal 4.--Help Ensure the FDIC is Ready to Resolve Failed
            Banks and Effectively Manages Receiverships;
      --Strategic Goal 5.--Promote Sound Governance and Effective
            Stewardship of Financial, Human, Information Technology, and
            Procurement Resources; and,
      --Strategic Goal 6.--Continuously Enhance the OIG's Business and
            Management Processes.

              FISCAL YEAR 2007 BUDGET BY MAJOR SPENDING CATEGORIES

        The following chart shows the distribution of the OIG's budget by
    major spending categories. Mostly, the OIG budget is comprised of
    salaries and benefits for its employees and the necessary funding for
    travel and training expenses. Our fiscal year 2007 budget also includes
    funds to replace our staff's laptop computers, which will be over 3
    years old and due for replacement, in accordance with the Corporation's
    computer replacement schedule.

                               CONCLUDING REMARKS

        Mr. Chairman and members of the subcommittee, I appreciate the
    support and resources we have received through the collaboration of the
    President, the Congress, and the FDIC. As a result, the OIG has
    continued to make a real difference in FDIC operations in terms of
    financial benefits and improvements, and by strengthening our own
    operations and efficiency. I look forward to continue working with this
    subcommittee and working with the new Inspector General when appointed.
    I believe our fiscal year 2007 budget strikes an appropriate balance
    between the mandate of the Inspector General Act, other legislative
    requirements, our judgments of OIG workload needs, the changing
    conditions in the banking industry, and the FDIC's downsizing. We
    continue to seek your support so that we will be able to effectively
    and efficiently conduct our work on behalf of the Congress, the FDIC,
    and the American public.
                                     ______

      Prepared Statement of Austin Smythe, Office of Management and Budget

        Mr. Chairman, Senator Murray, members of the subcommittee, I am
    pleased to present the President's fiscal year 2007 budget request for
    the Office of Management and Budget (OMB).

                         PROGRESS ON SPENDING RESTRAINT

        Before reviewing OMB's fiscal year 2007 budget, I would like to
    take a moment to review the substantial accomplishments in spending
    restraint we were able to achieve together over the past year. In line
    with the President's budget request, the Congress sent the President
    appropriations bills that held the growth of total discretionary
    spending below the rate of inflation and cut non-security spending. In
    addition, Congress adopted 89 of the President's proposed 154 cuts and
    terminations, saving $6.5 billion in the process. And Congress achieved
    nearly $40 billion in mandatory savings over 5 years, the first time in
    8 years reconciliation has been used to slow the growth in spending.
        President Bush's 2007 budget builds on last year's progress by
    focusing on national priorities and tightening our belt elsewhere. It
    gives our troops and those who defend our security what they need to
    fight and win the Global War on Terror. And it supports the President's
    pro-growth economic agenda.
        In order to stay on track to meet the President's goal of cutting
    the deficit in half by 2009, we must continue to do two things: keep
    the economy growing and restrain spending.
        First, the 2007 budget will support continued economic growth by
    proposing to make permanent the tax relief signed into law by the
    President in 2001 and 2003. Some have argued that we should let the tax
    relief expire. A tax increase is the wrong prescription, not only for
    the Nation's economic health, but for the government's fiscal health as
    well.
        We are not an under-taxed society. By rejecting tax increases on
    families and small businesses, this budget will help keep the economy
    on a continuing course of job creation and strengthen the foundations
    for long-term growth.
        The second critical component of deficit reduction is a vigorous
    policy of spending restraint. Similar to last year, the budget holds
    overall discretionary spending growth below the rate of inflation. It
    again proposes a cut in non-security discretionary spending. It calls
    for major reductions in or total eliminations of 141 Federal programs,
    saving nearly $15 billion. And it continues our efforts to slow the
    growth in spending on mandatory programs, by proposing $65 billion in
    savings over 5 years.
        The Appropriations Committees and the Congress have achieved
    considerable progress in restraining discretionary spending. We need to
    continue this progress on the mandatory side of the budget. The efforts
    begin to restrain the growth in mandatory spending are vital--not just
    for our near-term deficit reduction efforts--but especially for the
    long-term. Toward the end of the next decade, deficits stemming largely
    from entitlement programs such as Social Security and Medicare will
    begin to rise indefinitely. At that point, no plausible amount of
    discretionary spending cuts or tax increases will restore our long-term
    fiscal health.
        The President has shown a willingness to take on these future
    unfunded obligations and to propose long-term reforms. This year's
    budget proposes $36 billion in savings from Medicare, and includes
    proposals that pave the way for additional reforms in the future. As
    with Social Security and Medicaid, we do not need to cut Medicare, but
    we do need to slow its growth--and the President's budget begins to do
    just that.

                               DELIVERING RESULTS

        To ensure the Federal Government spends taxpayer dollars more
    effectively, the administration continues to implement the President's
    Management Agenda (PMA). The PMA helps individual agencies and programs
    focus on and produce results. It promotes this goal through several key
    components: strategic management of human capital; competitive
    sourcing; improved financial performance and reporting standards;
    electronic government (e-gov) initiatives; and integration of budget
    policy with performance measures.
        OMB has successfully designed and implemented the Program
    Assessment Rating Tool, or PART, to help agencies measure the success
    of their programs, focus efforts to improve program performance, and
    set budgetary policy accordingly. To support these efforts, OMB has
    introduced a new website called ExpectMore.gov. ExpectMore.gov allows
    taxpayers to review the OMB assessments of nearly 800 Federal programs.
    You can search the programs by rating, topic, or by a simple keyword
    search. I urge you and your staffs to use this new resource in
    evaluating whether programs are achieving the results you, the
    Congress, intend.
        In addition to the PART, I want to highlight our competitive
    sourcing and electronic government initiatives about which some members
    of Congress have raised concerns.
        The Competitive Sourcing initiative finds the lowest cost, highest
    quality sources to perform the government's commercial activities. This
    initiative is expected to generate savings to the taxpayers of more
    than $800 million a year.
        The Expanded Electronic Government initiative is identifying and
    eliminating duplicative information technology systems in agencies. The
    result is improved service delivery to citizens, businesses and Federal
    employees at a lower cost. Overall, these E-Government initiatives are
    delivering to Congress and the American people more than $380 million a
    year in cost savings and millions more in cost avoidance.
        Both of these initiatives have been the subject of statutory
    restrictions that inhibit their progress. OMB's Deputy Director for
    Management Clay Johnson is the lead for the administration on these
    issues and we want to work with you to make these initiatives a
    success. In this time of fiscal restraint, our mutual goal should be to
    maximize rather than limit the savings resulting from these common
    sense programs.

                                  OMB'S BUDGET

        Consistent with the President's overall fiscal year 2007 Budget,
    the Office of Management and Budget has submitted a disciplined request
    for our agency. OMB's budget requests $68.8 million--a 0.6 percent
    reduction from the fiscal year 2006 enacted level when measured on an
    apples-to-apples basis.
        To achieve this spending restraint, OMB is pursuing cost savings
    wherever possible. OMB has been operating under very tight budgets. Our
    budget is nearly entirely comprised of salaries and expenses and our
    only significant means to achieve savings is through reductions in
    staffing. To accommodate lower funding levels, we have reduced OMB
    staff from 527 positions in fiscal year 2001, to 510 positions in 2004,
    to 490 positions in 2005.
        In last year's appropriations bill, Congress provided a net
    increase of $750,000 to our request, boosting our budgeted staff levels
    to 500 positions. Following the guidance provided by the committee, we
    have increased staff levels in the resource management offices (RMOs)
    of OMB. To meet increased pay and other costs and achieve the 0.6
    percent reduction proposed in OMB's budget for fiscal year 2007, OMB
    would reduce staff levels by 11 positions compared to the enacted
    fiscal year 2006 level.
        We believe OMB can continue to deliver high-quality performance and
    fulfill our many important core responsibilities with these lower staff
    levels. The best known of OMB's responsibilities is the preparation of
    the President's annual budget. In addition, our responsibilities
    include oversight of the other agencies regarding budgetary matters,
    management issues, the administration's legislative proposals,
    regulatory reforms, procurement policies and other important subjects.
    We work to ensure that all the administration's proposals in these
    areas are consistent with relevant statutes and Presidential
    objectives. In meeting these responsibilities, OMB is prepared to work
    within the constraints of a tight budgetary environment.
        I look forward to working with the Congress to develop a final
    budget that is consistent with our goals of spending discipline while
    focusing on national priorities.
                                     ______

          Prepared Statement of W. Douglas Buttrey, Chairman, Surface
                              Transportation Board

        Mr. Chairman, and members of the subcommittee, thank you for the
    opportunity to submit for the record this testimony on the fiscal year
    2007 budget request of the Surface Transportation Board (Board).

                            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 Board provides an efficient and effective forum for the
    resolution of disputes relating to surface transportation regulation.
    The Board has jurisdiction over railroad rate and service issues and
    rail restructuring transactions (mergers, line sales, line
    construction, and line abandonments); certain trucking company, moving
    van, and non-contiguous ocean shipping company matters; certain matters
    relating to the structure, finances and operations of intercity
    passenger bus companies; and certain pipeline matters not regulated by
    the Federal Energy Regulatory Commission.
        The Board's Section of Environmental Analysis performs
    environmental reviews of construction, abandonment, and merger matters
    that come before the Board for review and approval, as required by the
    National Environmental Policy Act. These reviews have become more
    complex and require significant resources.

                  THE BOARD'S FISCAL YEAR 2007 BUDGET REQUEST

        The budget request submitted by the Board for fiscal year 2007
    totals $25,618,000. This budget level mirrors the Board's fiscal year
    2006 budgetary authority enacted by Congress, adjusted for a decrease
    in funding associated with the one-time build-out cost in fiscal year
    2006 for the Board's new office space and offset by the fiscal year
    2007 pay raise as well as the amount required to physically move to the
    new space. The Board also seeks resources and authority to operate at
    150 FTEs, the current staffing level authorized by Congress.
        The Board is requesting $375,000 for moving services to complete
    the agency's relocation by the General Services Administration (GSA)
    from its current physical site. The Board has been at its current site
    for the duration of its 10-year lease, which expires early in 2007. The
    Board cannot remain in its current building and must find new space
    because the building owners intend to vacate the building to provide
    for extensive renovation and modernization. GSA had the replacement
    lease prospectus approved by Congress during 2004. GSA advertised the
    lease solicitation during the summer of 2005 and will award the lease
    by the summer of 2006. GSA will begin the design and interior
    construction in 2006 with an anticipated move-in date of January 2007.
    Funds included in the fiscal year 2006 appropriations bill will provide
    GSA with the resources to schedule the network and telecommunication
    connections and interfaces and perform the required structural changes
    to the leased space to support the Board's mission. The Board is
    requesting funds in fiscal year 2007 for the physical relocation of its
    furniture, equipment and files to the new space, as well as an amount
    to pay for the new level of rent.
        The Board would use the remaining additional funds requested to
    cover salary and employee benefit costs associated with the fiscal year
    2006 and fiscal year 2007 pay increase and increases associated with
    employee health benefit and retirement costs. Unlike many agencies,
    there is little room in the Board's budget to absorb a pay increase
    without 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 would impair the Board's
    ability to perform its statutory mission.
        The requested authorization for 150 FTEs will enable the Board to
    hire staff to replace retirement eligible staff prior to their
    anticipated retirement date. Currently, 47 employees, or 34 percent of
    the Board staff, are retirement eligible. Several retirements can be
    expected in the near future. Having the flexibility to hire qualified
    people when they are available is particularly important for an agency
    that must hire professionals with 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.

                           OVERALL GOALS OF THE BOARD

        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, 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. 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;
      --diligently process cases before the Board and ensure that
            appropriate market-based transactions in the public interest
            are facilitated;
      --adhere to all statutory deadlines for the resolution of matters
            pending before the Board;
      --encourage 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;
      --work to ensure the provision of rail service that is responsive to
            the needs of customers; and
      --ensure that the Board's processes are open and transparent to the
            public.

       NATIONAL RAILROAD PASSENGER CORPORATION (AMTRAK) DIRECTED SERVICE
                                   PROVISION

        The fiscal year 2006 Transportation Appropriations Act directed the
    Secretary of Transportation to reserve $60 million of Amtrak's fiscal
    year 2006 appropriation to fund directed service, that is to direct
    another carrier or carriers to carry out the functions currently
    performed by Amtrak that are necessary to continue commuter and freight
    rail operations, in the event Amtrak ceased to operate during the
    fiscal year. The fiscal year 2007 President's budget request also
    proposes to provide the Board with $60 million to support commuter and
    freight rail service should Amtrak cease operations. These funds would
    allow the Board to direct service of commuter and freight rail
    operations that fail as a result of a cessation of service by Amtrak.
        The Board has statutory authority under section 11123 of title 49
    to direct service, or in other words, order another railroad to step
    into the shoes of a rail carrier that has stopped operating (usually
    because of bankruptcy) and serve its customers. This authority was
    broadened by Congress in 2005 to include authority for the Board to
    direct the continuation of commuter and freight rail services that fail
    as a result of a cessation of service by Amtrak. The Board participates
    in a joint working group to coordinate issues relating to Amtrak
    directed service with the U.S. Department of Transportation's Federal
    Railroad Administration (FRA). That group has met with all major
    stakeholders--including Amtrak, the affected commuter and freight
    railroads, and representatives of labor--to identify issues. It has
    compiled all of the services Amtrak provides to commuter and freight
    railroads, and has examined legal issues that might arise. However,
    these planning efforts would need to be significantly supplemented were
    the need to implement directed service imminent. While matters brought
    before the Board are often lengthy, in directed service proceedings
    section 11123 does alter some administrative procedures to allow the
    Board to act cooperatively and quickly.

               FISCAL YEAR 2006 AND 2007 ACTIVITIES OF THE BOARD

        The Board's workload involving rail rates and services is expected
    to remain stable through fiscal year 2007. The Board will continue to
    look for ways to streamline and improve its regulatory process and to
    promote private sector resolution of problems. In this regard, the
    Board is open to proposals filed by parties and independently will look
    for ways to shorten and streamline its procedures and processes.
        The Board has instituted a rulemaking proceeding to address major
    issues regarding the proper application of the stand-alone cost (SAC)
    test in rail rate cases and the proper calculation of the floor for any
    rail rate relief. The Board's general standard for judging
    reasonableness of rail freight rates are set forth in the Coal Rate
    Guidelines, which adopted a set of pricing principles known as
    constrained market pricing (CMP). Most captive rail shippers seek
    relief under CMP's SAC test. Under the SAC constraint, the rate at
    issue cannot be higher than the railroad would need to charge to serve
    the complaining shipper while fully covering all its costs, including a
    reasonable return on investment. Because the issues being addressed in
    the rulemaking have been raised or are implicated in the pending rail
    cases, the Board is holding the pending rail rate cases in abeyance
    while it examines these important issues.
        The Board will continue to handle rail cases involving questions of
    whether certain State or local regulation of certain rail-related
    facilities is preempted by Federal law. These issues have generated
    considerable interest in recent years, as the Board and the courts have
    explored the extent of Federal preemption on a case-by-case basis.
        Board staff expeditiously handles on an informal basis rail
    consumer inquiries and complaints concerning matters related to rates
    and other charges, car supply and other service issues, claims for
    damages, and service-related problems, employee concerns, and community
    issues. The Board's Rail Consumer Assistance Program is an informal
    mechanism for resolving disputes between freight railroads, and between
    those railroads and their customers. This program has a special toll-
    free telephone number and a website connection to assist rail customers
    and others with concerns involving railroads. It resolved 121 rail
    consumer issues during 2005.
        The Board has participated in forums between railroads and their
    customers to facilitate better communications regarding service issues
    and plans to resolve them. The Board continues to encourage parties in
    cases before it to reach private sector solutions to their disputes
    outside of the Board's formal processes.
        The Board's responsibility with respect to rail carrier
    consolidations includes a broad range of control transactions among
    larger railroads and smaller railroads. In addition, the Board
    continues to resolve issues related to past Class I rail mergers. We
    are not aware that any major rail mergers are contemplated in the
    immediate future, so the workload in this category is expected to
    remain constant through fiscal year 2007. Of course, it is impossible
    to predict with certainty that no major merger will be proposed during
    fiscal year 2007. If a major merger is proposed, that would
    significantly increase the workload beyond the expected level.
        The Board projects that its line construction docket will remain
    constant through fiscal year 2007. The Board has an unprecedented
    number of railroad line construction proposals currently under review.
    These 14 proposals vary in size and scope, ranging from less than 1
    mile to 280 miles of new rail line. The associated environmental review
    work is significant The Board granted final approval in its decision in
    STB Finance Docket No. 33407, ``Dakota, Minnesota & Eastern Railroad
    Corporation Construction into the Powder River Basin'', for a railroad
    to construct a 280-mile rail line into the Powder River Basin subject
    to extensive environmental mitigation conditions. This case represented
    a major multi-year effort on the part of the Board to address the
    complexities of a major rail construction case. Demands on the Board to
    conduct environmental reviews for such transactions continue to grow,
    and these activities require significant resources to complete.
        Other line transaction activity is expected to remain constant
    through fiscal year 2007 as more carriers continue to sell unprofitable
    or marginally profitable lines as an alternative to service
    abandonment. The Board continues to see a number of line acquisitions
    by both small carriers and noncarriers as the larger rail carriers
    continue to restructure their rail systems.
        Regarding non-rail matters, the Board has pending before it one
    pipeline rate dispute and one water carrier dispute, in addition to one
    water carrier dispute that has been decided by the Board and is now
    under court review. The Board's pipeline work is expected to remain
    constant as the pending case moves forward. The Board's intercity bus
    merger and pooling workload are projected to remain constant through
    fiscal year 2007; as is the Board's noncontiguous domestic water trade
    rate case activity. The Board expects to devote the same level of
    staffing resources to work on cases involving motor carrier ratemaking
    antitrust immunity through fiscal year 2007.

                                    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 appreciate the opportunity to
    submit this statement for the record and would be happy to respond to
    any questions that the committee may have about the Board's fiscal year
    2007 budget request.
                                     ______

             Prepared Statement of the Federal Election Commission

        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 2007 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. We have used those funds to
    continue a process of constantly seeking to improve the FEC's operation
    in all three of its core missions: disclosure, enforcing compliance
    with the law, and operation of the presidential matching funds system.
    Despite some financial belt-tightening in fiscal year 2006, we can see
    a measurable improvement in the FEC's ability to meet its core
    functions.
        Our fiscal year 2007 appropriation request is for $57,138,000, an
    increase of $2,985,000 or 5.51 percent over our enacted fiscal year
    2006 appropriation. This increase will permit the agency to continue
    its current functions while meeting statutorily mandated salary and
    benefit increases. This year, the FEC is seeking only a modest increase
    over its fiscal year 2006 budget of $54,153,000 ($54,700,000, less the
    fiscal year 2006 across-the-board rescission). The fiscal year 2007
    request represents a continuation of fiscal year 2006 funding levels,
    adjusted for inflation and salary and benefit increases. As such, it
    represents essentially a Current Services request for fiscal year 2007,
    with no additional funds or staff for new programs or initiatives. I am
    pleased to report this request conforms to the President's fiscal year
    2007 budget request for the FEC. We have provided detailed support for
    this request in our fiscal year 2007 budget justification.
        I would also like to note that our fiscal year 2007 request sets
    the agency's authorized personnel level at 375 FTE, a decrease of 16
    FTE from our previous authorized level of 391. Although the agency is
    authorized for 391 FTE in fiscal year 2006, we found it necessary to
    reduce staffing in order to handle the increased cost of operations and
    to fund some non-recurring expenses in fiscal year 2006. As spelled out
    in our fiscal year 2006 Management Plan, the FEC's projected FTE
    utilization for fiscal year 2006 will be approximately 380 FTE. In
    fiscal year 2007, we estimate that an FTE level of 375 will enable us
    to maintain operations at the current service level and absorb the full
    cost of the fiscal year 2007 COLA.
        Generally, the Commission submits a package of legislative
    recommendations to the President and the Congress in March. However,
    this year the district court's decision in Shays v. FEC required the
    Commission to rewrite some portion of nine of its previous rules in a
    condensed timeframe. Therefore, the annual review of legislative
    recommendations will be submitted at a later date. In the meantime,
    there is one legislative change that the Commission unanimously decided
    to include in its fiscal year 2007 budget request to Congress.
        We are seeking statutory authority to charge and use registration
    fees for FEC-hosted conferences. The Commission has always relied on
    effective outreach and our informational programs to reduce violations
    due to lack of understanding of the law. These programs, such as the
    800 informational line, the campaign finance workshops and seminars,
    and the campaign guides and brochures, have all received high marks
    from the election community, the media, and the public. Unfortunately,
    due to budget constraints we found it necessary to cancel our campaign
    finance workshops and seminars for 2006. In order to preserve these
    conferences in the future, we are seeking legislative authority to
    charge and use registration fees to help offset the costs of these
    conferences. If legislative authority is not granted, the Commission
    will require additional appropriated funds in order to host future
    conferences.
        Over the past few years, the FEC has achieved several major
    successes, while also seeing a steady improvement in its operations.
    These significant achievements include meeting statutory and court
    deadlines for implementing BCRA, successfully defending legal
    challenges to the constitutionality of BCRA, and settling the largest
    enforcement case in the history of the agency. In addition, the agency
    has expanded and invigorated its compliance program and improved the
    timeliness of reporting. These successes are the result of FEC efforts
    and support from our Congressional oversight committees.
        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 2007 budget
    request.

                               DISCLOSURE PROGRAM

        The FEC's disclosure program reviews, compiles, and places
    candidate and political committee campaign finance reports and
    information on the public record, primarily through the FEC's extensive
    electronic databases. The disclosure program is also responsible for
    educating the public and practitioners about the Federal campaign
    finance laws and their application. Over one-third of the agency's
    staff (143.4 FTE), are involved in our Disclosure program. This
    includes staff from the Public Records Office, Information Technology
    Division, Reports Analysis Division, Press Office, Information Office,
    and attorneys from the Office of General Counsel (OGC) who formulate
    proposed regulations and draft responses to advisory opinion requests.
        A key objective of the Disclosure program is to improve the web
    accessibility of FEC information. Via the FEC's website at www.fec.gov,
    the public can conduct detailed searches of candidate and political
    committee reports, closed FEC enforcement matters, and the agency's
    advisory opinions. The website also provides access to the most up-to-
    date campaign guides and brochures, past and current regulations,
    litigation materials, and agenda documents. Beginning this year, the
    FEC has made audio file podcasts of meetings available for download
    within 48 hours of meetings.
        The Disclosure program provides education outreach to the public
    and regulated community through campaign finance conferences and
    seminars, through a toll-free help line, and through the FEC's public
    records room. Our campaign finance conferences are crucial to the
    overall success of our Disclosure program, and it is imperative that we
    receive the statutory authority explained above in order to host these
    conferences without taking funds away from other core programs.
        Improvements in productivity, aided by information technology (IT)
    enhancements, have enabled the FEC to keep pace with the large
    increases in Federal campaign finance activity during recent election
    cycles. Campaign financing has skyrocketed since 1976, when the FEC
    regulated the $310 million in disbursements by Federal candidates and
    committees in the first publicly-funded Presidential election. For the
    2004 Presidential and Congressional elections, the FEC regulated the
    disbursement of approximately $4.8 billion--an increase of more than
    1,500 percent in just eight Presidential election cycles. With your
    help, we are building an impressive system capable of handling our IT
    needs well into the future. This system offers the capability of
    instantly updating our campaign finance database and expanding the
    types of information collected. As you are aware, however, this system
    is expensive. Our fiscal year 2007 budget request for IT funding is
    $6.5 million. This is the minimum amount required for IT projects. It
    keeps the ``lights on'' and supports the basic IT mission only. It
    forgoes some upgrades and desirable improvements. In future fiscal
    years we will require additional resources to complete necessary IT
    infrastructure upgrades and to make needed improvements in our
    disclosure and review functions. We do, however, plan to apply any
    savings realized through the course of the fiscal year to our IT
    programs.
        With the passage of legislation mandating electronic filing of
    campaign finance reports, we are seeing benefits of improved
    timeliness. Since the institution of electronic filing, the median time
    to process detailed information from all documents received has
    improved from 11 (2000 cycle) to 6 (2002 cycle) to 2 days (2004 cycle)
    from receipt of the disclosure reports by the Commission. Due to both
    the enhanced use of technology and management initiatives, the FEC is
    processing and reviewing disclosure reports more rapidly than ever,
    despite the huge increase in the amount of campaign finance funds and
    information to be processed and disclosed. This provides voters with
    more accurate and timely disclosure information prior to an election,
    enabling them to make an informed decision when it comes to the sources
    and uses of campaign funds by the candidate.

                               COMPLIANCE PROGRAM

        Obtaining voluntary compliance with Federal campaign finance laws
    is the foundation of the FEC's mission and central to its strategic and
    performance plans. An effective and comprehensive enforcement program
    is, however, an essential complement to any voluntary compliance
    effort.
        Nearly one-half of Commission resources in the proposed fiscal year
    2007 budget are dedicated to ensuring compliance with the law. In
    fiscal year 2007, we anticipate assigning over 175 FTE to compliance,
    including enforcement, supervisory, and support staff from OGC,
    Information Technology Division, Reports Analysis, and the Audit
    Division. In recent years, the administrative fine program and
    alternative dispute resolution program have been added to the
    Commission's compliance program.
        Together with the standard enforcement program, these three
    compliance programs allow the FEC to handle significantly more cases
    than it did several years ago. These programs have allowed the FEC to
    activate more cases, close more cases with substantive action, resolve
    cases that would otherwise have been dismissed, and generally enforce
    the law in a more thorough and efficient manner, while preserving the
    Commission's legal resources for more complex enforcement matters.
        The standard enforcement program, which is the responsibility of
    the Office of General Counsel, deals with the most complex cases and
    the most significant violations of the law. The General Counsel has
    undertaken a number of management and organizational initiatives in the
    last 5 years to increase the efficiency of processing matters under
    review (MURs), and those efforts have resulted in a more current
    caseload and significantly higher civil penalties. Despite a caseload
    that now involves the most factually and legally complex cases, MURs
    have been closed on average 35 percent faster in fiscal year 2005 than
    in fiscal year 2003, and a greater percentage of the assigned (or
    active) caseload now involves allegations arising from the most recent
    election cycle (i.e., 2003-2004). The administrative fine and
    alternative dispute resolution programs have helped to speed the
    resolution of less serious violations of the law.
        Overall, the compliance program has become more effective, as well
    as more efficient. In 1991, prior to the introduction of the
    administrative fine and alternative dispute resolution programs, the
    FEC assessed civil penalties totaling $534,000. By fiscal year 2004,
    approximately 4 years after the implementation of the administrative
    fine and alternative dispute resolution programs, that figure had grown
    to $3.46 million. Thus far in fiscal year 2006, the FEC has assessed
    civil penalties and fines totaling $5.302 million, including a single
    $3.8 million civil penalty, the largest in the history of the agency.
    Fiscal year 2006 marks the seventh consecutive year with more than $1
    million in civil penalties.
        The alternative dispute resolution (ADR) program affords both the
    FEC and the respondents the opportunity to resolve cases more rapidly
    with a focus on ensuring future compliance with the law. Since the
    inception of the program on October 1, 2000, through September 30,
    2005, the ADR Office concluded agreements with respondents and formally
    closed 214 cases, 150 with substantive action (70 percent). These 214
    cases were generally closed within 6 months of referral to the ADR
    program. The ADR Office has negotiated approximately $310,000 in civil
    penalties since fiscal year 2001. In fiscal year 2005 alone, civil
    penalties negotiated through ADR totaled $154,500. The administrative
    fine program has closed 1,223 cases since fiscal year 2000 and assessed
    civil penalties totaling $2,309,454 in cases of late and non-filed
    reports. In fiscal year 2005, cases were closed on average 201 days
    from when the reports were due to be filed at the FEC.
        Finally, in the audit track of the compliance program, we are
    pleased to report that the agency has sufficient resources to enable it
    to initiate 40 to 45 audits ``for cause'' for the 2006 election cycle.
    Further details on the compliance program are contained in the fiscal
    year 2007 Budget Justification.

                             PUBLIC FUNDING PROGRAM

        The Commission also administers the Presidential public funding
    program. During fiscal year 2007, approximately 55 FTE from the Audit
    Division, Office of General Counsel, and Information Technology
    Division will be directly involved in this program. Their
    responsibilities will include completing the audits of the remaining
    two candidates who received matching funds for the 2004 election, and
    the two general election candidate committees, for a total of four
    Presidential audits continuing from the 2004 cycle. In addition, they
    will be preparing for the 2008 Presidential election cycle by replacing
    the sampling software used to process matching funds requests and
    updating the Commission's ``Guideline for Presentation in Good Order''.
    The Guideline sets forth the uniform format required for the
    presentation of matching funds requests and specifies the quality of
    content standard that must be met.
        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 in the February primary matching
    payments for the 2004 Presidential election, which was restored the
    following month with the February deposits to the Fund. This was the
    only 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. This may change, however, 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,
    2000, and 2004 occurred for several reasons. First, the Treasury
    Department does not consider expected election-year check-off proceeds
    to be available when calculating payout resources on January 1 of the
    election year. Second, while payouts under the program have been
    adjusted upward, due to inflation, the $3 check-off amount has not been
    increased since 1993. Third, the number of taxpayers participating in
    the check-off has been declining. Fourth, the ``front-loading'' of
    primaries and caucuses, which puts a premium on early fundraising, has
    resulted in a high demand for matching payments early in the election
    year. Finally, the eligibility requirements for matching funds have not
    been adjusted since 1974, and many candidates can qualify for public
    funding as a result. Absent legislative action, the shortfall problem
    will recur in future elections.
        The foregoing summarizes the FEC's fiscal year 2007 budget request.
    For a more detailed review of this request, I would urge members of the
    committee to consult our 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 2007
    budget request.
                                     ______

        Prepared Statement of Terrence L. Bracy, Chair, Morris K. Udall
                                   Foundation

        Mr. Chairman, members of the subcommittee, thank you for the
    opportunity to present testimony regarding the fiscal year 2007 budget
    of the Morris K. Udall Foundation. We have previously submitted our
    Congressional Justification and met with the subcommittee's staff to
    answer their questions regarding our programs and budget.
        The Foundation has two major program areas, supported by two
    distinct appropriations funds: First, the U.S. Institute for
    Environmental Conflict Resolution (the U.S. Institute), supported by a
    combination of annual appropriations and fees charged for services; and
    second, the Education Programs, supported by the annual interest from a
    Trust Fund (invested solely in Treasury obligations).
        The President's budget requests $700,000 for the Institute in
    fiscal year 2007. The Institute anticipates generating an estimated
    $3.1 million in gross revenues in fiscal year 2007, of which an
    estimated $2.4 million will fund extramural mediation services and
    $700,000 will be applied to intramural costs. The Institute will
    continue to work toward maximizing its revenues from collection of fees
    for its services. An additional $750,000 will be applied from the
    remainder of the Institute's original appropriation for capitalization
    expenses.
        The President's budget requests no new appropriation for the Trust
    Fund. The Foundation education programs are expected to have a total
    budget of $1.6 million in fiscal year 2007, which includes $1.5 million
    in interest and $100,000 in carryover from fiscal year 2006. This
    funding is expected to allow the Foundation to maintain current
    Education Programs in fiscal year 2007, including 80 scholarships of
    $5,000 each and a grant of $296,000 to the Udall Center for Studies in
    Public Policy, as required by the Foundation's enabling legislation.
        The Foundation's budget details are thoroughly discussed in our
    Congressional Justification. In this testimony, I would like to focus
    on some of the programmatic highlights at the Udall Foundation over the
    last year.
        The U.S. Institute for Environmental Conflict Resolution continues
    to be recognized as a significant resource for assistance in resolving
    and preventing environmental conflicts involving Federal agencies. In
    November 2005, the Office of Management and Budget and Council on
    Environmental Quality jointly issued a memorandum directing all Federal
    agencies to increase the effective use of environmental conflict
    resolution and build institutional capacity for collaborative problem
    solving. The policy memorandum encouraged agencies to draw on the
    services of the U.S. Institute to assist in resolving disputes, as
    appropriate, and to help review strategies for increasing the use of
    environmental conflict resolution by those agencies. The U.S. Institute
    is coordinating an interagency forum of senior agency staff that will
    oversee implementation of the policy memo.
        In addition, the U.S. Institute has continued to provide conflict
    resolution and training services around the country. A substantial
    amount of work has been with the Federal Highway Administration--for
    example, the Institute has provided conflict resolution services in
    connection with a FHWA project in Oregon (the West Eugene Parkway), and
    it also has conducted workshops to strengthen FHWA efforts to work with
    State, local and tribal governments. One workshop focused on Federal
    and State consultation with American Indian Tribes, as required by the
    National Historic Preservation Act, bringing together the Tennessee
    Division of FHWA, the Tennessee Department of Transportation, and 11
    federally recognized Tribes. Additional customized workshops are
    expected to strengthen Federal and State agencies' efforts to
    successfully meet agency coordination and cooperation mandates of the
    Transportation Equity Act for the 21st Century (TEA-21), Section 1309:
    ``Environmental Streamlining'' and Executive Order 13274:
    ``Environmental Stewardship and Transportation Infrastructure Project
    Reviews''.
        The Institute recently completed one of the few successful
    mediations on timber issues in the United States, helping the parties
    to resolve a lawsuit challenging a timber sale in Oregon. The
    settlement provided for the Bureau of Land Management to continue with
    logging on 75 percent of the original 152 acres planned for sale and
    canceled logging on the rest, preserving old growth habitat. One
    innovation of the settlement was an agreement that community
    representatives can ride along with contract administrators during
    logging activities and visit post-harvested sites. The agreement is
    also important as a possible prototype for other settlements--at
    present, about 80 percent of proposed Forest Service timber sales are
    involved in litigation nationwide.
        Another area of increasing activity for the Institute has been in
    customized training for Federal agency personnel in the use of
    collaborative processes to resolve conflicts. For example, Institute
    staff designed and led training in multi-party negotiation and conflict
    management for the U.S. Air Force. This training was first delivered in
    April at the Air War College in Alabama. The Air Force plans to use
    alternative dispute resolution more systematically in environmental and
    land-use disputes, with the goal of reducing dispute resolution cycle
    times and avoiding unnecessary dispute resolution costs. The Air Force
    already has reported saving time and much of the cost of litigating
    contract disputes through use of ADR, while achieving results at least
    equal to those expected from litigation.\1\
    ---------------------------------------------------------------------------
        \1\ Report to the Secretary of the Air Force on the Air Force
    Alternative Disputes Resolution Program, January 2005. The Air Force
    ADR Program said data through fiscal year 2004 showed ADR resolves
    disputes in less than half the time, on average, compared with
    litigation through trial, and avoided much of the cost of full
    litigation, including the government's liability for interest on
    contractor claims. Early resolution through ADR also meant less
    disruption to Air Force programs and to the Air Force's working
    relationships with contractors, the report said.
    ---------------------------------------------------------------------------
        The Education Programs of the Udall Foundation are also thriving.
    The Foundation continues to draw the highest quality applicants for its
    scholarships, fellowships, and internships. A total of 836 college
    scholarships have been awarded through fiscal year 2006 to students
    from all 50 States and 259 colleges. The Native American Congressional
    Internship Program has placed 126 interns from 87 tribes in
    Congressional offices, the Executive Office of the President, and high-
    placed offices at the Departments of Interior, Education and Defense.
    Beginning in August 2006, the Foundation is planning a year-long
    ``Celebration of Public Service'' to mark the 10th anniversary of its
    Education Programs. As part of this effort, current and former
    scholars, fellows and interns will initiate and implement public
    service projects all around the country.
        Native Nations Institute, a joint project of the Udall Foundation
    and the University of Arizona, has conducted executive education
    sessions for more than 1,700 councilors, presidents and senior managers
    from more than 340 Indian nations over the last 5 years and has reached
    many more through conference presentations. In partnership with the
    Harvard Project on American Indian Economic Development, NNI has
    developed the leading research on tribal economic development,
    leadership and self-determination. NNI has maintained program levels in
    fiscal year 2006 due to a transfer from the fiscal year 2006 Udall
    Foundation Trust Fund appropriation (as authorized by Congress in
    Public Law 109-115); in fiscal year 2007, NNI will receive no
    additional funding from the Foundation but will utilize $176,000 in
    carryover from fiscal year 2006 and an estimated $62,000 in fees to
    continue the Native American internships and the executive education
    program. NNI will continue to seek other funding, including grants from
    public and private organizations.
        I am pleased to report to the subcommittee that the Foundation
    received an unqualified ``clean'' audit opinion again for fiscal year
    2005, and no material inadequacies were identified by the independent
    auditor, Clifton, Gunderson, LLP. As in prior years, I want to assure
    the chairman and members of the subcommittee that the Foundation has
    taken extraordinary steps to keep down administrative expenses and get
    the most value out of its limited funds.
        Thank you for the opportunity to provide testimony. We look forward
    to working with you and your staff on fiscal year 2007 appropriations.
                                     ______

        Prepared Statement of Kenneth D. Wade, Chief Executive Officer,
        Neighborhood Reinvestment Corporation dba NeighborWorks America

        Neighborhood Reinvestment Corporation, now doing business as
    NeighborWorks America, is pleased to submit this testimony for the
    record, on behalf of the NeighborWorks system. This system includes
    NeighborWorks America and 240 nonprofit, community-based organizations
    that comprise the NeighborWorks network. In fiscal year 2005, we served
    over 4,000 communities and generated over $2.4 billion in direct
    investment.

                      OVERVIEW OF THE NEIGHBORWORKS SYSTEM

        To help more Americans seize opportunities to build wealth,
    strengthen their communities and realize the dream of home ownership,
    we work on three basic fronts:
      --NeighborWorks America headquarters and training agency;
      --Our national NeighborWorks network of nonprofit community
            development organizations; and
      --Financial backing through Neighborhood Housing Services of America.
        For nearly 30 years, the NeighborWorks System has proven to be an
    increasingly effective and efficient vehicle for generating significant
    private-sector resources for community revitalization and affordable
    housing. The NeighborWorks System relies on public-private
    partnerships, the leveraging of Federal funding, and flexible revolving
    loan funds to achieve results. Innovations that are generated in
    response to community needs are a hallmark of the NeighborWorks System.
    We were borne out of a real and present community need for more private
    sector investment in decaying urban areas in the 1970's and continue to
    nimbly address real and present community needs today.
    NeighborWorks America
        NeighborWorks America evolved from a 1972 effort by the Federal
    Home Loan Bank Board to increase thrift-industry lending in declining
    neighborhoods. Recognizing the model's effectiveness in community
    development and turning around urban blight, Congress chartered
    NeighborWorks America as a public nonprofit organization in the Housing
    and Community Development Amendments of 1978 (Public Law 95-557).
        Today NeighborWorks America:
      --As the Nation's largest certifier of high-quality home ownership
            education counselors, creates a national force of home
            ownership and financial literacy education counselors that have
            educated and empowered 500,000 Americans nationwide.
      --Fuels local innovation with a powerful battery of community
            development training, research, managerial advice, turnaround
            specialists and an aggressive brokering of business and
            government partnerships.
      --Maintains high performance standards for its NeighborWorks member
            organizations through rigorous and thorough audits to ensure
            accountability and results.
      --Empowers underserved populations and regions of the Nation. When
            comparing total lending activity, the NeighborWorks network
            serves four times as many minorities as conventional lenders
            and twice as many as served by government agencies (as a
            percentage of the total clients served).
      --Ensures continued responsiveness to local needs through sound
            dependable capital loan funds that have invested $2.5 billion
            in communities in the last 5 years alone.
      --Challenges predatory lending with the twin tools of education and
            customized, responsible lending.
    The NeighborWorks Network
        In the early 1970's, NeighborWorks America founded the
    NeighborWorks network, a group of community-based nonprofits that has
    evolved from a few organizations to more than 240 members active in
    more than 4,000 communities across the country. NeighborWorks
    organizations operate in our Nation's largest cities, suburban
    neighborhoods and rural areas across all 50 States, Puerto Rico and the
    District of Columbia. No matter what their location, NeighborWorks
    organizations are responsive and effective, because they function as
    partnerships of local residents, lenders and other business leaders,
    and representatives from local government. NeighborWorks network
    results include:
      --forging private-sector partnerships that revitalize blighted
            communities to create an infusion of job retention and economic
            development strategies to local economies;
      --providing full-service affordable rental housing that provides
            citizens with much more than a roof over their heads;
      --creating home ownership incentives that help individuals realize
            the American dream and build wealth for their families and
            communities;
      --educating communities about strategies that improve safety and
            attract wealth-building opportunities.
    Neighborhood Housing Services of America (NHSA)
        Flexible financing enables NeighborWorks organizations to be
    nimble, competitive and effective. Neighborhood Housing Services of
    America works in partnership with NeighborWorks America to meet special
    secondary market needs of NeighborWorks organizations and their
    clients. The primary mission of NHSA is to operate a specialized
    secondary market created to replenish the revolving loan funds and
    capital pools of local NeighborWorks organizations. As such, it has
    become an important tool for challenging predatory lenders.

                    PROJECTED OUTCOMES FOR FISCAL YEAR 2007

        This is a time of unprecedented challenges and opportunities in
    housing and community development. NeighborWorks America is in a prime
    position to deliver results.
        An appropriation of $120 million will allow the NeighborWorks
    system to:
      --Award 8,300 training certificates in community development and
            housing; home ownership and community lending; home ownership
            education and counseling; construction, production, real estate
            and housing management; nonprofit management and leadership;
            and economic development, revitalization and community building
            to practitioners throughout the country.
      --Generate $20 in other investment for every $1 appropriated to
            NeighborWorks America, for a total reinvestment of over $2.4
            billion in American communities.
      --Provide affordable housing and counseling to more than 180,000
            individuals or families living in 4,000 communities by 240
            organizations the comprise the NeighborWorks network.
      --Increase financial fitness education in underserved markets to
            build better money management skills that position families to
            build assets and achieve financial independence.
      --Secure and expend $85 million in social investments in support of
            affordable housing loans.
        For fiscal year 2006, NeighborWorks America received an
    appropriation of $118 (minus an across-the-board rescission). The
    proposed increase for fiscal year 2007 of $2 million will further
    NeighborWorks America's work to create and sustain minority home
    ownership through grants to NeighborWorks organizations, as well as
    continue to allow NeighborWorks America to attract and retain qualified
    and competent staff in community development.

                        PRIORITIES FOR FISCAL YEAR 2007

        In developing the Corporation's fiscal year 2007 budget,
    NeighborWorks America is setting more aggressive expectations for the
    NeighborWorks system. NeighborWorks America has always worked to be
    good stewards of the funds that Congress has entrusted to us, and the
    Corporation continues to diligently work to maximize our efficiency and
    effectiveness. In order to meet these expectations, NeighborWorks
    America and the NeighborWorks system will:
      --Leverage strategic partners and resources to stay on the forward
            edge of housing and community development needs;
      --Monitor the efficiency and results of the NeighborWorks network
            through financial and performance reviews;
      --Fuel network innovation that can be applied across the Nation; and,
      --Build skills and performance in the housing and community
            development field.
    Leverage Strategic Partners and Resources
        Historically, the success of the NeighborWorks System has far
    exceeded its visibility. In fiscal year 2007, NeighborWorks America
    will continue its efforts to enhance the visibility of NeighborWorks by
    launching a public awareness and branding campaign: ``NeighborWorks
    America--Transforming Lives and Strengthening Communities.'' The
    campaign will unite the corporation with the national network it
    supports--240 NeighborWorks organizations across 50 States.
    Neighborhood Reinvestment is adopting the name ``NeighborWorks
    America'' as its public trade name. A resolution of the Board of
    Directors directing the Corporation to launch this public awareness and
    branding campaign passed unanimously on September 20, 2004.
        More awareness of NeighborWorks America will help us serve more
    communities, creating a force of empowered consumers and engaged
    communities. NeighborWorks America will promote several tools to
    empower neighbors to maximize their financial position, to become
    informed homebuyers and savvy homeowners whose home values grow and
    provide equity. As NeighborWorks America, united with our national
    network under one name and a singleness of purpose, we will become a
    more visible and powerful national force for change.
    Increase the Efficiency and Results of the NeighborWorks Network
        Our scale and history allows NeighborWorks America and its
    affiliated NeighborWorks network to be responsive and innovative,
    successfully navigating the rocky terrain of the current housing and
    community development landscape. To keep pace with the breakneck and
    challenging changes in the current environment, we will:
                Demand Accountability and Results
        NeighborWorks America is committed to promoting and maintaining a
    network of productive, well-managed, nonprofit housing and community-
    development corporations that deliver high quality services responsive
    to local needs and have a measurable impact on the communities they
    serve.
                Conduct Rigorous and Thorough Audits and Reviews of
                        NeighborWorks System
        As part of its responsibility to be a strong steward of Federal
    funding and protect the investment of other partners and the reputation
    of the NeighborWorks network as a whole, NeighborWorks America uses a
    rigorous and thorough audit and review of all NeighborWorks programs
    and organizations. Those who don't measure up are given a defined time
    period to turnaround or leave the network. We demand high-performance
    and results.
        Through a system of continuous monitoring, we assess the risks
    faced by each NeighborWorks organization with a thorough collection and
    analysis of programmatic and financial data.
                Measure the Success of the Community Development Field
        As stewards of taxpayer money and advocates for our most needy
    neighbors, we must make sure our investments are working in ways that
    truly make a difference. It's not good enough to talk about simple
    counts of housing units produced or dollars leveraged. We must be
    willing to hold ourselves accountable for results. If banks and
    actuaries can refine their investment and insurance packages with
    increasing accuracy and sophistication, we also must find new ways to
    measure the impact of our work. This year NeighborWorks America will
    begin using the Success Measures Data System as one important tool to
    help answer the question: ``Are we making a difference?'' This state-
    of-the-art program can measure dividends such as changes in safety,
    property values, levels of civic engagement and the quality and
    performance of schools and healthcare, helping us to work smarter in
    serving the real and present needs in our communities.
        The development of this index has been encouraged by OMB through
    its Program Assessment Rating Tool (PART) process. Federal Reserve
    Chairman Alan Greenspan cited Success Measures as a model tool for
    providing ``objective and quantifiable standards to assess community
    development programs.''
                Improve Efficiency and Coverage of Underserved Areas
        The efficacy of the NeighborWorks system is measured in
    productivity, more efficient use of resources and more responsive
    service delivery. In many underserved areas, the most effective growth
    strategy is to expand the reach and/or programmatic services of an
    existing network member or to facilitate a merger of two organizations
    to create one powerful organization with greater impact and efficiency.
        We receive far more applicants to become NeighborWorks members than
    we charter. Through a careful affiliation process, NeighborWorks
    America ensures that before any organization is chartered as a
    NeighborWorks entity, it is sound and productive; led by a board of
    directors reflective of the community it serves; and committed to a
    mission with goals, values, programs and accomplishments compatible
    with the focus and priorities of the NeighborWorks network.
                Invest in What Works
        Responsible, responsive real-estate development and lending
    requires dependable equity capital grants. NeighborWorks America
    provides our network with this critical gap funding and equity,
    allowing NeighborWorks organizations to make loans for home purchase,
    property rehabilitation and small business loans.
        NeighborWorks America also provides grants to NeighborWorks
    organizations to address a range of community needs, such as financial
    fitness education, home ownership counseling and education, development
    of affordable rental property, loans for improving safety, and much
    more.
    Fuel an Engine of Innovation
        The structure of the NeighborWorks network facilitates
    collaborative learning to harness all the practical knowledge picked up
    on the ground and in our research. Initiatives that allow NeighborWorks
    organizations to learn directly from each other include: the
    NeighborWorks Campaign for Home Ownership, the NeighborWorks
    Multifamily Initiative, the NeighborWorks Rural Initiative, and the
    NeighborWorks Insurance Initiative and its National Insurance Task
    Force.
        To help organizations stay on the forward edge of business
    practices and community development, we deploy several strategies:
                Topflight Expertise and Coaching
        NeighborWorks America deploys a team of experts to provide
    NeighborWorks organizations with the expertise and coaching needed to
    continue to serve resident needs.
        This on-call team provides help in six areas:
      --Organizational development;
      --Resource development and marketing;
      --Community revitalization and business planning;
      --Management systems (including technology and financial management);
      --Single-family housing and lending; and
      --Real-estate development and management.
                Championing Home Ownership Opportunities
        NeighborWorks America has worked for the past 20 years on expanding
    home ownership opportunities. Over the past 5 years, while access to
    credit has become easier, access to appropriately-priced mortgages
    continues to adversely and inordinately affect minority, female-headed
    households and immigrant families. The NeighborWorks network's
    financial literacy and homebuyer education efforts work to increase
    access to the best-priced mortgage for each consumer. The NeighborWorks
    System provides home ownership opportunities in a number of important
    and highly effective ways.
      --67 percent of those assisted by the NeighborWorks Campaign for Home
            Ownership are low- or very low-income households. Only 25
            percent of the clients of conventional mortgage lenders have
            low or very low incomes.
      --51 percent of the households assisted by the NeighborWorks Campaign
            for Home Ownership are ethnic minorities, compared to only 25
            percent of the clients served by conventional mortgage lenders
            are minorities.
      --46 percent of the buyers assisted by the NeighborWorks Campaign for
            Home Ownership are female, compared to only 21 percent of the
            clients of conventional mortgage lenders.
                The NeighborWorks Campaign for Home Ownership
        The NeighborWorks Campaign for Home Ownership is a joint effort of
    government, banks, the insurance industry, secondary markets, the real-
    estate community and others, coordinated by NeighborWorks America in
    conjunction with more than 158 community-based NeighborWorks
    organizations. Since 1993, the combined efforts of the Campaign have
    created more than 90,300 new homeowners (the majority of whom are low-
    and moderate-income minority families) and provided counseling to more
    than 538,300 individuals. As a result, $9.05 billion has been invested
    in many of America's distressed communities. The campaign provides
    resources and education for homeowners and empowers those for whom the
    American dream is thought out of reach.
                HomeOwnership Centers
        To date, NeighborWorks America has supported the development of
    nearly 100 NeighborWorks HomeOwnership Centers throughout the Nation.
    These Center are one-stop shops for a broad range of home ownership
    services available to low- and moderate-income families including
    unbiased advice, counseling, training, referrals to partners such as
    lenders, real-estate agents, inspectors, contractors, and special
    financial assistance to income-qualified buyers. The Centers can also
    help existing homeowners with housing rehabilitation advice and
    assistance along with maintenance training. Financial counseling to
    avoid credit problems, loan delinquencies and foreclosures is also
    available.
        NeighborWorks America expects to add at least 10 percent more
    HomeOwnership Centers in fiscal year 2007. On average, after becoming
    fully operational, each HomeOwnership Center will produce over 100 new
    homeowners per year and counsel over 375 families per year.
                Minority Home Ownership Strategies
        Between 2003 and 2007 the Campaign for Home Ownership set a goal to
    reach 30,000 minority homeowners. This goal also helps support the
    White House's Minority Home Ownership Initiative. Through 2005, the
    Corporation has developed and implemented a series of strategies to
    meet this goal. Among the strategies are development of an online
    searchable database called ``Winning Strategies'' that documents
    innovative strategies successfully used to promote minority home
    ownership in local communities; promoting expansion of financial
    education with new partners such as churches, schools and employers;
    working through NeighborWorks Center for Home Ownership Education and
    Counseling (NCHEC) to initiate new partnerships to develop training and
    certification classes on home ownership education that will be offered
    regionally and nationally; hosting national symposia on minority home
    ownership issues, education and counseling, and promoting stronger
    partnerships between nonprofits and real-estate agents, credit unions
    and employers.
    NeighborWorks Home Ownership Activities for Fiscal Year 2007
        In fiscal year 2007, the NeighborWorks System will continue to
    focus attention on helping qualified lower-income families and
    individuals purchase, maintain and stay in their homes for the long
    term. Our plans include:
      --Delivering new training classes on ``Reaching Underserved
            Homebuyers'' that will continue to be offered regularly at the
            NeighborWorks Training Institutes;
      --Designing a new ``minority marketing toolbox'' in 2005 that will
            include templates, tools and marketing materials to help local
            NeighborWorks organizations implement enhanced marketing
            efforts to attract more minority customers as potential
            homebuyers;
      --Promoting expansion of financial education and home ownership-
            education programs with new partners such as churches, schools
            and employers.
                Financial Literacy and Education to Help Avoid Predatory
                        Lending
        Predatory lending tactics are at an all-time high, particularly
    those preying on minority families, immigrants, and financially less-
    sophisticated borrowers. Too often bad actors encourage homeowners to
    pursue inappropriate debt consolidation, refinancing schemes, home
    improvement, or home equity loans that threaten the assets that the
    NeighborWorks System has worked so hard to help them acquire.
    NeighborWorks America just added a new course to its training
    curriculum to help combat predatory lending. The class filled up
    immediately and given this ballooning need, we are working to
    accommodate more.
        Other strategies we use to combat predatory lending include:
      --A Financial Fitness Program that prepares families to build sound
            finances and be aware of predatory tactics. The Corporation
            developed standards, adapted and created training materials,
            trained trainers to initiate this comprehensive program, and
            supports its growth;
      --The addition of 10 Financial Fitness sites in fiscal year 2007 to
            expand the reach of financial education efforts across the
            network;
      --A new consumer training curriculum for ``Refinancing Your Home''
            that can be offered to assist existing homeowners in making
            smarter choices when considering the multitude of options in
            refinancing their home;
      --A new consumer training curriculum on ``Buying a Manufactured
            Home'' to help consumers who are considering buying
            manufactured homes; and
      --A study on the cost/benefit of providing pre-purchase counseling to
            consumers.
                Support the Center for Foreclosure Solutions
        We need to prevent foreclosures earlier--before a family even
    thinks of buying a home. NeighborWorks America's approach is to provide
    education and counseling at every stage--pre- and-post-ownership. We
    want to empower individuals, their families, their communities and
    their economies to be on a path of continued wealth creation. Informed
    consumers can leverage better service, lower costs and a more
    transparent, accountable lending and real estate industry.
        Over the past 10 years, there have been dramatic increases in high-
    risk lending, growing job instability and excess consumer debt
    obligations that are all trademarks of susceptibility to foreclosures.
    NeighborWorks America has established the Center for Foreclosure
    Solutions (CFS) to research and test home ownership preservation
    efforts.
        Our NeighborWorks affiliate--Chicago Neighborhood Housing
    Services--is blazing trails for other organizations across the Nation.
    Chicago NHS teamed up with city officials and 20+ lenders to reduce
    geographically concentrated foreclosures that leave neighborhood blocks
    riddled with vacant homes. The Home Ownership Preservation Initiative
    (HOPI) provides counseling to financially strapped owners and
    assistance in working with lenders to discuss refinancing, lowering
    interest rates and modifying payment plans. Over the past 2 years, the
    HOPI campaign prevented 940 foreclosures through innovative outreach
    and counseling efforts.
        In fiscal year 2007, NeighborWorks America will expand the work of
    HOPI to establish a national model to address concerns about growing
    foreclosure problems. Other national and local partners are critical to
    successfully addressing these problems.
        The goals of the Center for Foreclosure Solutions include market
    penetration in 15 markets with a phase roll-out approach focusing on
    key foreclosure hotspots, telephone counseling 24 hours, 7 days a week
    through a national, third-party intermediary, and implementation of a
    national and local targeted media and public relations campaign to
    reach delinquent and at-risk homeowners.
                Rural America
        The NeighborWorks network has become increasingly active in rural
    communities around the country. Today, 77 out of 240 chartered
    NeighborWorks organizations--about 30 percent of the network--serves
    rural populations, across 39 States and Puerto Rico. As a result of a
    series of growth and programmatic innovations, the number of rural
    Americans assisted by the network is expected to increase to 50 percent
    in the next few years. The needs of rural homeowners and renters differ
    in many aspects from those in urban or suburban areas. In many States,
    rural areas have the highest rate of substandard housing, the highest
    poverty rate, and median incomes often 35 percent or less than the
    median incomes of urban residents. Unfortunately, rural areas
    traditionally have lacked the financial resources for home financing.
        In fiscal year 2007, NeighborWorks America will seek new
    affiliations with community-based organizations serving rural
    communities and will boost the capacity of existing NeighborWorks
    organizations to significantly increase their rural service areas to
    include high-priority under-served populations.
        Hurricane Katrina has demonstrated the importance of coordinating
    relief efforts. In addition to new and expanded NeighborWorks charters,
    the Corporation will partner with at least three regional capital
    intermediaries based in perennially under-served rural regions. The
    NeighborWorks System will provide access to customized training event,
    including place-based Training Institutes in areas such as the Gulf and
    Appalachia; equity capital to leverage targeted investment in housing
    and community economic development, and at least partial liquidity for
    those investments through the Corporation's national partnerships.
        During fiscal year 2007, the Corporation will also launch at least
    six pilot sites for community economic development projects in rural
    markets. The pilot project will be designed to strengthen communities
    through job creation, retention and enhancement strategies.
        This aggressive growth strategy is designed to increase
    NeighborWorks America's overall production in rural communities from
    $500 million in direct investments and 16,000 individuals served in
    fiscal year 2005 to $750 million in direct investments and 24,000 rural
    Americans served by the end of fiscal year 2007.
                Areas Affected by Natural Disasters
        The NeighborWorks System (NeighborWorks America, related Capital
    Corporations such as Neighborhood Housing Services of America and
    affiliated local NeighborWorks organizations) along with the
    Corporation's national partners are well-positioned to play a
    significant role in rebuilding the areas of the Gulf Coast region
    affected by Hurricane Katrina. This nationwide network has access to
    skilled housing and community development experts who will apply their
    expertise to the affected are in a number of ways:
      --Contractors and construction managers who can do a triage of work
            on existing properties to determine which properties can be
            rehabilitated and which should be demolished;
      --Real estate developers who know how to take an idea and turn it
            into a reasonably-priced quality constructed house or
            subdivision;
      --Mortgage lenders who can originate and underwrite loans;
      --Counselors on credit and housing issues, who can assist residents
            through complex processes involved with property rehabilitation
            and/or mortgage financing;
      --Contractors who are knowledgeable of various Federal, State and
            local programs and funding sources that may be available;
      --Organizers who can help provide hope to the affected families and
            communities, and mobilize volunteers in the rebuilding efforts;
            and,
      --Resource development professional who have a proven track record in
            soliciting private-sector contributions in support of
            rebuilding efforts.
                Affordable Rental Opportunities
        The desire to own a home is strong across all socioeconomic groups,
    but not everyone is adequately prepared, and the strongest communities
    offer multiple housing options. Therefore it remains important to have
    viable rental housing--especially units that allow a safe, stable
    environment--with rents affordable enough for occupants to accumulate
    savings. Tomorrow's first-time buyers are renters today.
        A major focus of NeighborWorks Multifamily Initiative, which
    provides affordable rental housing, has been on strengthening aging
    property portfolios that may be suffering a weakness in cash flow. Our
    expert coaches and analysts suggest operational improvements, and
    explore creative ways to restructure financing, with an eye to
    improving cash flow across the entire portfolio.
        NeighborWorks America also promotes more opportunities to increase
    the supply of affordable rental homes. In 2004, the Corporation was
    able to use the special set-aside of $5 million for multifamily housing
    to promote mixed income rental homes that truly serve their communities
    by providing more than just sound housing.
        NeighborWorks organizations in our Learning Center Consortium
    provide after-school care, job training, health care, parenting classes
    and much more. NeighborWorks America has commissioned a study to
    measure the impact on the difference made on the kids and their
    families in the form of dropout rates, GPA, attendance rate, and job
    retention.
    Build Skills and Performance in the Housing and Community Development
            Field
                NeighborWorks Center for Home Ownership Education and
                        Counseling
        NeighborWorks is the Nation's largest certifier of high-quality
    home ownership educators and counselors, working to empower consumers
    to make the biggest investment of their lives a successful one.
    Although the value of home ownership education and counseling to
    homebuyers is supported by research and is increasingly recognized as a
    powerful tool to promote neighborhood revitalization, the quality is
    uneven and the coverage insufficient. There are few national
    certification standards, limited continuing-education requirements for
    trainers and counselors, gaps in coverage across the Nation, and a lack
    of quality control for home ownership education and counseling--ranging
    from intensive, multi-day curriculum and standards to ``sham''
    counseling programs that lure potential buyers into predatory loan
    deals. There is also a dearth of well-trained educators and counselors
    to meet the growing national need.
        To address these concerns, NeighborWorks America, through the
    nationally recognized NeighborWorks Training Institute, has launched
    the NeighborWorks Center for Home Ownership Education and Counseling
    (NCHEC) to create a national force of high-quality home ownership and
    financial education counselors. To date these counselors have helped
    more than 500,000 Americans gain critical financial literacy skills and
    make the most of home ownership.
        NCHEC aims to increase the number of home ownership educators and
    counselors trained and certified through the NeighborWorks Training
    Institute from 700 to more than 2,000 per year--indirectly ensuring the
    education and counseling of several million individuals and families by
    2007. NCHEC has already provided over 3,800 training certificates a
    year in more than 20 courses in home ownership, education, counseling
    and lending.
        In the fall of 2004, the Department of Housing and Urban
    Development awarded NeighborWorks America $7.75 million over 2 years to
    train and certify HUD-approved housing counselors around the country
    through NCHEC. In addition to expanded home ownership and community-
    lending training offered at the NeighborWorks Training Institutes,
    NCHEC has partnered with other intermediaries, State-wide counseling
    collaboratives, and NeighborWorks organizations to offer trainings in
    local settings around the country.
                NeighborWorks Training Institutes
        For more than 15 years, NeighborWorks America has been providing
    outstanding community development training in the country through its
    NeighborWorks Training Institutes, which are held four to five times a
    year in different cities throughout the United States. In recent years,
    NeighborWorks America has begun taking its NeighborWorks Training
    Institute courses to local markets in the form of ``place-based
    trainings'' conducted in collaboration with local and regional
    partners. NeighborWorks America has also offers an Advanced
    Practitioner Program (APP) for seasoned community development
    practitioners and board members.

                                   CONCLUSION

        Let me close by thanking the subcommittee for the opportunity to
    brief you on our work, and the results generated by NeighborWorks
    America's congressional appropriation. The NeighborWorks System and
    NeighborWorks America's congressional appropriation represents a
    precious asset for 240 community development organizations and more
    than 4,000 communities across America. With our leveraging of dollars,
    NeighborWorks has been efficient and effective in ensuring the maximum
    impact of our Federal appropriation. Congress has allowed NeighborWorks
    America to be flexible and responsive to local needs; as a result,
    families and communities are stronger and more self-reliant.
        NeighborWorks America is committed to continuing to build healthy,
    strong and safe communities all across America. Your continued support
    is vital to us in accomplishing this goal.
                                     ______

    Prepared Statement of the Honorable Steven R. Blust, Chairman, Federal
                              Maritime Commission

        Mr. Chairman and members of the subcommittee, thank you for this
    opportunity to present the President's fiscal year 2007 budget for the
    Federal Maritime Commission.
        The President's budget for the Commission provides for $21,474,000
    for fiscal year 2007. This represents an increase of 5.8 percent, or
    $1,180,000, over our fiscal year 2006 appropriation. This budget
    provides for 132 work-years of employment.
        Our fiscal year 2007 budget request contains $15,691,000 for
    salaries and benefits to support the Commission's programs. This is an
    increase of $1,178,000 over our fiscal year 2006 appropriation. This
    includes all salaries, including those for employees hired in fiscal
    year 2006, promotions, within-grade increases, and an anticipated cost
    of living adjustment. The funding includes annualization of the fiscal
    year 2006 cost of living adjustment increase, and an anticipated 2.2
    percent fiscal year 2007 cost of living adjustment. Further, it
    includes funds to hire two critical staff: a Commissioner's Counsel and
    an attorney for our Office of Consumer Affairs and Dispute Resolution
    Services.
        Official travel has been straight-lined at our fiscal year 2006
    level of $237,000. Travel remains an essential aspect of our effort to
    provide better service to the ocean transportation industry and to
    accomplish our oversight duties more effectively. We are committed to
    working within our straight-lined travel funding to ensure that our
    expanded outreach and compliance programs are fully supported, in
    addition to providing appropriate travel funds to support all other
    program efforts.
        Administrative expenses have increased $2,000 net over fiscal year
    2006, to $5,546,000. The Commission is planning for a small increase in
    rent to accommodate rental rate increases in our field offices, as well
    as an increase to fund Homeland Security charges. Other administrative
    expenses will be incurred in fiscal year 2007 to support increases in
    our customary business expenses, such as maintaining government and
    commercial contracts, and for items such as telephones, postage, and
    supplies. These increases are partially offset by a reduction of
    $157,000 for furniture and equipment.
        Just as in previous years, the Commission's budget contains
    primarily non-discretionary spending. These items represent the basic
    expenses any organization faces in order to conduct its day-to-day
    operations, and are crucial to allow us to meet the responsibilities
    Congress has entrusted to the agency. This budget request therefore
    represents a modest increase over the current year appropriation,
    primarily to address anticipated cost increases over current year
    expenses.
        As you know, Mr. Chairman, the Commission is responsible for the
    regulation of oceanborne transportation in the foreign commerce of the
    United States. Since 1916, the Commission and its predecessor agencies
    have effectively administered Congress' directives for the ocean
    transportation industry, and its long-standing expertise and experience
    have been recognized by Congress, as well as by the industry the
    Commission oversees, courts, and other nations. Working with the
    industry, we have developed a regulatory system that allows for
    necessary oversight with minimal disruption to the efficient flow of
    U.S. imports and exports. I would like to highlight for you some of the
    significant activities in which the Commission is involved.
        Last year, I advised you of the Commission's rulemaking proceeding
    to allow non-vessel-operating common carriers (``NVOCCs'') to enter
    into confidential service arrangements with their shipper-customers. As
    you will recall, NVOCCs otherwise in compliance with the licensing,
    financial responsibility, and tariff publication requirements of the
    Shipping Act are now permitted to enter into confidential NVOCC Service
    Arrangements, or NSAs, with their shipper customers in lieu of
    publishing their rates in a publicly-available tariff, provided that
    the NSA is filed confidentially with the Commission and the essential
    terms are published in the NVOCC's tariff. This new regulation is
    consistent with those regulations governing service contracts between
    ocean common carriers and their shipper customers, and we anticipate
    that it will result in greater competition in the shipping industry.
        Originally the exemption rule did not allow NVOCCs or shippers
    associations with NVOCC members to participate in NSAs as shippers. We
    were concerned about the potential antitrust implications of such
    arrangements. Some of those concerns were ameliorated after issuance of
    a judicial decision last fall, and the Commission determined that it
    could remove these limitations. Two or more NVOCCs are still prohibited
    from jointly offering a single NSA, as we believe this might run
    counter to recent judicial interpretations which construe the antitrust
    provisions of the Shipping Act in a manner we believe to be much
    broader than what was envisioned by Congress, this Commission, and
    indeed even the industry. I indicated last year that we would continue
    to work with the industry to address this issue. In fulfillment of this
    obligation, the Commission requested the comments of industry
    participants on potential ways to authorize joint NSAs by multiple
    NVOCCs. The Commission received numerous comments in late 2005, and is
    presently evaluating them.
        As of mid-April 2006, 300 original NSAs had been filed--by 57 NVOCC
    filers--out of 355 NVOCCs who are registered to be able to offer NSAs.
    That means that only slightly more than 10 percent of all NVOCCs have
    registered to offer NSAs, and fewer than 2 percent have taken advantage
    of the new contracting option. It will take some time for new business
    processes, skills and recognition of benefit to converge into a new
    market; however, I forecast a substantial growth in the use of NSAs in
    the future as the industry becomes more familiar with these agreements.
        As part of the Commission's enforcement and ocean transportation
    intermediary oversight functions, as well as the ombudsman services
    provided by the Office of Consumer Affairs and Dispute Resolution
    Services, the Commission recently commenced a formal investigation
    against nine household goods moving companies operating in violation of
    the Shipping Act. The Commission's preliminary investigation indicated
    that these companies were unlawfully doing business as unlicensed
    NVOCCs without proof of financial responsibility or published tariffs,
    and were engaging in conduct that created risks of significant
    financial harm to the public. On January 17, 2006, the U.S. District
    Court for the Southern District of Florida granted the Commission's
    motion for a preliminary injunction against four of the companies and
    three of the individuals named as respondents in the proceeding. The
    injunction, which prohibits these respondents from operating in
    violation of the Shipping Act, will remain in effect pending the
    completion of the Commission's investigation.
        The Court injunction and the Commission's formal investigation are
    based on more than 250 consumer complaints. Some examples of those
    complaints include failure to deliver cargo and refusal to return the
    pre-paid ocean freight; loss of the shipper's cargo; charging the
    shipper for marine insurance never obtained; withholding cargo until
    the shipper pays a higher rate than the one originally quoted;
    misleading the shipper as to the cargo's whereabouts; and finally,
    making the release of cargo dependent upon the shipper paying a second
    carrier or warehouse for transportation and warehousing already pre-
    paid to respondents. As most of the injuries of which we are aware
    involve shippers' personal household possessions, the Commission
    considers it especially important that every effort be made to prevent
    the respondents from injuring anyone else. At the moment, the
    proceeding is before the Commission's administrative law judge and we
    will seek additional injunctions as warranted.
        Last year, I advised you about the agency's public outreach
    initiative involving a series of informational seminars hosted by the
    Commission's Area Representatives and other Commission personnel at
    various locations around the country. These seminars continue to be
    successful in creating a forum for enhanced dialogue between the
    industry and the Commission. As you may recall, we also started a
    program where we have invited representatives from various segments of
    the industry to brief our staff on current issues and concerns
    affecting the ocean transportation industry. Thus far, we have met with
    representatives from the ocean transportation intermediary, passenger
    vessel and vessel operator communities, as well as shippers, marine
    terminal operators, and port authorities. We are in the process of
    planning more informational briefings for 2007 with other segments of
    the maritime industry, including Federal agencies. One Federal agency,
    the Maritime Administration, briefed Commission staff last March, and
    the U.S. Customs and Border Protection is scheduled to brief our agency
    in June about the Automated Commercial Environment trade processing
    system. I am confident that these briefings will provide the Commission
    and its staff with a greater awareness and understanding of the most
    current issues facing the maritime community.
        The Commission continues to address restrictive or unfair foreign
    shipping practices under section 19 of the Merchant Marine Act, 1920
    (``Section 19''); the Foreign Shipping Practices Act of 1988
    (``FSPA''); and the Controlled Carrier Act of 1978. Section 19 empowers
    the Commission to make rules and regulations to address conditions
    unfavorable to shipping in our foreign trades; FSPA allows the
    Commission to address adverse conditions affecting U.S. carriers in our
    foreign trades that do not exist for foreign carriers in the United
    States. Under the Controlled Carrier Act, the Commission can review the
    rates of government-controlled carriers to ensure that they are not
    below a level that is just and reasonable.
        In my statement last year, I advised you of several pending
    proceedings related to shipping conditions in China. In particular, the
    Commission was investigating whether Chinese laws and regulations might
    discriminate against and disadvantage U.S. vessel operators and NVOCCs
    with regard to a variety of maritime-related services. As you know, in
    December of 2003, the United States, through the Secretary of
    Transportation, and his Chinese counterpart, the Minister of
    Communications, signed a bilateral maritime agreement which appeared to
    address many of the concerns raised by the Commission, including issues
    affecting vessel operators, NVOCCs, and other industry interests. That
    agreement became effective with the exchange of diplomatic notes in
    April of 2004.
        Subsequently, the Commission requested comment from the industry on
    whether the commitments made in the bilateral agreement, which would
    have relieved the impediments to U.S. companies identified by the FMC,
    were being honored.
        The issues we raised were adequately addressed, and the Commission
    terminated the formal proceeding investigating these Chinese practices
    on April 21, 2005. Informally, we continue to receive positive feedback
    from the U.S. industry in this regard. Another U.S.-flag carrier has
    entered the U.S.-China trade and has opened offices in two cities in
    China. Matson Navigation's first vessel in the Ningbo-Shanghai-Long
    Beach express service called in Ningbo on February 21, 2006. As always,
    we will continue to monitor practices around the world to determine
    whether formal action is warranted.
        Lastly, the Commission recognizes that its oversight of ocean
    common carriers, ocean transportation intermediaries, including ocean
    freight forwarders and NVOCCs, and marine terminal operators, is an
    important element in the effort to protect our Nation's seaports. We
    are continuing our efforts to combat unlawful participation in the U.S.
    ocean transportation system by ensuring that all entities engaged in
    the U.S. foreign commerce are in compliance with the requirements of
    the statutes we administer. The Commission has met with the Office of
    Naval Intelligence, the Department of Homeland Security and the
    Department of Transportation to discuss information sharing and other
    possible FMC contributions to maintaining a safe and efficient maritime
    transportation system. The Commission's regulation of operators of U.S.
    marine terminals ensures that they follow just and reasonable
    practices, and that they do not unreasonably prefer or prejudice any
    person or unreasonably discriminate against carriers using their
    facilities. While our oversight is limited to the regulation of such
    commercial practices, we make every effort to work closely with other
    agencies to share information in this area. Moreover, the Commission is
    a member of the Committee on the Marine Transportation System, the
    inter-agency group created by this administration to carry out a joint
    strategic plan that ensures that the U.S. marine transportation system
    achieves the expansion goals necessary to support the level of traffic
    anticipated in the 21st Century in a secure, environmentally sound and
    coordinated manner for all stakeholders. We also continue to exchange
    information with the U.S. Customs Service through a Memorandum of
    Understanding. As the Commission continues to refine its role in the
    safeguarding of our national security, we stand ready to provide our
    technical expertise and assistance to all groups that are on the front
    lines of securing our ports and vessels.
        Mr. Chairman, I hope that my comments have served to give you a
    clear indication of the important work to be accomplished by the
    Federal Maritime Commission. I respectfully request favorable
    consideration of the President's budget for the Commission so that we
    may continue to perform our vital statutory functions in fiscal year
    2007.
                                     ______

       Prepared Statement of Mark V. Rosenker, Acting Chairman, National
                          Transportation Safety Board

        Chairman Bond, Ranking Member Murray, and members of the
    Subcommittee on Transportation, Treasury, the Judiciary, Housing and
    Urban Development, and Related Agencies, the National Transportation
    Safety Board appreciates the opportunity to present testimony on its
    appropriations request for fiscal year 2007.
        The National Transportation Safety Board is an agency with the
    critical mission of ensuring the safety of the traveling public through
    transportation accident investigation and special study of
    transportation safety concerns. The Safety Board investigates aviation,
    pipeline, rail, hazardous material, marine, and highway accidents. The
    Board also conducts highly technical laboratory examinations and
    analyses of voice and data recorders and physical evidence recovered in
    accident investigations. The Board determines the probable cause of the
    transportation accidents and makes safety recommendations to prevent
    similar accidents from happening again. We address these
    recommendations to the agencies, organizations, and companies that are
    best able to make improvements. The Board's investigators serve as U.S.
    accredited representatives as specified in international treaties for
    aviation accidents outside U.S. borders involving U.S.-registered
    aircraft or involving aircraft or major components of U.S. manufacture.
    Beyond our national and international accident investigation work, the
    Board works closely with State governments to transform our safety
    recommendations into laws that save lives.
        I assure you that we work hard to manage well the people and
    resources of the Safety Board to perform our critical mission. During
    last year's appropriations cycle, the committee expressed concerns
    about the distribution and management of agency resources. Over the
    last year we have made considerable progress to improve the mission
    focus of the Safety Board.
        Recent leadership changes at the Safety Board have been
    significant. In March 2005, Joe Osterman began serving as the Board's
    Managing Director, its highest-ranking career leader. Mr. Osterman is
    effectively leading a highly talented management team. Over the past
    year, the Board has changed personnel in 14 of the top 24 leadership
    positions. Highly qualified and experienced professionals, from both
    inside and outside the Board, fill these important positions. Some
    noteworthy new members of the team are Dr. Jack Spencer, the Director
    of our Office of Marine Safety, and Colonel Gary Halbert, our General
    Counsel. Dr. Spencer, an MIT-educated naval architect, comes to us from
    the private sector, and Mr. Halbert--an accomplished attorney and
    aviator--recently retired from the U.S. Air Force. Both have hit the
    ground running and are making important contributions to the Board.
    Also, we are currently recruiting for a Chief Information Officer who
    will join the agency's management team with the responsibility of
    managing the agency's information infrastructure. We are improving our
    performance management system throughout the agency; and, most
    importantly, we are refocusing our efforts on leadership, internal
    communication among staff and the Board members, external
    communications with our committees and the public, and dedication to
    the Board's mission.
        The Safety Board has reinvigorated its focus on the timely
    completion of investigations and the production of accident reports. We
    have increased production of reports, with safety recommendations by 50
    percent, without compromising the quality that is the hallmark of
    Safety Board investigations and reports. Since this time last year, the
    Board has considered and adopted 21 investigation or safety reports in
    public meetings and conducted two public hearings. Moreover, our
    leadership team is on track to improve this record even further. A
    dozen of next year's Board products have been scheduled, and three
    public hearings and one safety forum have been proposed for the Board's
    consideration. We are focused on the mission. Furthermore, our
    leadership team is improving the management of the agency. In each of
    the last 3 fiscal years, timely and accurate NTSB financial statements
    have received clean audit opinions from the Department of
    Transportation Inspector General. The Board now has a strategic plan,
    and we are working closely with the Government Accountability Office to
    examine our management practices to determine where we can make
    additional improvements.
        The Safety Board also has heard clearly the concerns regarding the
    NTSB Academy. The building is the site of our training center, but it
    also houses the Board's Mid-Atlantic Aviation Safety Regional Office,
    the reconstruction of the TWA flight 800 wreckage (an important
    training tool) and a laboratory. Finally, it serves as the continuity-
    of-operations site for the Board as well as for other government
    agencies. In the fiscal year 2006 appropriations for the Board, this
    committee acknowledged the Academy's benefit in sharing accident
    investigation best practices with the broader transportation community;
    however, the committee also believed that the functions of the Academy
    should be secondary to the Board's core mission of accident
    investigation. The committee directed the Board to reduce the
    investigator workforce hours at the Academy so that critical
    investigative responsibilities would not suffer because accident
    investigators were diverted to Academy teaching assignments. The
    committee encouraged the Board to more boldly and directly cover the
    cost of the Academy using authority to impose and collect fees for the
    Academy's services. (Consistent with the committee's direction, we have
    redirected our approach.) The Board now looks at the Academy as an
    integral adjunct to the core investigative mission, concentrating on
    the Academy's unique ability to develop and sustain innovative and
    state-of-the-art training courses that support, not supplant, accident
    investigation and safety activities.
        I would like to provide a brief overview of some of the major
    accidents, reports, and activities of the Safety Board in each mode of
    transportation, and also touch on the important work of other major
    offices during this past year.
        Marine Safety.--The Safety Board initiated five marine accident
    investigations in fiscal year 2005 including the sinking of the
    uninspected passenger vessel Sydney Mae II in Oregon in September 2005.
    Board investigators led the investigation of a fire on board the
    passenger vessel Lady Baltimore in Baltimore, Maryland, and also a fire
    on the small passenger vessel Express Shuttle II in Port Richy,
    Florida, in October 2004. The Board also investigated accidents
    involving two foreign ships: the Norwegian Dawn, a Bahamian flag
    passenger vessel en route to New York that suffered heavy weather
    damage, and the Malaysian flag bulk carrier Selendang Ayu that went
    aground in the Aleutians.
        The Board completed four marine investigations in fiscal year 2005.
    These included the collision of the U.S. Navy submarine USS Greenville
    and the Japanese vessel Ehime Maru off the coast of Hawaii, the
    passenger vessel Taki Tooo, the Staten Island Ferry Andrew J. Barberi,
    and the Alaskan Marine Highway System ferry Leconte.
        Aviation Safety.--The Safety Board initiated five major domestic
    aviation accident investigations in fiscal year 2005, including the
    crash of a Northwest Airlink regional jet that killed both crewmembers
    during a repositioning flight in Jefferson City, Missouri. Just 5 days
    later, the Board launched a second go-team to Missouri to investigate
    an accident involving an American Connection commuter flight that
    crashed on approach to Kirksville causing 13 fatalities. A go-team also
    was launched to Houston, Texas, in November to investigate an accident
    involving a Gulfstream jet that was en route to pick up former
    President Bush for a foreign speaking engagement. Two other accidents
    involving corporate jets occurred in February: one was taking off from
    Teterboro, New Jersey; the other was carrying Circuit City executives
    to Pueblo, Colorado.
        The Board launched investigators to assist on 17 foreign accidents
    in fiscal year 2005, including the crash of a military Boeing 737
    charter in Kabul, Afghanistan. August was an extremely busy month for
    foreign investigations--the Board launched investigators to a Sikorsky
    S-76 helicopter accident in Tallin, Estonia, and launched investigators
    to assist in airline accident investigations in Canada, Greece,
    Venezuela, and Peru.
        The Board completed four major investigations in fiscal year 2005:
    American Airlines flight 587 in-flight separation of the vertical
    stabilizer in Belle Harbor, New York; Air Sunshine in-flight engine
    failure near Treasure Cay, Bahamas; Federal Express hard landing and
    gear collapse in Memphis, Tennessee; and Executive Airlines crash
    during landing near San Juan, Puerto Rico. During this time, the Board
    also issued two important aviation safety studies: ``General Aviation
    Activity Reporting Requirements'' and ``General Aviation Weather
    Accidents''.
        Regional investigators initiated 1,862 general aviation accident
    investigations in fiscal year 2005, and initiated 132 investigations
    involving commercial (not GA accidents) operations. Regional
    investigators completed 2,132 investigations during this period. The
    Board also published annual reviews of aircraft accident data for air
    carrier and general aviation operations.
        Railroad, Pipeline, and Hazardous Materials.--In fiscal year 2005,
    the Safety Board launched teams to investigate 13 railroad accidents
    and 2 pipeline and hazardous material accidents. These included a
    launch to Graniteville, South Carolina, in which a freight train
    diverted at full speed onto an industrial siding where it subsequently
    crashed into a standing train, releasing chlorine gas that killed nine
    people and resulted in the evacuation of more than 5,400 people. The
    Board completed eight railroad and three pipeline and hazardous
    materials accident investigation reports and one pipeline safety study
    in fiscal year 2005. The accidents included a tank car explosion in
    Freeport, Texas, that occurred during chemical off-loading operations
    and the derailment of an Amtrak train in Flora, Mississippi.
        Highway Safety.--The Safety Board launched investigators on 6 major
    highway investigations and 31 other investigations during fiscal year
    2005. Those included a 14-fatality motorcoach rollover accident in
    Turrell, Arkansas; a motorcoach that struck an overpass in Alexandria,
    Virginia, while the driver was talking on a cell phone; two accidents
    causing 5 fatalities in which gasoline tankers overturned (one near the
    Pentagon in Arlington, Virginia, and the other in Davie, Florida); a
    school bus collision with a trash truck in Arlington, Virginia, in
    which 2 children were killed; and the tragic motorcoach fire in Wilmer,
    Texas, that killed 23 elderly passengers during the Hurricane Rita
    evacuation.
        Five major reports were completed in fiscal year 2005, including
    reports on two accidents 7 months apart at a Border Patrol security
    checkpoint in North Hudson, New York, killing 4 and injuring 54; an
    accident involving a motorcoach that struck the rear of a parked
    tractor-trailer near Tallulah, Louisiana, killing 8; and another
    accident in which a motorcoach crossed a highway median in a rainstorm
    striking an SUV and killing 7 in Hewitt, Texas. In addition, the office
    of Highway Safety also completed a special investigation report for the
    Board on ``Medical Oversight of Non-Commercial Drivers'' that
    highlighted the dangers of seizures and other medical issues uncovered
    during the investigations of four accidents that resulted in 8
    fatalities and 27 injuries. The Board also completed a report on the
    effectiveness of driver's education programs that involved a public
    hearing on an accident in Belgrade, Montana, that killed a driver's
    education instructor and three students.
        Safety Recommendations.--The most important result of an accident
    investigation are the safety recommendations that help prevent future
    accidents. Our recommendation acceptance rate was over 82 percent in
    2005. We currently have 850 open safety recommendations of which 62
    percent are to operating administrations of the Department of
    Transportation and the U.S. Coast Guard in the Department of Homeland
    Security.
        In fiscal year 2005, the Safety Board issued 84 safety
    recommendations and closed 142, 111 of which were closed with an
    acceptable response. In aviation, 29 were successfully closed, as were
    37 in highway, 8 in pipeline and hazardous materials, 10 in marine, and
    27 in rail. The Board also updated its Most Wanted List of critical
    safety recommendations targeted to Federal regulators and States that,
    if implemented, will make the most dramatic impact on safety. The Most
    Wanted List contains 56 recommendations directed to Federal recipients,
    and 9 directed to the States. Additionally, the Safety Board conducted
    more than 20 meetings and legislative briefings in 10 States to promote
    Safety Board recommendations.
        Some examples of successfully implemented recommendations include
    tougher surveillance of rapidly growing air carriers, revised
    lubrication intervals and pilot checklist procedures for horizontal
    stabilizer trim systems on DC-9 and MD-80/90 and B-717 aircraft, new
    regulations upgrading safety requirements for 9- to 15-passenger vans,
    a requirement that steel pipe used in construction pipelines must have
    adequate toughness to prevent brittle fracture, and improved crew
    resource management training for railroad employees.
        NTSB Academy (Training Center).--Fiscal year 2005 marked the first
    full year of operational experience on site for the Academy. During the
    year, the Academy expanded course offerings and received accreditation
    from the International Association for Continuing Education Training,
    allowing continuing education credits to be given to students who meet
    the required criteria. Also, as a result of the direction provided in
    the Board's appropriations, the philosophical approach for the Academy
    has changed significantly and investigative resources are used for
    Academy programs have been sharply curtailed. The focus of the NTSB
    Academy is to support the accident investigation mission of the Safety
    Board and promote transportation safety in the following ways:
      --Improving the quality of NTSB accident investigations through
            technical training and instruction;
      --Improving the effectiveness of NTSB staff through skill development
            instruction;
      --Improving the efficiency and effectiveness of NTSB accident
            investigations by communicating lessons learned, sharing
            accident investigation techniques, and fostering the exchange
            of new ideas and experience among organizations that
            participate in NTSB investigations as parties and the broader
            transportation safety community;
      --Providing a forum for instruction, outreach, and advocacy on issues
            relevant to the transportation safety community;
      --Providing a facility for advanced laboratory and research activity;
            and
      --Utilizing its high-quality training resources to facilitate
            transportation disaster response programs, collaborative
            instruction with partner agencies, and other compatible
            activities.
        Summary.--Included in the President's fiscal year 2007 budget for
    the National Transportation Safety Board is a provision that would
    rescind the $1.998 million balance in the Board's no-year emergency
    fund and make that sum available in the Board's fiscal year 2007 1-year
    appropriation account. In addition, the President's budget proposal
    would make up to $5 million of the 1-year appropriation available until
    expended, thus allowing the Board to set aside up to $5 million of the
    appropriation for extraordinary expenses, such as those that normally
    would be covered by the emergency fund.
        Should the Congress approve this provision, the Safety Board would
    anticipate initially reserving some portion of its appropriations to
    ensure that a minimum amount would be available for carry over for
    emergency expenses. Any additional amounts that are available at year-
    end would also be carried over for this purpose. Because establishing
    an adequate pool of money for emergency expenses would likely take
    several years to accomplish, this provision would necessarily need to
    be included in the Board's appropriation language for subsequent fiscal
    years as well.
        As the Acting Chairman of the National Transportation Safety Board,
    I am very proud of the men and women with whom I work. Other countries
    have adopted our model, and many countries ask for the Safety Board's
    assistance. The employees at the Board are considered to be the best in
    the business, and prove it every day. What surprises many people is the
    size of the agency. Currently the Board has only 399 employees. Of this
    number, 283 employees are investigators or are mission-critical to an
    accident investigation. Seventy percent of our budget is used for
    employee compensation and benefits, 15 percent for fixed expenses (such
    as office space, telephones, etc.) and 15 percent for everything else
    including travel to accident sites, accident investigation services,
    and lab equipment replacement and upgrades. I appreciate very much that
    the Appropriations Committee has had to make difficult choices in the
    last several years. This year's appropriation, which was held to last
    year's funding level, was further reduced by a 1 percent across-the-
    board rescission. In addition, the cost of the annual pay increase had
    to be absorbed in the reduced appropriation. As a result, we reduced
    our FTE level by 15 and have not been able to replace some key staff.
        The Safety Board faces significant challenges. Although the Board
    has executed a human capital forecast this year to realign our existing
    resources to continue to meet critical mission needs, the Board will
    find increasing challenges in some critical areas. Advances in
    transportation technologies, increases in our necessary involvement in
    foreign aviation accident investigations, and the sheer complexity of
    many recent accident investigations will stretch thin our employee
    resources. The Board has been very careful with its appropriated funds,
    but we will have difficulty sustaining the high standards we demand of
    ourselves without sufficient funding. In fiscal year 2005, we have made
    demonstrable improvements in the management, financial fitness, and
    mission focus of the NTSB. I would like to request that the
    subcommittee consider the Board's critical mission and our future needs
    for additional professionals to continue the fine work of the Safety
    Board. In 2004, there were more than 44,000 fatalities in
    transportation accidents, and we know that Congress shares our belief
    that more can be done to prevent these fatalities. I would like to
    thank the subcommittee for your continued support of the Safety Board.
                                     ______

        Prepared Statement of Honorable Patrick E. McFarland, Inspector
                    General, Office of Personnel Management

        Mr. Chairman and members of the subcommittee, thank you for
    providing me with this opportunity to discuss the President's fiscal
    year 2007 request for appropriations for the Office of the Inspector
    General. The total request for the Office of the Inspector General is
    $17,764,000 which is $452,000 below the amount enacted in fiscal year
    2006. Of this amount, $1,598,000 is from the salaries and expenses/
    general fund and $16,166,000 is from the trust funds. These resources
    are requested to perform our core functions which include:
      --Conduct audits of agency programs and operations, primarily
            carriers participating in the Federal Employees Health Benefits
            Program (FEHBP), associated information systems, and internal
            agency operations and financial systems;
      --Provide investigative oversight of the OPM-administered employee
            benefit programs; and
      --Issue administrative sanctions, including debarments, suspensions,
            and civil monetary penalties, to health care providers who pose
            a financial risk to the FEHBP itself or a health care risk to
            persons who receive health insurance coverage through the
            FEHBP.
        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 $715.8 billion in fiscal year 2005, their receipts were
    $85.1 billion, and their annual outlays were $94.4 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 270 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 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 fund and commitments by program
    management to recover additional amounts. Since fiscal year 1992, these
    recoveries and commitments total approximately $1.2 billion which is
    approximately $10 of positive financial impact for each direct program
    dollar spent. During fiscal year 2005, the positive financial impact
    exceeded $121.7 million, and current estimates for fiscal year 2006 and
    fiscal year 2007 are $130 million and $115 million respectively. In
    addition, we believe that audits and criminal investigations provide a
    significant deterrent against future instances of fraud, waste, and
    abuse.
        With the additional resources received over the past few years, the
    Office of the Inspector General has established 21 investigative field
    offices. We have determined that the most effective deployment of
    investigative staff is to locate them in areas of the country where
    FEHBP and retirement benefits are more concentrated. Experience has
    shown that criminal investigators located in these areas often work in
    cooperation with other law enforcement entities similarly located
    resulting in additional criminal leads and better protection of OPM
    programs. In many instances, criminal investigators located outside of
    Washington, DC work exclusively on cases referred to them by local
    authorities. During fiscal year 2005, investigative work resulted in 38
    arrests, 43 indictments, and 20 convictions and we are projecting
    similar outcomes in fiscal years 2006 and 2007.
        During fiscal year 2007, we will continue to conduct audits of
    pharmacy benefit managers (PBMs). The premiums paid for prescription
    drug coverage have risen exponentially over the last 10 years and
    allegations against PBMs have also increased. It is estimated that
    approximately $6 billion was paid during 2004 in prescription drug
    premiums to experience-rated carriers by the Office of Personnel
    Management and Federal employees. This represents approximately 26
    percent of experience-rated carrier premiums paid for health benefits
    coverage for Federal employees and annuitants.
        Also during fiscal year 2007, we will further our development of a
    data warehouse of health benefits 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 also provides information enabling our criminal
    investigative staff to react quickly to criminal investigative leads.
    For example, the OIG investigators are 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.
        Our administrative sanctions program has continued to improve its
    effectiveness in protecting FEHBP and its enrollees against
    untrustworthy health care providers. This program enforces the FEHBP
    sanctions statute, which authorizes suspension or debarment of
    providers on the basis of 18 different categories of violations. The
    most frequently-encountered violations represent criminal convictions
    or loss of professional licensure. The highest priority sanctions cases
    involve providers who are the subject of investigation by our Office of
    Investigations. We have also developed a state-of-the-art capability to
    obtain sanctions-related information online and integrate it into our
    decision-making processes. With the nature and extent of electronically
    accessible information constantly growing, we are now able to identify
    violations involving providers nationwide who are directly associated
    with FEHBP as members of preferred provider organization networks and
    or who have actually submitted claims to FEHBP carriers. We select
    cases for action on the basis of the seriousness of the provider's
    violations and the risks that the provider poses to the FEHBP and its
    subscribers. We currently have over 29,350 active debarments and
    suspensions in effect.
        Thank you for this opportunity to present my resource request for
    fiscal year 2007.
                                     ______

    Prepared Statement of the Honorable Linda M. Springer, Director, Office
                            of Personnel Management

        Mr. Chairman and members of the subcommittee, I appreciate the
    opportunity to submit for the record a statement addressing the
    appropriations request for the Office of Personnel Management (OPM) for
    fiscal year 2007.
        As you know, OPM provides a variety of products and services to the
    nearly 1.8 million employees in the Federal Government. Some of our
    products and services include managing health insurance for
    approximately 8 million current and former Federal employees and their
    families, administering retirement services for over 2 million retirees
    from all branches of government, completing 90 percent of background
    investigations, and administering career development programs. As the
    OPM Director, I am committed to successfully delivering on our
    responsibilities on a timely basis. In short, I believe the American
    citizens and the Federal civilian workforce expect us to get things
    done, and our fiscal year 2007 budget request will allow us to do just
    that.

                    OPM'S NEW STRATEGIC AND OPERATIONAL PLAN

        Mr. Chairman, operational planning and budgeting go hand in hand,
    and the OPM process is no exception. For an organization to fulfill its
    mission, it is first necessary to have a clear understanding of that
    mission, with supporting strategic objectives and operational goals.
    These goals must be accompanied by strong oversight and accountability
    in order to reach optimal performance.
        With these principles in mind, we recently reassessed the agency's
    goals and priorities, with an eye toward creating a more transparent
    and accountable OPM. This planning process was guided by an advisory
    group consisting of executives and senior General Schedule employees
    with OPM knowledge and expertise. During these meetings, the advisory
    group reviewed draft strategic objectives and goals, identified
    important program needs and milestones, and played a critical role in
    the development of the resultant plan.
        During the planning process, I also reached out to other resources
    for input, including members of Congress, the Chief Human Capital
    Officers Council Executive Committee, union leadership, and the Office
    of Management and Budget.
        The result is OPM's new Strategic and Operational Plan, which
    begins with a concise mission statement--to ensure the Federal
    Government has an effective civilian workforce. While this plan
    complies with the Government Performance and Results Act of 1993, it
    differs markedly from previous OPM plans and other Federal agency plans
    as well. This is intentional. Its goals are straightforward and readily
    identifiable, with each being action-oriented and beginning with a
    verb. Each goal also has a date by which it will be accomplished. The
    plan's 170 goals are included in the OPM Senior Executives' performance
    agreements. This means that, under the new SES performance-based pay
    system, executive compensation is directly linked to successful
    execution of the plan's goals. The bottom line is this--program
    performance will remain subject to high level management attention to
    ensure achievement.
        The new plan was developed concurrently with our 2007 budget
    request. The budget priorities you have seen in the Congressional
    Budget Justification can be traced back to program priorities in our
    new plan. This means that accomplishing the goals of the plan is
    realistic as long as the funding request is sustained.
        We are requesting $36.6 billion to carry out our mission in fiscal
    year 2007. Of this total, $36.4 billion is requested for mandatory
    programs and $255.7 million for discretionary activities. The
    discretionary request reflects $238 million for Salaries and Expenses--
    including transfers from the Trust Fund Accounts of $126.9 million--and
    $17.7 million for the Office of the Inspector General. The total
    discretionary request reflects a net increase of $17.2 million compared
    to the fiscal year 2006 enacted level.
        Highlights of the request are discussed below.

               RETIREMENT CLAIMS PROCESSING AND BENEFITS PROGRAMS

        OPM's request includes funding to improve the services it delivers
    to Federal employees, annuitants, and their families through the
    retirement and insurance programs. Most notably, we will reduce the
    time needed to process claims for benefits submitted by retiring
    Federal employees to an average of 30 days. This represents a
    significant improvement over the timeliness reported for fiscal year
    2005--80 days for employees retiring under the Civil Service Retirement
    System (CSRS), and 93 days for those under the Federal Employees'
    Retirement System (FERS).
        The budget requests an additional $26.7 million in No-Year Trust
    funds for the Retirement Systems Modernization (RSM) Project. These
    funds will allow OPM to continue the conversion of millions of paper
    retirement records to electronic data and contract for the information
    technology needed for the system. RSM is the core strategy to meet
    OPM's long-term customer service, business, and financial management
    goals for the retirement program. As RSM is implemented, OPM will
    authorize new retirement benefits within 5 or fewer days (for 17
    percent of all claims in fiscal year 2008 and 49 percent in fiscal year
    2009). RSM will also improve the accuracy of retirement claims from 90
    percent (CSRS) and 93 percent (FERS) to between 95 percent and 97
    percent, respectively.
        RSM implementation is scheduled for 18 to 36 months from contract
    award. During this period, OPM will need experienced Legal
    Administrative Specialists (claims processors) to provide subject
    matter expertise and advice as the effort progresses. The fiscal year
    2007 budget provides the flexibility to support RSM implementation
    while maintaining timeliness and accuracy in processing retirement
    claims.
        For the Federal Employees Health Benefits Program (FEHBP), OPM will
    continue to negotiate and contract with private insurance companies
    that offer a broad range of health insurance benefits, including high-
    deductible health plans with Health Savings Accounts and consumer-
    driven health plan options. Customers can make informed health
    insurance decisions by several means: OPM-sponsored health plan
    brochures and Web site postings, health plan customer satisfaction
    survey results, Web-based comparison/decision tools, and the Health
    Plan Employer and Data Information Set. OPM will continue to carry out
    tough negotiations with health carriers to contain premium hikes and
    maintain benefit levels, and continue to provide, improve, and expand
    tools so customers can make informed health insurance decisions. In
    addition, OPM will continue to maintain the competitiveness of the
    insurance programs by implementing the new dental/vision benefits
    required by Public Law 108-496.

                    HUMAN RESOURCES MANAGEMENT (HRM) REFORM

        In fiscal year 2007, OPM will pursue policy initiatives that
    continue to reform human resources management in Federal agencies. We
    will work with the Departments of Homeland Security (DHS) and Defense
    (DOD) to ensure the reforms underway link pay to performance. At the
    same time, OPM will work with other agencies engaged in Alternative
    Personnel Systems to assess the lessons learned from various
    modernization efforts. OPM is uniquely positioned to apply lessons
    learned from modernization efforts undertaken at DHS and DOD to the
    rest of the Federal workforce.
        Mr. Chairman, in the last half-century, the Federal workforce has
    changed significantly, and the old personnel system has not kept pace.
    According to the 2004 Federal Human Capital Survey (FHCS), for example,
    only 27 percent of Federal employees believe steps are being taken to
    deal with poor performers, and only 29 percent believe differences in
    performance are recognized in a meaningful way. Little of an employee's
    current compensation is based on performance or mission accomplishment.
    The fiscal year 2007 request will allow OPM to deliver this needed
    human resources modernization.
        The fiscal year 2007 budget will also allow OPM to maintain the
    competitiveness of Federal employee benefits by promoting affordable
    options within the Federal Employees Health Benefits Program, such as
    health savings plans, explore ways to refine market adjustments to
    Federal pay, and provide Federal employees with opportunities,
    benefits, and service delivery that compare favorably with other
    employers. For instance, OPM will continue to develop new workforce
    recruitment strategies and tools, and further improve the hiring
    process.
        OPM will assess the results of its strategic human resources policy
    activities by analyzing data collected from the FHCS and Federal
    Benefits Survey to be issued in 2006 and by continuing to track and
    report the extent to which agencies use innovations such as hiring
    flexibilities, teleworking, and student loan repayments. The results of
    these surveys will provide broad Government-wide indicators on the
    status of Federal human capital, which will benefit lawmakers,
    managers, and employees--and enable OPM to assess its performance in
    terms of delivering new human resources policies and issuing ongoing
    policy guidance as needed.

                IMPLEMENTING HUMAN CAPITAL STANDARDS FOR SUCCESS

        OPM will use requested funds to engage Federal agencies in
    implementing Human Capital Standards for Success, and other best
    practices in human capital management, in keeping with the Merit System
    Principles, veterans' preference, and other standards. OPM's success
    will be measured by the number of agencies that meet the Human Capital
    Standards for Success. At the beginning of fiscal year 2006, 11 of the
    26 agencies reporting under the President's Management Agenda Scorecard
    met these standards, up from 8 in 2005, and zero in 2003. An additional
    14 agencies have made significant progress toward achieving these
    standards. As a result, more than 99 percent of the Federal civilian
    workforce is employed by agencies that have made significant progress
    toward meeting these standards.
        OPM expects continued improvement in 2006 and 2007 as it
    strengthens these standards and engages more agencies to fully adopt
    them. Also, OPM expects Federal agencies to make hiring decisions more
    quickly and implement improved and documented succession plans. In
    addition, OPM anticipates Federal employees to be better trained for
    their jobs and to be held accountable for their performance as agencies
    implement improved performance management systems.
        Through the Compliance Program, OPM will continue audit, review,
    and oversight activities to ensure agencies comply with Merit System
    Principles and veterans' preference, and to ensure whistleblower
    protection and other rights and privileges are honored and protected.
    OPM will strengthen this program by implementing a human capital
    accountability system that holds agencies accountable for adhering to
    these principles, laws, and rules, as well as the human capital best
    practices referenced above.

                        HUMAN RESOURCES LINE OF BUSINESS

        In 2007, OPM will continue to be a leader in the President's
    Management Initiative for Expanding Electronic Government and has
    included $8,349,000 in its request for this purpose. The requested
    resources will support the Human Resources Line of Business (HR LOB)
    and Enterprise Human Resources Integration (EHRI). HR LOB will continue
    to identify and document common functional, technical, and data
    requirements consistent with Federal human resources policies. It will
    work toward the establishment of Federal and private sector Shared
    Service Centers to meet these requirements. During 2007, the EHRI
    project will continue to modernize how the Federal Government
    maintains, stores, protects, and transmits human resources transactions
    and resulting information.

                          SECURITY-RELATED ACTIVITIES

        The fiscal year 2007 request includes funding for a number of
    important security-related activities. OPM will implement Homeland
    Security Presidential Directive 12 (HSPD-12), Policy for a Common
    Identification Standard for Federal Employees and Contractors, which
    was signed by the President on August 27, 2004. This mandates the
    circulation of a Federal standard for a secure and reliable form of
    identification for Federal employees and contractors. HSPD-12
    requirements will enhance OPM's strategic goal of improving security
    and emergency actions throughout the agency. Our request also contains
    funds for security upgrades at OPM field offices across the country.
    These funds will be used to address critical vulnerabilities and
    correct the most serious problems identified during field evaluations.
    Failure to correct these deficiencies compromises the security of our
    employees.

                        OFFICE OF THE INSPECTOR GENERAL

        OPM's discretionary request includes a total of $17.8 million for
    the Office of the Inspector General (OIG) to carry out its audit,
    investigative, and oversight responsibilities. This amount reflects a
    net decrease of $452,000 (2.2 percent) in general funds from the 2006
    appropriated resources. The trust funds annual level is unchanged from
    2006 and will enable the OIG to continue its investigative oversight of
    the Federal Employees Health Benefits Program and the Civil Service
    Retirement System/Federal Employees' Retirement System programs, to
    audit FEHBP plans and carrier information systems, and to continue its
    prescription drug audit plan, established in 2005.

                                 REVOLVING FUND

        OPM also provides a variety of ongoing services that are financed
    by other agencies through our revolving fund. These services include
    providing one-stop access to high-quality e-Training products and
    services; offering professional development and continuous learning for
    Federal managers and executives; 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;
    testing potential military personnel for the Department of Defense
    where it is cost-effective for OPM to do so; managing the selection,
    coordination, and development of Presidential Management Fellows; and
    conducting investigations for all employees to determine whether they
    are suitable for employment, as well as more in-depth investigations
    for employees whose positions require a security clearances. For those
    ongoing revolving fund responsibilities, the fiscal year 2007 budget
    includes an estimated $1 billion in obligations and 2,786 FTE to be
    financed through payments for OPM's services by other agencies.

                           MANDATORY PAYMENT ACCOUNTS

        Since OPM serves as the ``employing agency'' for Federal
    annuitants, the OPM budget request also includes, as always, mandatory
    appropriations to fund the government contributions to the health
    benefits and life insurance programs for those individuals.
        A ``such sums as may be necessary'' appropriation is requested for
    each of these accounts because of the mandatory nature of those
    payments. For the approximately 1.9 million annuitants participating in
    the Federal Employees Health Benefits Program, we estimate that about
    $8.8 billion will be needed to pay the government's share of the cost
    of coverage. That represents an increase of $560 million over fiscal
    year 2006. We estimate that, for the 500,000 annuitants under age 65
    who elect post-employment life insurance coverage, an appropriation of
    $39 million will be required.
        Also, as mandated by the financing system established in 1969 by
    Public Law 91-93, liabilities resulting from changes (principally pay
    raises) since that year that affect retirement benefits must be
    amortized over a 30-year period. For that purpose, we are requesting a
    ``such sums as may be necessary'' payment to the Civil Service
    Retirement and Disability Fund in the amount of $27.5 billion dollars.
    This represents an increase of $350 million to cover the service cost
    of the Civil Service Retirement System, which is not funded by and for
    active employees.

                                   PAY RAISE

        Finally, the President's budget proposes an overall average
    civilian Federal pay increase of 2.2 percent--the same overall average
    increase as proposed for the military. This amount is equal to the full
    increase in the Employment Cost Index for the 12-month period ending in
    September 2005. It is designed to preserve the relative position of the
    Federal Government in the overall labor market.
        The budget includes a legislative proposal that would provide the
    President with the flexibility to allocate a portion of the 2.2 percent
    pay increase to special rate increases for specific groups of employees
    (by occupation, location, or grade level) for which recruitment or
    retention efforts are or may become significantly handicapped.
        This proposal is designed to send a signal that the Federal pay
    adjustment process should be ``smarter''--i.e., more strategic and
    market-sensitive. This new flexibility cannot be exercised without
    congressional approval of the proposed legislation. It would be used
    only if the government has sufficient data to support the need for such
    pay increases in response to demonstrated recruitment/retention
    problems and OPM determines its readiness to implement.
        Thank you again for the opportunity to provide for the record a
    discussion of OPM's budget request. I would be pleased to provide any
    additional information the subcommittee may need.
                                     ______

         Prepared Statement of the U.S. Merit Systems Protection Board

        Chairman Bond, Ranking Member Murray and members of the
    subcommittee, thank you for the opportunity to submit this statement
    for the record on the fiscal year 2007 appropriations request for the
    U.S. Merit Systems Protection Board (MSPB or ``the Board'').
        An independent quasi-judicial agency, MSPB employs 227 employees in
    its Washington, DC headquarters, 6 regional and 2 field offices. The
    Board has two statutory missions. The first mission is to adjudicate
    employee appeals of personnel actions such as removals, suspensions,
    furloughs, and demotions; employee complaints filed under the
    Whistleblower Protection Act, the Uniformed Services Employment and
    Reemployment Rights Act, and the Veterans Employment Opportunities Act;
    Special Counsel complaints of prohibited personnel practices and Hatch
    Act violations; and appeals of administrative decisions affecting an
    individual's rights or benefits under the Civil Service Retirement
    System or the Federal Employees' Retirement System. The Board's second
    statutory mission is to conduct studies of the Federal civil service
    and other Federal merit systems in the Executive Branch.

                            OVERVIEW OF THE REQUEST

        The Merit Systems Protection Board is a small agency that uses
    approximately 79 percent of its appropriation for personnel costs and
    approximately 20 percent of its appropriation for fixed expenses, such
    as space rent and utilities. We are requesting $36,531,000 in
    appropriated funds and a reimbursement limitation of $2,579,000 from
    the Civil Service Retirement and Disability Trust Fund to support the
    operations of the agency. This request represents a $1,287,000 increase
    over the fiscal year 2006 funding level, taking into account the
    government-wide rescission. This increase covers the built-in cost
    increases for pay raises and space rent as well as the costs of
    relocating the San Francisco Regional Office because the current space
    is not compliant with current earthquake standards.

      FISCAL YEAR 2005 ACCOMPLISHMENTS WITH FISCAL YEAR 2007 OUTLOOK (BY
                                BUDGET ACTIVITY)

    Adjudication
        In fiscal year 2005, the Board did an outstanding job, at both the
    regional and headquarters levels, in adjudicating cases in a timely
    manner. During fiscal year 2005, the administrative judges in the
    regional and field offices issued approximately 6,800 initial
    decisions, with an average case processing time of 92 days.
        At the headquarters level, the Board members issued approximately
    1,600 decisions, most of which were on petitions for review of
    decisions issued by the administrative judges. The Board has reduced
    its inventory of outstanding cases by 48 percent. The average case
    processing time for adjudicating petitions for review of initial
    decisions was 265 days in fiscal year 2005. All this was accomplished
    with no loss of quality, despite the growing complexity of the law and
    the changing makeup of the Board. The Court of Appeals for the Federal
    Circuit left unchanged 94 percent of the Board decisions that were
    appealed to the Court.
        The Board expanded its Mediation Appeals Program (MAP) to include
    all regional and field offices and completed mediation training for new
    mediators. Of the 105 cases that were processed through MAP, 83
    mediations were completed. Settlements were reached in 40 of the 83
    cases mediated for a success rate of 48 percent.
        Both the Department of Homeland Security (DHS) and the Department
    of Defense (DOD) have issued final regulations to implement their new
    personnel systems. While Congress granted both agencies the option of
    establishing an alternative process to adjudicate their employee
    appeals, both decided to continue to have the Merit Systems Protection
    Board adjudicate these appeals. All aspects of the Board's operations
    will be affected by these new procedures. The regulations of both
    departments have been challenged in the courts. We expect to see a
    resolution to the court actions soon.
        It should be noted that, while the new DHS and DOD systems require
    the Board to revise its procedural regulations, the Board will still be
    adjudicating appeals from DHS and DOD employees under several laws
    (e.g., the Whistleblower Protection Act, Uniformed Services Employment
    and Reemployment Rights Act and Veterans Employment Opportunities Act)
    under procedures that are applicable to all other agencies subject to
    the Board's jurisdiction.
        As the agency begins adjudicating appeals under the new DOD and DHS
    regulations with the faster processing times, it is important that the
    agency have the staffing and administrative resources to process
    appeals involving all other agencies in a timely manner.
        Approximately 198 FTE, or about 84 percent of the approximately 236
    FTE, have been allocated to the Board's adjudication function for
    fiscal year 2007.
    Merit Systems Studies and Oversight
        The Board issues 6 study reports and 4 newsletters annually. Our
    studies and reports are based on objective, independent research using
    established scientific methods. To ensure the value of our products and
    the effective use of government resources, we work closely with
    research groups from the Government Accountability Office, the Office
    of Personnel Management, and the National Academy of Public
    Administration to share research agendas and expand the peer reviews of
    our work. Reports of the Board's studies are directed to the President
    and the Congress and are distributed to a national audience of human
    resource practitioners and professional organizations.
        Recent study reports include: ``Contracting Officer
    Representatives: Managing the Government's Technical Experts to Achieve
    Positive Contract Outcomes (2006)''; ``Designing an Effective Pay for
    Performance Compensation System (2006)''; ``Reference Checking in
    Federal Hiring: Making the Call (2005)''; ``Building a High-Quality
    Workforce: The Federal Career Intern Program (2005)''; and
    ``Probationary Period: A Critical Assessment Opportunity (2005)''.
        In addition to these reports, the Board completed its latest Merit
    Principles Survey (MPS) in 2005. MSPB has conducted the MPS every 3-5
    years for the past two decades. Each administration of the MPS assesses
    the degree to which Federal agencies adhere to the merit principles,
    tracks the incidence of prohibited personnel practices in Federal
    agencies, and gathers information to support other OPE research
    studies. The MPS 2005 was the first MPS administered via the World Wide
    Web. Nearly 37,000 full-time civilian Federal employees completed the
    MPS during the summer and fall of 2005. The Board's Office of Policy
    and Evaluation is currently analyzing the data from this survey and
    preparing a report for release by the end of fiscal year 2006.
        The new DHS and DOD personnel systems will affect about half of the
    Federal civil service employees, resulting in the biggest change since
    the Civil Service Reform Act was passed in 1978. To facilitate the
    accomplishment of MSPB's statutory mission of studying the health of
    the civil service system, the Board will be gathering baseline data
    about how the personnel systems in these agencies are currently
    working. This data will then be compared with similar data after the
    new systems have been operational for approximately 2 years.
        This function will use approximately 12 FTE, or about 4 percent of
    the approximately 236 FTE, the Board is projected to use in fiscal year
    2007.
    Management Support
        The management support function, which will use approximately 26
    FTE, or 11 percent of the 236 estimate in fiscal year 2007, provides
    the information resources management, human resources management,
    budget, finance, procurement, equal employment opportunity, travel,
    space, and property management services for the agency.
        In the area of information technology, the Board upgraded its wide
    area network (WAN) infrastructure to improve response time and to
    support the increasing traffic of electronic documents between the
    headquarters and regional offices. In fiscal year 2006, we started
    piloting wireless broadband technologies that enable high-speed access
    for MSPB staff from any major metropolitan area.
        The Board's Office of Information Resource Management (IRM) began
    an impact analysis study on the transition to IPv6, as directed by OMB
    (See OMB Memorandum No. M-05-22). This OMB memorandum requires the
    agency's network backbone to be capable of passing IPv6 traffic by June
    30, 2008. This IPv6 project will require careful planning, staff
    training, hardware upgrade, and possible system changes and budget
    implications over the next several years in order for us to prepare for
    a smooth transition to meet all of OMB's requirements.
        IRM has also increased its computer security in accordance with the
    Federal Information Security Management Act. In fiscal year 2002 and
    fiscal year 2003, IRM developed security plans, analyzed risks,
    prepared contingency plans, upgraded servers and system software,
    installed additional monitoring and access controls, and tested
    recovery plans. In fiscal year 2004 and 2005, IRM made further
    enhancements to IT security, following the recommendations of the
    independent auditors and improvements identified from risk assessments
    and penetration tests. These enhancements included updating of
    policies, clarification of the role of program offices in IT security,
    implementation of a centralized anti-virus server and spam filtering
    software, improvements in internal network security, annual security
    awareness training, and additional testing of contingency plans. IRM
    will continue to make further enhancements to IT security and comply
    with FISMA guidelines.
        The Board has implemented several technology initiatives such as e-
    Appeal that will expedite case processing and adjudication. Through e-
    Appeal, individuals may file appeals online. Another innovation
    provides all Board members with electronic access to complete case
    files. As a result, Board members can analyze case records and issue
    decisions while on official travel.
        As previously stated, the Board is requesting funds to cover the
    costs of relocating the San Francisco Regional Office because the
    current space is not compliant with current earthquake standards.

                                   CONCLUSION

        I am honored to serve as Chairman of the Merit Systems Protection
    Board. My staff and I are mindful of the need for all Federal agencies
    to exercise fiscal restraint in this tight budgetary environment. We
    have been, and will continue to serve as, careful stewards of the
    public resources that have been entrusted to us for the purpose of
    carrying out our statutory missions. The Board and its staff continue
    to work diligently to maintain the reputation for efficiency,
    effectiveness, and fairness it has earned over its long history. We
    appreciate the support we have received from our appropriations
    committees and welcome the opportunity to continue our partnership in
    service to the American public.
                                     ______

         Prepared Statement of the U.S. Election Assistance Commission

                                  INTRODUCTION

        Thank you Mr. Chairman and members of the subcommittee for the
    opportunity to submit testimony regarding the work of the U.S. Election
    Assistance Commission (EAC) and its budgetary needs to continue
    assisting the States in implementing the Help America Vote Act of 2002
    (HAVA) and the National Voter Registration Act of 1993 (NVRA) in fiscal
    year 2007 .
        EAC is a bipartisan commission consisting of four members: Paul
    DeGregorio, chairman; Ray Martinez III, vice chairman; Donetta
    Davidson; and Gracia Hillman. In addition to the four commissioners,
    EAC employs 19 full-time staff persons.

        HAVA instructs the EAC to develop and update national voluntary
    voting system guidelines and manage the Federal Government's first
    voting system certification program. EAC is also charged with assisting
    the 50 States, four territories and the District of Columbia in
    implementing provisional voting, updated and upgraded voting equipment,
    State-wide voter registration lists, administrative complaint
    procedures, and voter identification requirements and procedures.
        Under the NVRA, the EAC develops the National Voter Registration
    form, collects information for Congress and advises States of their
    responsibilities. Below is a discussion of each EAC program and the
    financial and human resources needed in fiscal year 2007 for EAC to
    continue its work in improving the administration of Federal elections.
        The following four program areas reflect the agency's mandates
    under HAVA: (1) distribution and management of HAVA funds; (2) aiding
    in the improvement of voting systems; (3) national clearinghouse of
    election information; and (4) guidance and information to the States.
    EAC conducts its activities in these program areas in an efficient and
    cost effective manner to ensure maximum value of the funds appropriated
    to the agency by the U.S. Congress.

                   DISTRIBUTION AND MANAGEMENT OF HAVA FUNDS

        Congress appropriated more than $3,000,000,000 to help States meet
    the requirements of HAVA and improve the administration of Federal
    elections. All HAVA sections 101, 102 and 251 funds appropriated have
    been distributed. The tables located on EAC's website (Title II
    Requirements Payments & Early Money) show the disbursement of funds by
    category and fiscal year. The graphic below shows the funds distributed
    to each State, including funds distributed by the Department of Health
    and Human Services under Section 261 of HAVA.

    Responsible Stewardship of HAVA Funds
        Now that the election reform funding has been distributed, EAC is
    working to ensure that States are good stewards of these Federal funds.
    To monitor the use of these funds, EAC issues guidance and answers
    questions on the appropriate use of HAVA funds, reviews reports
    submitted by the States and territories on expenditure of the funds,
    and conducts assessments and audits of the States.
    Appropriate Uses of HAVA Funds
        HAVA specifically limits the use of funds distributed under the
    various funding programs. These uses include purchasing voting
    equipment to replace punch card or lever voting systems, implementing
    provisional voting, purchasing equipment and software to build State-
    wide voter registration databases, as well as various activities aimed
    at improving the administration of Federal elections. To help clarify
    the appropriate uses of HAVA funds, EAC and GSA applied OMB Circulars
    A-87, A-102, and A-133. In addition, EAC provided guidance and
    information on the appropriate use of HAVA funds in response to
    questions from the States. Even with these resources, EAC must answer
    questions daily from the 50 States, four territories and the District
    of Columbia about allowable expenses under HAVA.
        EAC requires that States, territories and the District of Columbia
    report their uses of HAVA funds. In the second quarter of each year,
    States report on their use of both Title I and Title II funds. The
    Title II report includes: (a) a list of expenditures for each category
    of activities described in Title III; (b) the number and types of
    voting equipment obtained with the funds; and (c) an analysis and
    description of the activities funded to meet HAVA requirements and how
    such activities conform to the State plan. Title I reports require
    States to (1) disclose, in separate reports for section 101 and 102
    funds, the financial activity for the previous calendar year on a
    Standard Form 269; and (2) provide the same detail on the expenditures
    that is required for the reports on Title II requirements payments. EAC
    conducts a detailed review of each report to validate that the
    expenditure of funds met the requirements of HAVA and was in accordance
    with plans filed by the State or territory. The States' Title I and
    Title II reports are available to the public upon request.
    Auditing
        Section 902 of HAVA gives EAC and other HAVA granting agencies the
    authority to conduct regular audits of HAVA funds. EAC's audit activity
    will be conducted through EAC's Office of the Inspector General (OIG),
    which currently consist of two types of reviews to determine if the
    States are exercising sufficient controls and using the funds
    distributed under HAVA for appropriate purposes. One is an assessment
    of procedures each State uses to administer and monitor HAVA funds, as
    well as a review of certain critical elements such as whether the State
    has maintained sufficient matching funds. On a concurrent track, OIG
    will commission audits of several States each year to more fully review
    the State's internal controls, processes, procedures, and transactions
    to ensure compliance with Government Auditing Standards.
        In addition to EAC's regular audits, HAVA also provides for two
    other means of extraordinary audit authority--(a) funds are subject at
    least once during the term of the program to an audit by the
    Comptroller General; and (b) section 902(b)(6) of HAVA allows EAC to
    conduct a ``special audit'' or ``special examination'' of the funds
    that are subject to regular audit under Section 902(b)(1). This special
    audit authority covers every HAVA program, including funds distributed
    under Title I, Title II, and programs administered by the Department of
    Health and Human Services. If EAC determines that a special audit is
    warranted, by vote of the Commission, EAC will refer the matter to the
    OIG for review.
        The OIG currently employs 1 full-time staff person. Two additional
    persons have been provided to EAC by the Department of Interior via a
    Memorandum of Understanding (MOU). These persons are responsible for
    conducting the majority of the State assessments discussed above,
    monitoring outside contracts for audits, reviewing EAC's internal
    operations, and coordinating investigations of complaints, as
    necessary.
    Financial and Human Resources Needs for Management of HAVA Funds in
            Fiscal Year 2007
        In fiscal year 2006, EAC has budgeted $2.5 million for these
    activities. Of that, $1.65 million is allocated to the OIG for auditing
    the use of HAVA funds and assessing State controls. At this level of
    funding, EAC anticipates that it will be able to fund the MOU for the
    two persons provided by the Department of Interior, conduct assessments
    of four or five States, and begin four or five full audits of States.
    The remaining $550,000 is budgeted for management activities such as
    reviewing reports submitted by the States, answering questions related
    to the proper use of HAVA funds, and reviewing States' indirect cost
    proposals. Three full time equivalents (FTE) and two staff persons via
    MOU with the Department of Interior currently serve these functions.
        In fiscal year 2007, EAC anticipates allocating the same amount of
    funding and personnel to this function, including pay and non-pay
    adjustments ($2.6 million). At this rate, EAC will be able to continue
    assessing and auditing States at the rate projected for fiscal year
    2006. Availability of personnel will depend on the willingness of the
    Department of Interior or other agencies to continue providing
    assistance through an MOU. It is essential that EAC maintain the
    current level of staff support (5 persons), either through FTE or MOU
    in order to assure that the use of HAVA funds is monitored
    appropriately.

                  AIDING IN THE IMPROVEMENT OF VOTING SYSTEMS

        One of the most enduring effects of HAVA will be the change in
    voting systems used throughout the country. All major HAVA funding
    programs can be used by States to replace outdated voting equipment.
    HAVA also provides for the development and maintenance of testable
    standards against which voting systems can be evaluated. It also
    provides for Federal certification according to these standards. EAC is
    responsible for and committed to improving voting systems through these
    vital programs.
    Voluntary Voting System Guidelines
        One of EAC's most important mandates is the testing, certification,
    decertification and recertification of voting system hardware and
    software. Fundamental to implementing this key function is the
    development of updated voting system guidelines, which prescribe the
    technical requirements for voting system performance and identify
    testing protocols to determine how well systems meet these
    requirements. EAC along with its Federal advisory committee, the
    Technical Guidelines Development Committee (TGDC), and the National
    Institute of Standards and Technology (NIST), work together to research
    and develop voluntary testing standards.
        On December 13, 2005, EAC adopted the first iteration of the
    Voluntary Voting System Standards (VVSG). This document was an initial
    update to the 2002 Voting System Standards focusing primarily on
    improving the standards for accessibility, usability and security.
    These testing guidelines also incorporated standards for reviewing
    voting systems equipped with voter verifiable paper audit trails
    (VVPAT) in recognition of the many States that now require this
    technology. VVSG also establishes the testing methods for assessing
    whether a voting system meets the guidelines.
        Significant work remains to be done to fully develop a
    comprehensive set of standards and testing methods for assessing voting
    systems and to ensure that they keep pace with technological advances.
    In fiscal year 2007, EAC along with TGDC and NIST, will revise sections
    of the VVSG dealing with software, functional requirements, independent
    verification, and security and will develop a comprehensive set of test
    suites or methods that can be used by testing laboratories to review
    any piece of voting equipment on the market.
    Accreditation of Voting System Testing Laboratories
        HAVA Section 231 requires EAC and NIST to develop a national
    program for accrediting voting system testing laboratories. The
    National Voluntary Laboratory Accreditation Program (NVLAP) of NIST
    will provide for the initial screening and evaluation of testing
    laboratories and will perform periodic re-evaluation to verify that the
    labs continue to meet the accreditation criteria. When NIST has
    determined that a lab is competent to test systems, the NIST director
    will recommend to EAC that a lab be accredited. EAC will then make the
    determination to accredit the lab. EAC will issue an accreditation
    certificate to the approved labs, maintain a register of accredited
    labs and post this information on its website.
        In July 2005, NVLAP advertised for the first class of testing
    laboratories to be reviewed under the NVLAP program and accredited by
    EAC. Five laboratories have applied for the accreditation program. Pre-
    assessments of these laboratories began in April 2006 and formal review
    will proceed thereafter. NVLAP anticipates that those laboratories will
    be reviewed and those that are eligible to be recommended for
    accreditation will be delivered to EAC in fall 2006.
        Because testing of voting systems cannot be delayed, there must be
    some interim review and accreditation of laboratories. In late 2005,
    EAC invited laboratories that were accredited through the National
    Association of State Election Directors (NASED) program as Independent
    Testing Authorities (ITAs) to apply for interim accreditation. All
    three ITAs have applied for interim accreditation. Interim
    accreditation reviews by EAC contractors will begin in the Spring 2006.
    ITAs will be accredited on an interim basis until the first class of
    laboratories is accredited through the NVLAP process. After that time,
    all testing labs must be accredited through the NVLAP evaluation
    process.
    Voting System Certification
        In 2006, EAC is assuming the duty of certifying voting systems
    according to national testing standards. Previously, NASED qualified
    voting systems to both the 1990 and 2002 Voting System Standards. EAC's
    certification process will constitute the Federal Government's first
    efforts to standardize the voting system industry. EAC's program will
    encompass an expanded review of voting systems. It will utilize testing
    laboratories and EAC technical reviewers. The program will also include
    assessments of quality control, field monitoring, vendor registrations,
    and enhanced public access to certification information.
        Historically, voting system qualification has been a labor
    intensive process. In 6 months, NASED received 38 separate voting
    system test reports for review and qualification. All requests must be
    received, processed and monitored while the testing laboratory is
    assessing compliance. Once a test report is produced, technical
    reviewers must analyze the reports prior to recommending systems for
    certification. Based upon the NASED data, this process will take
    anywhere from 4 to 120 hours per report. In addition, EAC's enhanced
    testing and certification program will require reviewers to evaluate
    voting system technical data packages prior to testing, which will take
    an additional 4 to 20 hours per voting system.
    Financial and Human Resources Needs for Fiscal Year 2007
        In fiscal year 2006, EAC has budgeted $3.95 million for its work to
    aid in improving voting systems used throughout the country. Of that
    amount, $2.772 million is transferred to NIST for its research for and
    support of the TGDC. The remaining $1.178 million is dedicated to the
    development, implementation, and operation of a voting system
    certification program and laboratory accreditation program. EAC
    currently employs one FTE to support all of these functions. In
    addition, EAC anticipates hiring several contractors to serve as
    technical reviewers in the voting system certification program and one
    contractor to assist with the development of the VVSG and
    administration of the voting system certification and laboratory
    accreditation programs.
        In fiscal year 2007, EAC has requested $6.421 million, which
    represents an increase of $2.471 in this program. Of that amount, $4.95
    million, which includes an increase of $2.178 million, will go to NIST
    to complete work on the VVSG prior to the 2008 presidential election.
    The needed work includes updating and revising the testing standards
    and the development of testing protocols to assess whether a voting
    system meets the standards. The remaining $1.471 million will be
    applied to administering the voting system certification, voluntary
    voting system guidelines, and laboratory accreditation programs. This
    includes an increase of $293,000 to hire two additional FTE to manage
    the day-to-day operations of the voting system certification and
    laboratory accreditation programs, including work to assess vendor
    facilities and processes to assure that quality control provides
    equipment that is consistent with the caliber of the samples that are
    certified under the EAC program.

                 NATIONAL CLEARINGHOUSE OF ELECTION INFORMATION

        HAVA establishes EAC as a national clearinghouse of election
    information, which means EAC studies and makes research available on a
    range of issues including best practices in election administration,
    hours and places for voting, and election data. EAC has conducted
    extensive research on a variety of topics related to election
    administration, has begun an ongoing process of collecting election
    related data, and has compiled election-related resources such as
    statutes and regulations. This information is presented to the election
    community and to the public through the EAC's website as well as
    through formal reports on studies and data collections. Through this
    clearinghouse, EAC positions itself as a primary source of information
    about Federal elections.
    Research and Study
        HAVA requires EAC to conduct a number of studies and provides
    considerable discretion to research other election administration
    issues to assist States in their efforts to improve election reform.
    EAC uses its Federal advisory committees to assist in prioritizing
    research topics that are important to and that will assist election
    officials. In 2006, EAC will produce guidance, best practices and
    reports on recruiting, training and retaining poll workers; usability
    of ballots and information provided to voters; procedures for counting
    and recounting ballots; provisional voting; voter identification; voter
    fraud and intimidation; as well as launching a legal resources database
    that will provide election officials and the public with access to
    election laws and regulations from each of the 50 States. In addition,
    EAC will also issue election management guidelines as a companion to
    the VVSG.
        In fiscal year 2007, EAC will focus on completing the research
    required by HAVA on the use of social security numbers in voter
    registration, standards for internet voting, and the possibility of
    postage-free absentee voting. EAC will also collect and analyze data
    from the 2006 Federal elections including voter turnout, absentee
    voting, voter registration and military and overseas citizen voting.
    The 2006 Election Day Survey will provide comprehensive data indicating
    the progress States have made in implementing HAVA.
    EAC's Website as a Clearinghouse
        Using EAC's website as its main means of transmitting information
    to the public is a useful, accessible and cost-effective tool. As its
    studies, guidance and best practices are completed, EAC will have an
    increasing amount of information to store and display through its
    website. EAC will also use the website to provide information about the
    voting system standards and certification program. EAC currently has a
    memorandum of understanding with the General Services Administration
    for its information technology (IT) support including servers to
    maintain EAC data. In addition, EAC contracts for the hosting and
    maintenance of its website. To accommodate the expanding clearinghouse,
    EAC will need to expand its IT capabilities by either enhancing its
    contracts for web services and IT support or by considering bringing
    those services in-house.
    Financial and Human Resources Needs for Fiscal Year 2007
        In fiscal year 2006, EAC budgeted $2.5 million for its research and
    study. In fiscal year 2007, EAC anticipates spending $2.13 million on
    required research projects, data collection and analysis, development
    of best practices documents, and expansion and maintenance of its
    technical resources to host a clearinghouse on its website.

                     GUIDANCE AND INFORMATION TO THE STATES

        HAVA established EAC to provide guidance and assistance to the
    States on implementation of the law and transferred to EAC the
    responsibility of implementing the National Voter Registration Act
    (NVRA). EAC has provided valuable guidance to the States on what HAVA
    means, implementing the law, and appropriate use of HAVA funds. In
    fiscal year 2007, EAC will continue that work by developing election
    management guidance, expanding on its voter registration data base
    guidance, and by updating and revising the NVRA regulations and
    national voter registration form. The election management guidance is a
    comprehensive companion document to the VVSG that will assist States in
    managing an election from receipt of voting equipment to the reporting
    of results to the canvass or recount that follows. EAC's continued work
    on voter registration databases will focus on studying the appropriate
    use of security measures, verification of voter information using
    appropriate matching protocols, and sharing information with other
    State agencies and, ultimately, with other States. EAC will address
    issues involving voter registration using the Federal form by updating
    the NVRA regulations and the Federal registration form.
    Financial and Human Resources Needs for Fiscal Year 2007
        EAC has budgeted $750,000 in fiscal year 2006 for these activities.
    In fiscal year 2007, EAC anticipates spending $1.2 million on providing
    guidance and assistance to the States.

                                 ADMINISTRATION

        The administration objective represents the efforts of EAC,
    internally or through contracts and MOUs, to support the mission and
    work of this agency and meet the HAVA-imposed mandates. These costs
    include rent, equipment, supplies, human resources functions, finance
    and budget, computers, telephones, publication, and printing. This
    objective includes maintaining the leadership and support staff for the
    agency. Charges for salaries and benefits for the Commissioners and
    non-programmatic support staff are included in this category. In
    addition, the administrative objective includes supporting the efforts
    of EAC's two Federal advisory committees, the Board of Advisors and
    Standards Board. Between these two boards there are 147 members who
    meet at least once in each fiscal year to fulfill their
    responsibilities under HAVA. The leadership of these Boards meets more
    frequently, approximately once each quarter.
    Financial and Human Resources Needs for Fiscal Year 2007
        In fiscal year 2006, EAC has budgeted $4.4 million for these
    activities. In fiscal year 2007, EAC anticipates spending a similar
    amount, including pay and non-pay adjustments ($4.55 million).

                                   CONCLUSION

        In the first 2 years of EAC's existence, the main focus was
    expeditiously completing the distribution of more than $3 billion in
    HAVA funds to the States to purchase voting equipment and implement
    other election administration improvements. During this time, EAC also
    adopted the 2005 Voluntary Voting System Guidelines within the HAVA-
    prescribed 9-month timeframe. The completion of these activities
    generates a new set of related priorities: (1) monitoring and auditing
    the use of HAVA funds; (2) making sure the VVSG keep pace with
    technology by updating them periodically, especially in the areas of
    security and usability; and (3) establishing the Federal Government's
    first voting system certification program.
        Consequently, EAC will direct more funding in fiscal year 2007 to
    its audit program, the VVSG and the certification program.

        EAC will also continue to conduct research about election
    administration issues and make that information available to election
    officials to assist them in making policy decisions at the local level.
    EAC will assure that all HAVA funds are used properly to effectuate the
    required election reforms.
        The EAC appreciates the opportunity to provide this testimony
    regarding our needs for fiscal year 2007. If you have any questions
    regarding these activities and allocations of funding, we will be happy
    to address them.
                                     ______

    Prepared Statement of William A. Chatfield, Director, Selective Service
                                     System

        Chairman Bond and members of this subcommittee, it is an honor for
    me as Selective Service Director to present once again the President's
    fiscal year 2007 Appropriations request of $24,255,000 for the agency.
    This Congress and successive administrations under both parties have
    acknowledged the wisdom of maintaining Selective Service as a hedge
    against unforeseen threats and a relatively low-cost insurance policy
    against underestimating any threat our Armed Forces might face in a
    still-dangerous world.
        This agency is as determined as ever to carry out the mission
    Congress has given us, no matter how austere the budget climate shaped
    by the requirements of homeland security and other priorities listed in
    the President's January 31, 2006, State of the Union Address. To
    achieve this balancing act of advancing the mission while accepting
    budgetary realities will require creativity and discipline. I welcome
    the challenge, and appreciate the opportunity to share my vision for
    Selective Service with you today.
        Personnel reductions at Selective Service have come from planned
    attrition and will not involve a reduction-in-force. Meanwhile, the
    agency will continue to employ more state-of-the-art information
    technologies and public outreach to accomplish its statutory mission of
    raising nationwide registration compliance by eligible young men while
    preserving maximum customer service. Satisfying our goals will assure a
    Selective Service that is beyond reproach while meeting the needs of
    its primary customer, the Department of Defense.

                                WHAT WE DO TODAY

        Selective Service is in business to perform two unique functions.
    Should the Congress and the President authorize a return to a military
    draft, the agency can conduct a draft that is efficient, fair, and
    accepted by the public. It is also ready to administer a program of
    alternative community service for men who are classified as
    conscientiously opposed to military service.
        Additionally, each and every day Selective Service continues its
    close partnership with the Department of Defense by providing direct
    support to Armed Forces recruiting and accessions processing.
    Specifically, Selective Service provides names of registrants to the
    Secretary of Defense for recruiting purposes, in accordance with a
    provision in the Military Selective Service Act. Approximately every 1
    to 2 weeks, information about Armed Forces opportunities for Regulars,
    National Guard, and Reserves and a business reply card are enclosed
    with our registration acknowledgment that the Selective Service sends
    to each new registrant. For calendar year 2005, these contacts totaled
    over 2.2 million young men. Consequently, the Defense Department
    benefits by ``piggy-backing'' on our routine mailings which generate
    actual recruiting leads. And it reimburses us for the additional costs
    in accordance with the Economy Act.
        Beyond its compliance with the Military Selective Service Act and
    providing these tangible services, the agency also promotes an
    intangible national benefit. For present and future generations of
    America's young men, Selective Service is a very critical link between
    society-at-large and today's volunteer military. It is a reminder that,
    as Americans, every young man is personally responsible to ``provide
    for the common defence'' in the time-honored tradition of preceding
    generations.

                               AREAS OF EMPHASIS

        To foster a greater public reception of the agency's new approach
    to its traditional missions, I have approved an augmenting approach to
    harness the power, passion, and patriotism of air shows to our core
    mission of raising registration compliance by young men.
        My vision for Selective Service is to present the agency in huge,
    open community venues across the Nation, highlighting authentic
    American heroes, and promoting public service and patriotic themes
    appealing to multiple generations. Air shows are the second most
    attended spectator events in America, and attract a high concentration
    of registration-age men. I am convinced that funding and implementing
    this approach will result in a substantial increase in registration
    compliance, the surest path to assuring Americans that any future draft
    will be fair and equitable. We are conducting this pilot effort by
    absorbing the less than $300,000 expense out of our fiscal year 2006
    budget. No new money is involved.
        The value of this effort presented itself after several months of
    assessing the agency's capabilities, priorities, and missions. These
    events will complement other agency activities directed at conforming
    to the President's Management Agenda.
        I would point to three endeavors that I believe satisfy
    administration and Congressional charges to Federal agencies to evolve
    into performance-based organizations.
        Organizational Adjustments.--The agency continues the process of
    internal review and analysis it undertook in fiscal year 2004. As part
    of this comprehensive ``bottom-up review,'' Selective Service is
    restructuring. This will empower the agency to satisfy its missions
    more efficiently and to bring Selective Service to full mobilization
    more effectively in the event of a return to conscription.
    Additionally, full-time civilian staffing has been reduced, and all
    full-time military officers eliminated. Also, the number of part-time
    military officers has decreased. I am convinced benefits accrued from
    strategic management of human capital, competitive sourcing, improved
    financial performance, expanded e-Government, and better integration
    between budget and performance will substantially increase agency
    efficiency in its core and support processes. Be assured that each of
    my changes and staffing decisions is being driven by practical, cost-
    conscious considerations grounded in greater customer service.
        Registration Compliance.--Here the air shows will play an important
    role in 2006 and possibly beyond. Although Selective Service has
    reversed the decline in registration compliance from a high of 98
    percent in 1991 to a low of 87.7 percent in 2000, anything less than
    100 percent compliance constitutes a challenge. Only when all eligible
    young men are equally vulnerable will any future draft be considered
    completely fair and equitable. The public would believe, rightly so,
    that not everyone who should be in the manpower pool is accounted for;
    and therefore those who are registered have an increased chance of
    being called for involuntary service.
        Our final accounting for calendar year 2005 indicates about 93
    percent of eligible men (ages 18 to 25) are registered. Keeping this
    rate high is very important because I believe a compliance rate of less
    than a healthy 90-plus percent would contribute to a lack of public
    confidence in our ability to administer a fair and equitable draft. The
    compliance rate of for ``on-time'' registration of men turning 18
    continues at 76 percent.
        Naturally, our priority is to maintain an increasing registration
    compliance rate. We appreciate the subcommittee's support in ensuring
    that our work over the past decade continues, and our successes satisfy
    our congressional mandate to raise and maintain favorable registration
    compliance. Since public trust in Selective Service is at stake, I will
    use every resource to continue proven positive trends in compliance. In
    addition to our outreach air shows effort, Selective Service intends in
    pursuit of that goal to:
      --(a) Continue to develop and distribute public service broadcast
            messages to low compliance markets, together with printed
            materials. To support this effort, we have distributed new
            radio public service announcements in English and Spanish.
            These high-quality products have been praised by listeners
            around the country. In calendar year 2005 and so far this year,
            the agency has secured commercial airings representing 82,036
            worth of free airings, a commercial airtime value of more than
            $5.1 million. These airings are in markets with no or optional
            driver's license supporting legislation and cost Selective
            Service only the expense of development, replication and
            distribution. Public service broadcast messaging by Selective
            Service is a very efficient method of raising public awareness
            of the legal registration obligation, especially among those
            who most need access to governmental benefits linked to
            registration such as minorities. Support of the President's
            budget request guarantees that this effective and efficient
            outreach effort continues and America's youth are reminded of
            their civil responsibility.
      --(b) Carry on routine updating of the interactive Selective Service
            pages on the World Wide Web (www.sss.gov) where online
            registration, database verification, the ability to file
            changes of information, and to review a wealth of other agency
            information are available to anyone with access to the
            Internet. For fiscal year 2005, 81.2 percent of registrations
            reached Selective Service through electronic means, an increase
            of more than 2 percent over 2004. Electronic registrations are
            more cost-effective than processing paper registrations and
            provide better customer service. We are also placing links to
            our site with other Federal, State and local agencies, schools,
            and assorted organizations to enhance public education and
            facilitate customer responsiveness.
      --(c) Profit from an increasing number of States which link obtaining
            a driver's license or State I.D. card to the Selective Service
            registration requirement. These State and territorial laws
            currently provide Selective Service with an average of nearly
            71,000 registrations per month. As of this month, 34 States,
            three territories, and the District of Columbia have laws
            enacted. These jurisdictions represent 63 percent of the
            national 18-year-old male registrant population. We continue to
            work closely with additional States where such legislation is
            pending to provide technical expertise. Data electronic
            exchanges are the most cost-effective, timely, user-friendly,
            and technology-simple registrations available. Selective
            Service is committed to aid the remaining 16 States in
            implementing this easy method to protect their young men's
            eligibility for State and Federal benefits and programs. This
            program has been a valuable tool to reach not only all eligible
            registrants, but also has enabled a more customer-friendly
            system.
        Information Technology (IT).--The agency has applied new
    initiatives to the traditional way it does business. Support of the
    President's request will allow Selective Service to continue to
    modernize its core and support processes. We are pleased with the
    returns generated by these IT investments. The agency has turned to
    information technology because it is a force multiplier to offset
    reduced staffing and constrained dollars. It permits this small agency
    to examine how it does business, how it might improve its IT
    architecture, both hardware and software, and to have the support
    structure necessary to advance its operations. I am committed to
    investing in IT because I know that it enhances customer service,
    increases productivity, compensates for limited human and fiscal
    resources, and establishes the technological framework to administer
    well a fair and equitable draft. The agency has no choice but to keep
    pace with IT applications in the Federal Government and society-at-
    large.

                              FOCUSED YET FLEXIBLE

        While there has been much dialogue among the public, private
    groups, the media, and academia concerning a future draft,
    volunteerism, homeland security, and national service, the Selective
    Service System remains focused on its missions. It manages its
    volunteer board members, is prepared to administer programs of
    alternative community-based service for men classified as conscientious
    objectors, and updates its conscription plans and registration
    procedures. All these efforts are aimed at being ready to conduct a
    fair and equitable classification procedure to determine who should
    serve when not all can serve during an emergency. To ensure fairness
    and equity, each Selective Service board is a gathering of civic-minded
    men and women reflecting the racial, cultural and ethnic diversity of
    the young men in the communities it serves. Through these volunteers, a
    unique bond has been formed at the grass roots with young American men,
    society-at-large, and the U.S. Armed Forces. Through the Selective
    Service structure, every American community plays a positive role in
    providing for the common defense. In short, this agency has extensive
    practical experience in identifying, contacting and classifying people
    to participate in a national security or a community service program.
    Selective Service can lend its expertise and ample experience to any
    appropriate task directed.

                                    CLOSING

        Mr. Chairman, Selective Service stands prepared to perform its
    time-tested responsibilities, when directed. The fiscal year 2007
    appropriation request of $24,255,000 will be invested prudently in one
    of the Nation's important security assets in an increasingly dangerous
    and ambiguous world. The president's request is adequate to provide a
    compact, cost-efficient civilian structure capable of expansion in a
    crisis; to provide manpower to the U.S. Armed Forces as required; and
    to do it fairly, equitably, and within the necessary timeframes.
    Additionally, this funding will allow outreach to minority and out-of-
    the-mainstream youth, better privacy protections in our contacts with
    the public, and improvements in our registration compliance rates. All
    these outcomes will advance the guidance of the Congress, satisfy our
    statutory mandate, and maintain the high registration compliance rates
    so painstakingly raised over the last decade. Selective Service is
    staying the course, ever watchful for opportunities to improve. It
    remains an active partner in the national preparedness community.
        Thank you, Mr. Chairman. I would be pleased to answer your
    questions.
                           NONDEPARTMENTAL WITNESSES

        [Clerk's note.--The following testimonies were received by
    the Subcommittee on Transportation, Treasury, the Judiciary,
    Housing and Urban Development, and Related Agencies for
    inclusion in the record. The submitted materials relate to the
    fiscal year 2007 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 Independent Sector

        Independent Sector appreciates the opportunity to comment on fiscal
    year 2007 Federal appropriations for Internal Revenue Service
    activities.
        Independent Sector is a nonprofit, nonpartisan membership
    organization committed to strengthening, empowering, and partnering
    with nonprofit and philanthropic organizations in their work on behalf
    of the public good. Our coalition of more than 500 nonprofit
    organizations, foundations, and corporate philanthropy programs
    collectively represents tens of thousands of charitable groups as well
    as millions of donors and volunteers serving a wide range of causes in
    regions across the country. We have worked since our inception to
    assist our member organizations to meet the highest standards of
    ethical practice, accountability, and effectiveness.
        We write today in support of increased funding of the Internal
    Revenue Service's enforcement budget and urge you to appropriate, at a
    minimum, the level requested by the President.
        Increased resources for IRS tax law enforcement would:
      --Continue Congress' recent efforts to restore the IRS enforcement
            program;
      --Help protect the integrity and credibility of the charitable sector
            by providing resources to audit organizations' annual returns
            and deter and penalize wrongdoers; and
      --Foster greater compliance by funding additional education of
            charitable organizations about existing tax law.

              CONTINUE RESTORATION OF THE IRS ENFORCEMENT PROGRAM

        During the late 1990's resources for IRS tax law enforcement
    activities declined dramatically. According to testimony by IRS
    Commissioner Mark Everson before this committee in April 2004, between
    1997 and 2001 the total number of revenue agents, revenue officers, and
    criminal investigators each declined by over 25 percent.\1\ During the
    same period the number of IRS examinations of tax-exempt annual returns
    dropped by 22 percent, while the number of returns filed increased by
    19 percent.\2\ Explaining the consequences of these circumstances in a
    March 2005 letter to Senate Finance Committee Chairman Charles
    Grassley, Commissioner Everson wrote that, ``This decline, combined
    with the significant growth of the tax-exempt sector . . . created
    opportunities for noncompliance.'' \3\
    ---------------------------------------------------------------------------
        \1\ Commissioner of Internal Revenue Mark W. Everson, Written
    Statement, Senate Committee on Appropriations, Subcommittee on
    Transportation, Treasury and General Government, Hearing on Internal
    Revenue Fiscal Year 2005 Budget Request, at 2 (April 7, 2004).
        \2\ Government Accountability Office, ``Tax-Exempt Organizations:
    Improvements Possible in Public, IRS, and State Oversight of
    Charities'' (GAO-02-526) at 21-22 (April 2002).
        \3\ Commissioner of Internal Revenue Mark W. Everson letter to
    Chairman Charles E. Grassley, Senate Committee on Finance, p. 3,
    available at http://www.senate.gov/finance/hearings/other/
    Letter%20from%20Everson.pdf (March 30, 2005).
    ---------------------------------------------------------------------------
        We applaud the recent increased investments Congress has made
    toward restoring IRS enforcement activities. In addition to conducting
    audits of individuals, corporations, and tax-exempt organizations and
    collecting due revenue, this funding has permitted the IRS to undertake
    critical investigations into areas of concern in the tax-exempt sector,
    including abuses by credit counseling agencies and nonprofit
    compensation practices, and provide valuable guidance educating tax-
    exempt organizations about their obligations under current law.
        We believe, however, that still more needs to be done. The
    Government Accountability Office noted in a statement for the record
    before this committee in April 2006 that ``. . . tax law enforcement
    continues to be included on our list of high-risk Federal programs.
    This is due, in part, to the persistence of a large tax gap.'' \4\
    Commissioner Everson noted in his March 2005 letter to Chairman
    Grassley that the IRS continues to ``struggl[e] with yearly increases
    in the number of applications for tax exemption.'' \5\
    ---------------------------------------------------------------------------
        \4\ Government Accountability Office, ``Internal Revenue Service:
    Assessment of the Interim Results of the 2006 Filing Season and Fiscal
    Year 2007 Budget Request'' (GAO-06-499T), at 1 (April 27, 2006).
        \5\ Commissioner of Internal Revenue Mark W. Everson letter to
    Chairman Charles E. Grassley, supra at p. 3.
    ---------------------------------------------------------------------------
        The administration has emphasized the need for continued oversight
    resources, requesting in the President's fiscal year 2007 Federal
    budget an increase of $137 million over fiscal year 2006 to sustain
    fiscal year 2006 enforcement initiatives. The IRS Oversight Board has
    recommended an even greater funding increase--$368 million over fiscal
    year 2006--as part of a broader effort to address the tax gap. The
    recently approved Senate fiscal year 2007 Budget Resolution proposes an
    increase of $500 million.

      ADDITIONAL IRS ENFORCEMENT FUNDING WILL HELP PRESERVE THE PUBLIC'S
        TRUST IN THE CHARITABLE SECTOR AND FOSTER GREATER COMPLIANCE BY
                            CHARITABLE ORGANIZATIONS

        Our country's expansive network of charitable organizations
    provides vital services in such fields as health, education, social
    assistance, community development, and the arts. Charities depend upon
    the generosity of Americans--their gifts of time and money--to achieve
    these missions. These gifts are fueled by the confidence that they are
    used for the purposes for which they were intended. Indeed, this public
    trust is essential to maintaining a viable and vibrant nonprofit
    sector, and preservation of that trust depends upon a combination of
    vigorous self-regulation by the sector and effective enforcement of the
    law.
        In recent years, media stories have revealed increased instances of
    abuse by taxpayers using charitable organizations for personal gain and
    individuals claiming excessive contributions. Although few in number,
    these occurrences threaten to cripple the charitable sector by eroding
    the public's confidence. IRS Commissioner Mark Everson encapsulated
    this threat in testimony before this committee in April 2005, ``[i]f we
    do not act expeditiously, there is a risk that Americans will lose
    faith in our Nation's charitable organizations. If that happens,
    Americans will stop giving and those in need will suffer.'' \6\
    ---------------------------------------------------------------------------
        \6\ Commissioner of Internal Revenue Mark W. Everson, Written
    Statement, Senate Committee on Appropriations, Subcommittee on
    Transportation, Treasury, the Judiciary, Housing and Urban Development,
    and Related Agencies, Hearing on Internal Revenue Fiscal Year 2006
    Budget Request, at 8 (April 7, 2005).
    ---------------------------------------------------------------------------
        At the encouragement of the chairman and ranking member of the
    Senate Finance Committee, owing in large measure to these reports,
    leading members of the charitable community convened the Panel on the
    Nonprofit Sector in October 2004 to consider and recommend actions to
    improve the transparency and accountability of charitable
    organizations. Over the next 9 months, over 5,000 individuals
    participated in the Panel's efforts, making comments on the best
    methods for providing legitimate oversight of the sector while
    protecting the independence crucial to its ability to remain innovative
    and effective.
        The Panel submitted its ``Final Report to Congress and the
    Nonprofit Sector'' \7\ in June 2005 recommending more than 120 actions
    to be taken by charitable organizations, Congress, and the IRS. A key
    recommendation is to increase resources allocated to the IRS for
    oversight of charitable organizations as well as overall tax
    enforcement.
    ---------------------------------------------------------------------------
        \7\ Panel on the Nonprofit Sector, ``Strengthening Transparency,
    Governance, and Accountability of Charitable Organizations: A Final
    Report to Congress and the Nonprofit Sector,'' available at http://
    www.nonprofitpanel.org/final/Panel_Final_Report.pdf (June 2005).
    ---------------------------------------------------------------------------
        As noted by the Panel, effective oversight of the charitable sector
    requires vigorous enforcement of the law. Education of charitable
    organizations about changes in Federal and State laws and reporting
    requirements is also critical to increasing compliance. During the past
    20 years, however, funding for IRS oversight of exempt organizations
    has remained essentially constant while the sector has nearly doubled
    in size and become even more complex. While recognizing the fiscal
    challenges facing Congress, the Panel emphasized ``that, without
    adequate resources for oversight and enforcement, those who willfully
    violate the law will continue to do so with impunity.'' \8\
    ---------------------------------------------------------------------------
        \8\ Id. at 25.
    ---------------------------------------------------------------------------
        In addition to continuing recent efforts to restore the overall IRS
    enforcement program, increased resources for IRS oversight would help
    protect the integrity and credibility of our Nation's charitable sector
    by providing resources to audit organizations' annual returns and deter
    and penalize wrongdoers. Moreover, it would foster greater compliance
    over the long term by making possible increased education of charitable
    organizations about existing tax law.

                                   CONCLUSION

        Following a significant decline in resources, the Internal Revenue
    Service has made great strides toward restoring its tax law enforcement
    program. This achievement is due in large measure to recent actions by
    Congress to appropriate increased funding to IRS oversight. We applaud
    and appreciate this effort.
        However, we echo recommendations by Commissioner Everson, the GAO,
    and others that additional resources are necessary to enable the IRS to
    continue to ensure effective oversight of the charitable sector and
    enforcement of our tax laws while also maintaining taxpayer service. We
    urge you to support the enforcement capacity of the IRS by increasing
    the agency's fiscal year 2007 enforcement budget.
        We thank you for consideration of these comments.
                                     ______

                       Prepared Statement of Easter Seals

    EASTER SEALS PROJECT ACTION (ACCESSIBLE COMMUNITY TRANSPORTATION IN OUR
                                    NATION)

        Chairman Bond, 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,
    continued the authorization in 1997 in TEA-21 and reauthorized the
    project in 2005 as part of SAFETEA-LU. 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 2007.
        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 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 the FTA. 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 will take place in April
    of this year and approximately 25 communities will take place in the 2-
    day event. The teams are representing localities across the country
    including Thomas Jefferson District, VA; Harford County, MD; Montgomery
    County, PA; Aiken County, SC; Santee Wateree Region, SC; Jacksonville,
    FL; Louisville, KY; Ann Arbor, MI; Genesee County, MI; Lake County, OH;
    Polk County, MN; Washburn County, WI; Capital Area Region, TX; Valencia
    County, NM; Spearfish, SD; Orange County, CA; Fairbanks County, AK; and
    Multnomah-Clackamas-Washington Counties, OR. This was the fourth group
    of communities to go through the MPS training. The first three groups
    of communities remain 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 has partnered with the FTA on several initiatives
    designed to increase the capacity of States to support accessible
    transportation for people with disabilities.
        A good example of this collaboration is the work that Project
    ACTION is doing with the FTA to support the success of the multi-
    Federal Department ``United We Ride'' initiative. Project ACTION helped
    facilitate a national meeting in March of 2003 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 assisting 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 is providing technical assistance on its use throughout the
    country.

           EASTER SEALS PROJECT ACTION WORKING AT THE NATIONAL LEVEL

        Some of the materials that Easter Seals Project ACTION has
    developed over the years include:
      --A toolkit for assessing bus stop accessibility;
      --A guide for employment professionals working with people with
            disabilities on how to solve transportation issues that serve
            as a barrier to employment;
      --A public transportation curriculum for children with disabilities
            in grade 8-12; and,
      --A guide to transportation resources in rural communities for people
            with disabilities.
        All resource materials available from Easter Seals Project ACTION
    activities are available free of charge through the Project ACTION
    clearinghouse on the Project ACTION website: www.projectaction.org.
        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 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 YEAR 2007 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 2007 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 Skokomish Tribe

        My name is Gordon James. I am Chairman of the Skokomish Tribe of
    Washington State. The Skokomish Indian Reservation is a rural community
    located at the base of the Olympic Peninsula with a population of over
    1,000 people. The Skokomish Tribe appreciates the work of the
    subcommittee and asks that you provide $2.1 million from the Department
    of Transportation, Federal Lands Highway Fund for the Skokomish Tribe
    Highway 101 Improvements and Parkway Access Infrastructure Project. The
    Tribe requests this funding for construction and improvements on
    Highway 101 and the access road leading to the site of the Tribe's
    planned community housing development.

                              BACKGROUND AND NEED

        The need for housing in the Skokomish community is great. We
    currently have 91 families with no available housing. Of the existing
    housing stock, nearly half is within the 100-year floodplain. Flooding
    has already caused damage to 40 percent of the Reservation's septic
    systems, resulting in serious community health concerns and
    environmental damage, such as dissolved oxygen in the Hood Canal.
    Because it is in the floodplain, Federal funds are not available to
    rehabilitate this housing.
        To meet this need, the Tribe has been working for the past 9 years
    to plan and develop a safe, practical and culturally relevant housing
    development for tribal members. The Tribe recently purchased 160 acres
    and will soon begin construction on the Skokomish Community Housing
    Development. The development will eventually contain 138 homes and will
    be constructed in three phases. Phase 1, which will entail construction
    of 30 homes and the necessary infrastructure to support them, will be
    constructed over the next 2 years. (Please see Attachment 3: Estimate
    for Skokomish Master Plan for a detailed budget for the housing
    development.)
        The funding requested for fiscal year 2007 will support the road
    improvements necessary to complete Phase 1. Highway 101 passes near the
    development site, but the access road leading to the site is a small
    logging road used for access to an adjacent State park. In order to use
    it as a residential area, the access road must be drastically improved.
    In addition, because the access road leaves the highway at a corner,
    substantial infrastructure improvement will be needed to improve the
    line of sight and make the road safe for frequent use. This includes,
    for example, constructing a retaining wall, widening the highway and
    adding a left turn lane. In addition to its use as an access road for
    the Tribe's housing development, this road will also offer improved
    access to the State park.

                               STATUS OF PROJECT

        Over the past year and a half, the Tribe has acquired land and
    developed a master plan for construction of a tribal housing
    development. On April 1, 2006, construction will begin on the
    infrastructure for Phase 1 of the development (the first 30 homes),
    including the water and wastewater facilities. The Washington
    Department of Transportation has issued a permit so that construction
    can begin even without an asphalt road. However, improvement to U.S.
    Highway 101 and the access road will be critical to both the
    construction process and the eventual use of the development. We
    anticipate that Phase 1 will be completed within 2 years. Once Phase 1
    is completed, tribal members can begin moving into the first 30 homes.
    Phases 2 and 3 will involve subsequent expansion of the development.
    Funding from the fiscal year 2007 HUD budget will enable the Tribe to
    complete the road improvements necessary for Phase 1. Funds for the
    housing have been secured from other sources.
        The total project cost is $2.1 million for road improvements
    (highway improvement and parkway access). These improvements will be
    undertaken during Phase 1 of the project, which we estimate will be
    completed in approximately 2 years. Of this, at least $1.1 million will
    be expended during fiscal year 2007. This amount includes the items
    listed in Part A of Attachment 2: Parkway, Highway 101 to West Side of
    Phase 1 & 2 (parkway access). It also includes the cost of Construction
    Surveying and Engineering & Administration listed in Part B: Highway
    101 Improvements (costs necessary to begin surveying for Highway 101
    improvements). For additional information please see Attachment 2:
    Estimate for Highway 101 Improvements and Parkway Access.

                        STATE, LOCAL AND FEDERAL SUPPORT

        The Tribe has broad Federal and State support for its housing
    development project. For Phase 1, the Tribe has secured a Community
    Development Block Grant from HUD for water and wastewater and is
    pursuing a grant/loan from the USDA for additional infrastructure
    costs. Infrastructure funding will also come from HUD's Indian
    Community Development Block Grant program and from the Indian Health
    Service. Washington's Community Trade and Economic Development Council
    will contribute money from its revolving fund for housing.
        In addition to these financial commitments, the project is
    supported by the Washington Department of Transportation, the Public
    Utility Department and various financing institutions, and all these
    Federal and State entities participate in regular planning meetings
    with the Tribe.
        For the reasons described above, the Skokomish Tribe supports full
    funding of the Federal Lands Highway Fund and requests a special
    appropriation of $2.1 million to support this project. We appreciate
    the opportunity to present testimony on these important infrastructure
    needs. If we can provide any additional information, please contact the
    Tribe or our Counsel.
        Attachments.--(1) Letter from Chairman James; (2) Estimate for
    Highway 101 Improvements and Parkway Access; (3) Estimate for Skokomish
    Master Plan; and (4) Phase 1 Design diagram. This diagram shows a
    proposed dual access road that would serve both the housing development
    and the adjacent State park. We are working closely with the State to
    ensure that both sites are served by the improved access road.

                                     ______

     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 2007 funding request of $500,000
    from the Department of Transportation for CCOS. These funds are
    necessary for the State of California to address the very significant
    challenges it faces to comply with new national ambient air quality
    standards for ozone and fine particulate matter. The study design
    incorporates recent technical recommendations from the National Academy
    of Sciences (NAS) on how to most effectively comply with Federal Clean
    Air Act requirements.
        First, we want to thank you for your past assistance in obtaining
    Federal funding for the Central California Ozone Study (CCOS) and
    California Regional PM10 /PM2.5 Air Quality Study
    (CRPAQS). Your support of these studies has been instrumental in
    improving the scientific understanding of the nature and cause of ozone
    and particulate matter air pollution in Central California and the
    Nation. Information gained from these two studies is forming the basis
    for the 8-hour ozone, PM2.5, and regional haze State
    Implementation Plans (SIPs) that are due in 2007 (ozone) and 2008
    (particulate matter/haze). As with California's previous SIPs, the
    2007-2008 SIPs will need to be updated and refined due to the
    scientific complexity of our air pollution problem. Our request this
    year would fund the completion of CCOS to address important questions
    that won't be answered with results from previously funded research
    projects.
        To date, our understanding of air pollution and the technical basis
    for SIPs has largely been founded on pollutant-specific studies, like
    CCOS. These studies are conducted over a single season or single year
    and have relied on modeling and analysis of selected days with high
    concentrations. Future SIPs will be more complex than they were in the
    past. The National Academy of Sciences (NAS) is now recommending a
    weight-of-evidence approach that will involve utilizing more broad-
    based, integrated methods, such as data analysis in combination with
    seasonal and annual photochemical modeling, to assess compliance with
    Federal Clean Air Act requirements. This will involve the analysis of a
    larger number of days and possibly an entire season. In addition,
    because ozone and particulate matter are formed from some of the same
    emissions precursors, there is a need to address both pollutants in
    combination, which CCOS will do.
        Consistent with the new NAS recommendations, the CCOS study
    includes corroborative analyses with the extensive data provided by
    past studies, advances the state-of-science in air quality modeling,
    and addresses the integration of ozone and particulate pollution
    studies. In addition, the study will incorporate further refinements to
    emission inventories, address the development of observation-based
    analyses with sound theoretical bases, and includes the following four
    general components: Performing SIP modeling analyses, 2005-2011;
    Conducting weight-of-evidence data analyses, 2006-2008; Making emission
    inventory improvements, 2006-2010; Performing seasonal and annual
    modeling, 2008-2011.
        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
    Particulate Air Quality Study, are landmark examples of collaborative
    environmental management. The proven methods and established teamwork
    provide a solid foundation for CCOS.
        For fiscal year 2007, our Coalition is seeking funding of $500,000
    from the DOT through Highway Research funds. DOT is a key stakeholder
    in air quality issues because Federal law requires that transportation
    plans be in conformity with SIPs. 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, which
    are linked because motor vehicle emissions are a dominant element of
    SIPs in California and nationwide. Determining the emission and air
    quality impacts of motor vehicles is a major part of the CCOS effort.
        Heavy-duty trucks are known to have very different driving patterns
    than light duty cars and, despite smaller numbers, are responsible for
    a disproportionate amount of emissions (e.g. approximately 50 percent
    of California's mobile source NOx emissions). The continued growth of
    heavy-duty truck travel, including increases in inter-State and
    international goods movement, makes this element of the SIP
    transportation emission estimate critical. Thus, to support the
    region's new SIPs and to address the new NAS recommendations,
    improvement of the temporal and spatial distribution of heavy-duty
    truck emissions is needed. We propose funding of this activity at a
    level of $500,000. The funding will go to collect data that can be used
    to more accurately characterize heavy-duty truck emissions, including
    those resulting from NAFTA.
        Thank you very much for your consideration of our request.

                            COOPERATIVE PARTNERSHIP

    Private Sector
        Western States Petroleum Association; Pacific Gas and Electric
    Company; Electric Power Research Institute; Nisei Farmers League and
    Agriculture; Independent Oil Producers' Agency; California Cotton
    Ginners and Growers Associations.
    Local Government
        San Joaquin Valley Unified Air Pollution Control District (On
    Behalf of Local Cities and Counties); Bay Area Air Quality Management
    District; Sacramento Metro Air Quality Management District; San Luis
    Obispo County Air Pollution Control District; Mendocino County Air
    Pollution Control District.
    State Government
        California Air Resources Board; California Energy Commission.
    Federal Government
        Environmental Protection Agency; Department of Agriculture;
    Department of Commerce; National Oceanic and Atmospheric
    Administration; Department of Transportation; Department of Interior;
    Department of Energy (Invited Partner).
                                     ______

         Prepared Statement of the Coalition of Northeastern Governors

        As the subcommittee begins the fiscal year 2007 transportation
    appropriations process, the Coalition of Northeastern Governors (CONEG)
    is pleased to share with the subcommittee testimony on transportation
    and community development programs in the fiscal year 2007
    Transportation, Treasury, the Judiciary, Housing and Urban Development,
    and Related Agencies Appropriations bill. The CONEG Governors commend
    the subcommittee for its past support of funding for the Nation's
    highway, transit, and rail systems. We understand that the complex,
    interlocking issues that the subcommittee faces in crafting this
    appropriations measure are compounded by the overall budget
    challenges--challenges that are intensified by the deficit and defense
    and security needs. We urge the subcommittee to continue the important
    Federal partnership role that is vital to strengthening the Nation's
    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.

                                 TRANSPORTATION

        The subcommittee's challenge in the transportation arena is
    compounded by the uncertainty surrounding the future of contributions
    to the Highway Trust Fund and its ability to sustain the structure
    created by the Safe, Accountable, Flexible, Efficient Transportation
    Equity Act: A Legacy for Users (SAFETEA-LU) (Public Law 109-59). The
    CONEG Governors strongly support the National Surface Transportation
    Policy and Revenue Study Commission created by SAFETEA-LU (Section
    1909) and are concerned that it produce a credible report. We encourage
    the subcommittee to review the funding levels provided to the
    Commission and urge your active involvement.
        The Governors urge the subcommittee to fund the combined highway,
    public transit and safety programs at levels consistent with the
    authorized levels in SAFETEA-LU. This Federal funding is essential to
    continue the progress in recent years to improve the condition and
    safety of the Nation's highways, bridges and transit systems. Continued
    and substantial Federal 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 support the substantial growth in freight movement that
    is projected in the coming decade.
      --We are pleased that the President requested a Federal aid highway
            obligation limit of $39.1 billion for fiscal year 2007, a level
            equal to the authorized contract authority plus $842 million
            from the Revenue Aligned Budget Authority (RABA).
      --The Governors strongly urge the subcommittee to fund public transit
            at the fiscal year 2007 authorized funding level of $8.97
            billion. The proposed $100 million shortfall in the newly-
            created Small Starts program is of concern. This program is
            attractive since it provides the flexibility to fund small but
            vital transit projects, such as bus rapid transit, that might
            not be efficient or cost-effective if subject to the lengthy
            approval process needed for larger endeavors. Although the
            administration questions the funding level needed as the Small
            Starts program gets underway in fiscal year 2007, this does not
            justify a reduction in the overall funding level for the
            Capital Investment Grants program--a program which is highly
            competitive and oversubscribed. Furthermore, a failure to fully
            fund transit would undermine the important and historic 80/20
            funding split between highways and transit.
      --The Governors also urge the subcommittee to provide sufficient
            funding for the Coordinated Border Infrastructure Program. 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.
        The CONEG Governors also request that the fiscal year 2007
    appropriations include $1.598 billion in Federal funding for intercity
    passenger rail, with specific funding levels provided for operations,
    capital and debt service. This funding level requested by the Amtrak
    Board can ensure the stability of the current national system as
    capital investment and operations reform are undertaken through
    concerted and hopefully coordinated activities of Amtrak, the U.S.
    Congress, the U.S. Department of Transportation (USDOT), and the
    States. The administration's request of $900 million for Amtrak,
    particularly its exclusion of funds required for debt service, could
    undermine the reforms and critical capital investments currently
    underway.
      --Capital investment in infrastructure and equipment is the key to
            improved reliability, increased ridership, and greater
            operational efficiency. It is essential that the Federal
            Government continue to be a consistent partner in funding the
            capital needs of the Nation's intercity passenger rail system.
            Across the Nation, States already partner with Amtrak by
            investing in tracks, stations and equipment. Between 2002-2006,
            the Northeast States have spent or committed approximately $1.7
            billion for infrastructure improvements that benefit intercity
            passenger rail. Amtrak is embarked upon a long-deferred capital
            program to bring the federally-owned Northeast Corridor (NEC)
            to a state of good repair. In fiscal year 2006, Northeast
            Corridor States and commuter agencies and other third parties
            will provide almost half of Amtrak's NEC infrastructure budget.
            We are particularly concerned that the subcommittee ensures
            that Amtrak can continue to fund the critically needed bridge
            repair projects and life-safety work in the New York and
            Baltimore tunnels.
      --Intercity passenger rail is a complex and interconnected system.
            Therefore, operations reform, such as that being developed for
            Amtrak's long distance service, is an incremental process that
            must be carefully designed and implemented to minimize
            unintended consequences for ridership and revenues. Since
            actual savings may not be realized for a number of years, we
            urge the subcommittee to continue providing Federal operating
            funds to Amtrak as part of its regular quarterly grant, not as
            the discretionary Efficiency Incentive grant. The quarterly
            operations and capital grant process is already subject to
            USDOT oversight and approval.
      --Amtrak has incurred substantial debt in past years to maintain
            operations of the national system, acquire and improve
            equipment for the entire system, and invest in infrastructure.
            As in fiscal year 2006, we believe that the fiscal year 2007
            appropriations should specifically include adequate Federal
            funds for debt service so that this expense, incurred on behalf
            of the entire national system, should not be paid at the
            expense of essential capital investment.
        The CONEG Governors recognize that the Appropriations Committee has
    assumed a primary role in instituting reforms of Amtrak's internal
    management, and more recently, reform of system management. We
    previously shared with the subcommittee and the administration our
    concerns with a number of specific and immediate reform provisions
    imposed by the fiscal year 2006 transportation appropriations bill
    (Public Law 109-115). We appreciate the subcommittee's recognition of
    the importance of consulting with States in a number of these proposed
    system reforms. However, we continue to believe that reform of
    intercity passenger rail must occur in an orderly, timely process that
    reflects collaboration with the States--not through an annual
    appropriations process.
      --We are deeply concerned with the NEC commuter access fee provision
            that, for the first time, injects the USDOT into the public-
            private contractual arrangements that govern passenger rail
            cost-sharing on the Northeast Corridor. Rail service on the NEC
            is governed by hundreds of carefully negotiated legal,
            financial and operating agreements that involve substantial
            State financial investments and numerous in-kind exchanges. The
            Northeast Governors met with Secretary Mineta and Deputy
            Secretary Cino, and chief executive officials from the State
            transportation agencies and commuter authorities are engaged in
            on-going discussions about this access fee. As previously
            noted, Northeast Corridor commuter agencies already fully pay
            for the additional operations expenses incurred by Amtrak due
            to commuter rail service, and they participate in numerous
            joint-benefit capital projects on this vital national
            transportation corridor. Therefore, we urge the subcommittee to
            allow the issue of cost-sharing to continue as part of
            negotiated agreements between the commuter agencies and
            Amtrak--and to allow any future changes to be undertaken as
            part of these negotiations or parallel authorization
            legislation.
      --As the subcommittee also reviews the fiscal year 2006 appropriation
            bill's reform provision dealing with restrictions on ticket
            pricing and food and beverage service, we urge careful
            consideration to ensure that any legislative requirements do
            not negatively impact the ability of State-supported intercity
            services to offer innovative food and beverage service and
            market-based fares to grow intercity ridership, improve overall
            financial performance, and meet State transportation goals.
        A number of other national rail programs are important components
    of the evolving Federal-State-private sector partnerships to enhance
    passenger and freight rail across the country. SAFETEA-LU creates a new
    Rail Relocation Program and enhances the Swift High Speed Rail
    Development Program. We encourage the subcommittee to provide funding
    for both these programs. We are concerned with the President's budget
    proposal to eliminate the Railroad Rehabilitation and Improvement
    Financing (RRIF) loan program, the principal Federal program for
    addressing shortfalls in rail infrastructure investment. This proposal
    is at odds with the tenfold increase in the RRIF program authorized by
    SAFETEA-LU. The RRIF program provides an important financial tool,
    particularly for the many regional and short line railroads that serve
    communities across the Northeast and the Nation, as they seek to
    upgrade infrastructure and equipment to meet the demands of changing
    and competitive markets.
        The CONEG Governors also support a modest increase in funding for
    the Surface Transportation Board (STB) to $25.6 million. This funding
    level will allow the STB, which provides essential oversight services
    for the Nation and the Northeast, to maintain current service levels
    while also addressing its increased building and security costs.

                             COMMUNITY DEVELOPMENT

        The CONEG Governors urge the subcommittee to maintain the fiscal
    year 2006 funding level for the Community Development Block Grant
    (CDBG) program in fiscal year 2007. Federal funding for CDBG is an
    efficient Federal investment since it leverages significant private and
    public funds. Each $1 of Federal CDBG funding is matched by $3 in
    private funds. The CDBG enables States to provide funding for
    infrastructure improvement, housing programs, and projects that attract
    businesses to urban and rural areas. It helps create new jobs and spurs
    economic development, growth and recovery in the Nation's low income
    and rural communities.
        The CONEG Governors thank 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

                          FISCAL YEAR 2007 IRS BUDGET

         NTEU represents 150,000 Federal employees in 30 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 2007.
        There are several items in the administration's IRS budget that
    NTEU believes would be detrimental to the IRS's mission. The two most
    egregious items include the administration's plans to contract out tax
    collection to private collection agencies starting this summer, and an
    inadequate budget request that will prevent the IRS from continuing to
    improve its customer service record while bolstering enforcement.

                                     BUDGET

        The IRS budget forms the foundation for what the IRS can provide to
    taxpayers in terms of customer service and how the agency can address
    the ever-increasing tax gap through enforcement. Without an adequate
    budget the IRS cannot expect continued IRS customer service performance
    ratings and to shrink the tax gap. I commend the administration for
    acknowledging in its fiscal year 2006 Budget in Brief (page 12) that
    the ``IRS yields more than four dollars in direct revenue from its
    enforcement efforts for every dollar invested in its total budget.''
    However, I must criticize the administration for failing to request a
    budget for fiscal year 2007 that is commensurate with the needs of the
    agency to meet its customer service, as well as enforcement challenges.
        NTEU supports the IRS Oversight Board's overall IRS budget
    recommendation which calls for an increase of $732 million over the
    enacted fiscal year 2006 IRS budget. The Board's budget represents a
    6.9 percent increase over the fiscal year 2006 budget and includes
    increases in enforcement and taxpayer service programs, in contrast to
    the President's budget request which calls for a cut of 2,500 full-time
    equivalent (FTEs) employees and relies on unrealistic assumptions such
    as an increase of $135 million in user fees. NTEU specifically supports
    the increased enforcement budget proposed in S. Con. Res. 83, the
    fiscal year 2007 Budget Resolution, as passed by the Senate. The Senate
    Budget Resolution quadruples the President's enforcement request from a
    $137 million increase over fiscal year 2006 to an additional $500
    million increase for IRS enforcement in fiscal year 2007.
        NTEU believes that if the IRS is going to continue to ask for
    improved performance from its employees then it must request a
    realistic budget that is commensurate with the agency's goals. The
    President's budget request falls short and I would urge the
    subcommittee for an appropriation that is commensurate with the IRS's
    goals of bolstering enforcement and improving customer service.

                                SPAN OF CONTROL

        I realize that Congress does not operate in a vacuum and it must
    consider all Federal Government budget needs. In its fiscal year 2006
    IRS Budget/Special Report, the IRS Oversight Board stated that it
    ``agrees that investing in enforcement does pay for itself many times
    over, not only in increased revenues but by reinforcing the belief that
    all taxpayers are paying their fair share.'' Although it's widely
    recognized that additional funding for enforcement may provide a great
    return on the investment, the administration seems reluctant to request
    an adequate budget for the IRS enforcement budget. Thus, the agency
    must look toward other cost-cutting measures within its budget
    framework.
        NTEU recommends the IRS look at the management-to-bargaining-unit
    employee ratio to find much needed resources for additional collection
    work. Although the number of frontline employees who do the work at the
    IRS has decreased by 5.1 percent since 2000, the number of managers who
    supervise these employees has increased by 1 percent over this same
    period. If the IRS decreased the number of managers and management
    officials at the same rate as it has decreased its rank and file
    employees, the agency could put the savings toward bolstering
    collections work, and avoid cuts to customer service.

                                CUSTOMER SERVICE

        Congress must continue to reject IRS's plan to implement draconian
    cuts to customer service. I was pleased that the subcommittee decided
    to halt IRS's plans to move forward with cuts to customer service at
    the end of last year with language in H.R. 3058 (Section 205), the
    Transportation, Treasury, Housing and Urban Development, the Judiciary,
    the District of Columbia, and Independent Agencies Appropriations Act,
    2006. H.R. 3058, Section 205, uses broad language that prohibits any of
    the appropriated funds to ``be used to reduce taxpayer services as
    proposed in fiscal year 2006 until the Treasury Inspector General for
    Tax Administration completes a study detailing the impact of such
    proposed reductions on taxpayer compliance and taxpayer services . .
    .''. The IRS decided to move forward with cuts to the toll-free service
    by reducing hours of service and closing call sites, despite the
    language this subcommittee imposed in H.R. 3058. In response, the
    subcommittee followed up with additional language to clarify its intent
    in H.R. 2863, Section 5021 (the fiscal year 2006 Defense Appropriations
    bill) further explaining that ``reduced taxpayer services'' in the
    Transportation-Treasury Appropriations bill included--but was not
    limited to--any reductions in telephone service.
        Despite these two explicit directives from Congress not to make any
    taxpayer customer service cuts, the IRS closed the Chicago and Houston
    telephone call sites. Furthermore, the IRS continues to consider
    cutting Taxpayer Assistance Centers (TACs) as a cost-saving measure, as
    confirmed in a recent TIGTA report (Reference Number: 2006-40-061). The
    report also indicates that management does not have reliable data on
    the TACs to make decisions about TAC operations. TIGTA also points out
    that 47 of the 400 TACs nationwide--nearly 12 percent--are
    ``critically'' understaffed--meaning that they would be in danger of
    closing were it not for the dedicated IRS employees who are filling in
    from nearby TACs and through the use of seasonal employees. In its
    first report responding to the congressional mandate in Section 205 of
    H.R. 3058, TIGTA sharply criticizes the business model the IRS used to
    justify the TAC closings last year (see TIGTA Reference Number: 2006-
    40-067). Clearly, the IRS lacks the management information necessary to
    provide adequate oversight of its TAC operations--much less make a
    decision to close any of them.
        I urge the subcommittee to continue to oppose the IRS's plan to
    drastically cut customer service until the IRS has the data to justify
    its customer service cuts and can explain the effects of such cuts on
    taxpayers.

                             PRIVATE TAX COLLECTION

        NTEU strongly opposes the administration's plan to privatize IRS
    debt collection, as authorized by Congress in 2004 in H.R. 4520, the
    American Jobs Creation Act of 2004. Under the statute, the IRS is
    permitted to hire private sector debt collectors and pay them a bounty
    of up to 25 percent of the money they collect. NTEU opposes this short-
    sighted proposal, anticipates its complete failure as witnessed in a
    similar 1996 pilot program and will continue to work towards its
    repeal.
        The IRS has said that it has learned from the 1996 project and is
    better equipped to address the problems raised. However, a revealing
    report by the Treasury Inspector General for Tax Administration (TIGTA
    Audit No. 2003-20-010) provides evidence to the contrary. It shows how
    IRS contractors, revamping IRS computers, put taxpayers' data at risk.
        The objective of the TIGTA audit was ``to determine whether the
    Internal Revenue Service (IRS) has adequately protected Federal
    Government equipment and data from misuse by contractors.'' The review
    found: ``The involvement of non-IRS employees in critical IRS functions
    increases the risk of misuse or unauthorized disclosure of taxpayer
    data, and could lead to loss of equipment or sensitive taxpayer data
    through theft or sabotage.'' The TIGTA audit found that the ``lack of
    oversight of contractors resulted in serious security
    vulnerabilities.'' The report, found that, ``contractors blatantly
    circumvented IRS policies and procedures even when security personnel
    identified inappropriate practices.''
        A more recent report by the General Accounting Office (GAO-06-328)
    highlights the continuing failure of the IRS to ensure the internal
    security of sensitive taxpayer data. GAO reported the IRS has corrected
    only 41 of the 81 information security weaknesses it previously
    discovered at two of the agency's critical data processing sites;
    moreover, GAO said it has identified ``new information security
    weaknesses that threaten the confidentiality, integrity and
    availability of IRS financial information systems and the information
    they process.'' These include, for example, the agency's failure to
    implement effective ``electronic access controls related to network
    management, user accounts and passwords; user rights and file
    permissions; and logging and monitoring of other information security
    controls to physically secure computer resources, and to prevent the
    exploitation of vulnerabilities.'' Its report added: ``Collectively,
    these weaknesses increase the risk that sensitive financial and
    taxpayer data will be inadequately protected against disclosure,
    modification, or loss, possibly without detection, and place IRS
    operations at risk of disruption.''
        The GAO report presents yet another warning signal about the
    dangers of the IRS effort to move ahead with plans to hire private
    sector debt collectors to pursue tax debts. Rather than seek to move
    personal and sensitive taxpayer information into private hands the IRS
    needs to devote time, attention and resources to ensuring it can
    protect these vital data when the information is in its own hands. I
    don't think anyone can realistically be satisfied right now that the
    agency has accomplished that.
        Clearly, the IRS does not have sufficient oversight of the current
    contractors or technology it employs. Combine this fact with a 25
    percent bounty incentive paid to the contractors and you have a recipe
    for disaster, resulting in overly aggressive and abusive tactics on the
    part of the private debt collectors.
        While the IRS is currently 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 while the
    reputation of the IRS and the Federal Government is tarnished.
        Furthermore, the debt collectors won't be given the same training
    that is given to IRS collections employees. Even the National Taxpayer
    Advocate in her 2005 Annual Report to Congress recognizes the problems
    with implementation of the private debt collection initiative:

        ``However, the current plan shortchanges taxpayers by exempting
    private collectors from the type of training required of IRS employees
    in similar functions . . . Yet, the private collectors will not receive
    even a small fractions of the training that is given to the IRS
    employees in similarly situated positions. Moreover, the private
    collectors themselves will administer the PDC training.'' (Volume 1,
    page 78).

        Not only will the private debt collectors not be given the same
    training as IRS employees, but the contractors will be administering
    the training. IRS collection professionals have a wealth of tax
    knowledge that they have at their disposal in every case where they
    deal directly with the taxpayer. The private debt collectors on the
    other hand, will only be given a fraction of the training and not have
    that same level of expertise as the IRS employee.
        One of the most often-heard arguments in favor of the use of
    private collection agencies is that if they are paid out of the
    proceeds of what they collect, IRS's enforcement capabilities increase
    without having to increase appropriations. Numerous congressional
    supporters said they would prefer to have tax collection done by
    Federal employees, but would go along with the use of private
    collection agencies solely because it avoids the difficult issue of
    getting Congress to approve additional appropriations for the IRS.
        The statute that gives the IRS the authority to use PCAs allows 25
    percent of collected revenue to be returned to the collection companies
    as payment and 25 percent to be retained by the IRS for enforcement
    efforts, thereby circumventing the appropriations process altogether.
    There is nothing magical about revenues collected by private collection
    companies. If those revenues could be dedicated directly to contract
    payments and IRS enforcement efforts, there is no reason some small
    portion of other revenues collected by IRS employees couldn't be
    dedicated to IRS enforcement efforts. This would allow for increased
    enforcement by IRS employees, which most people indicate is the
    preferable route and eliminate large payments (up to 25 percent of
    collections) to private collection companies, significantly increasing
    net revenue to the General Treasury. While legislation would be
    required to allow for this kind of dedication of revenue, I believe the
    precedent has now been set with the private collection agency funding
    provisions. Congress should consider supporting this approach as a
    common sense way to make real progress in closing the tax gap, lowering
    our deficits and making more funding available for our Nation's
    critical needs.
        It is a plain and simple fact: This plan to privatize tax
    collection at the IRS will hurt U.S. taxpayers, will hurt IRS workers
    and will erode the great gains the IRS has made with improved customer
    satisfaction ratings. I urge the subcommittee to scrutinize the IRS's
    accountability of its contractors and hold the private collection
    agencies to the same standards as IRS employees.

                                   PAY PARITY

        The administration has asked Congress to provide only a 2.2 percent
    pay raise for Federal workers in fiscal year 2007. This would be the
    lowest raise since 1998, at a time when the cost of living rate is
    steeply increasing and health insurance premiums are going up
    dramatically. While in past proposals the Bush Administration did not
    honor the historic practice of parity between the civilian and military
    workforce, this year's proposal provides an equally insufficient pay
    raise to both parts of government service.
        Not only are Federal employees taking an effective pay cut once
    inflation and health care costs are considered but the pay gap between
    them and the private sector is widening. The Federal Employees Pay
    Comparability Act (FEPCA), enacted in 1990 to close the gap between
    Federal and private sector pay, has never been fully implemented.
    Today, Federal pay lags 13 percent behind the private sector. Bringing
    Federal worker pay into line with the private sector would be the most
    effective cure to the Federal Government's hiring crisis.
        Further reducing the potential fiscal year 2007 pay raise, the
    administration proposes to reduce pay in fiscal year 2007 by funding
    special rate pay out of this meager increase. While agencies should
    have the resources they need to provide special rate pay, it should not
    come by raiding the locality adjustments and annual pay increase for
    Federal workers.
        NTEU urges the subcommittee to oppose the administration's
    legislative proposal to fund special rate pay by diverting part of the
    locality and annual pay raise. I also seek your continued support for a
    fair and equitable pay raise for the Nation's Federal civilian and
    military workforce for fiscal year 2007.

                                CONTRACTING OUT

        Last year, the House and Senate Transportation-Treasury HUD
    subcommittees worked in a bipartisan, bicameral fashion to enact
    legislation in H.R. 3058, Section 852 that begins to level the playing
    field for Federal employees. NTEU supports the provisions and thanks
    the subcommittee for its work last year. The legislation allows Federal
    employees to offer their own realistic best bid with a most efficient
    organization (MEO) in job functions being performed by more than 10
    Federal employees; requires a 10 percent or $10 million cost savings of
    the contractor in order for the work to be contracted out; and allows
    executive agency heads to conduct public-private competitions to bring
    contracted work back in-house. NTEU would strongly recommend that the
    same provisions be included in the fiscal year 2007 Transportation-
    Treasury Appropriations bill and additional flaws in the process be
    examined.
        For example, the process should prohibit the contractor from
    receiving a cost advantage in the competition by offering an inferior
    employer-sponsored health benefit than the Federal employees receive.
    Contractors have an incentive to cut benefits to their workers in order
    to reduce labor costs when offering their best bid. However,
    contracting out should not be a race to the bottom. If contractors want
    to offer inferior benefits to their workers, they should not be
    rewarded for this by being given an advantage in the competition for
    the work. Congress must also make sure that Federal employees are
    treated fairly throughout the competition process by allowing us the
    same legal standing before GAO for appeals purposes as has long been
    enjoyed by contractors.
        This list is by no means exhaustive but it's a good starting point.
    If the administration is going to insist on using its flawed revised A-
    76 Circular, then Congress must insist on correcting those flaws in the
    competitive sourcing rules.

                                      RIFS

        I commend the subcommittee for acknowledging the IRS's haphazard
    approach to reorganizing the agency and directing ``the IRS to consult
    with the Committee prior to elimination, consolidation, or
    reorganization of its workforce, and prohibits the IRS from proceeding
    with matters relating to such job movement prior to the Committee's
    action on the IRS budget.'' (Senate Rept. 109-109--Transportation,
    Treasury, the Judiciary, Housing and Urban Development and Related
    Agencies Appropriations Bill, 2006).
        Despite the committee Report language, the IRS moved forward with
    its planned reductions in force (RIFs) in several different areas.
    Generally speaking, NTEU believes that the IRS would benefit both in
    terms of cost savings and human resource satisfaction by placing a
    greater emphasis on retraining current employees for other positions
    within the IRS. Unfortunately, this has not been the approach taken by
    the IRS with regards to RIFs at the agency. A more sensible downsizing
    model is needed if the IRS wishes to keep the talented workforce it
    currently has but also in order to attract new talent. A more
    comprehensive, thoughtful approach to RIFs will also ensure that the
    improved customer service gains made since 1998 are not lost.

                                   CONCLUSION

        It is indisputable that the IRS workforce is getting mixed signals
    regarding its value to the mission of the Service and the level of
    workforce investment the Service is willing to make. Without a doubt,
    the frontline employees are committed to working with management to
    increase efficiency and customer satisfaction. NTEU is committed to
    striking a balance between taxpayer satisfaction, business results and
    employee satisfaction. I invite Congress to join us in this endeavor.
                                     ______

              Prepared Statement of the City of San Marcos, Texas

    AIRPORT IMPROVEMENTS REQUEST--SAN MARCOS MUNICIPAL AIRPORT, SAN MARCOS,
                                     TEXAS

        Mr. Chairman and members of the subcommittee, on behalf of the City
    of San Marcos, Texas, I am pleased to submit this statement in support
    of our requests for project funding for fiscal year 2007.
        The City of San Marcos requests Federal funding for the San Marcos
    Municipal Airport to accomplish improvements that are in the public
    interest. The improvements are described in the three specific projects
    listed below:

    ------------------------------------------------------------------------
                                                                  Amount
    ------------------------------------------------------------------------
    Northside T-Hangar Construction.........................      $3,500,000
    New Terminal Building...................................       4,500,000
    Fixed Base Operator (FBO) Facility......................       1,500,000
                                                             ---------------
          Total Request.....................................       9,500,000
    ------------------------------------------------------------------------

        The San Marcos Municipal Airport is a public general aviation
    airport owned and operated by the City of San Marcos, Texas. It is
    located just east of Interstate Highway 35 on Texas Highway 21
    approximately 30 miles south of Austin and 45 miles north of San
    Antonio in one the fastest growing corridors in Texas.
        The airport is part of a closed military base; the remainder of the
    former Air Force Base is occupied by the United States Department of
    Labor's Gary Job Corps Center. When the base was closed and divided in
    1966, the Job Corps retained the portion of the property with the
    buildings and other amenities while the City of San Marcos was given
    the aeronautical facilities consisting of runways, taxiways, and the
    parking apron.
        This arrangement has resulted in a ``bare bones'' airfield that
    lacks the support structure to sustain an economically viable modern
    airport. We have adequate aeronautical facilities and real estate but
    little other facilities. In addition, current legislation provides for
    airport capital improvement funding assistance through the Federal
    Aviation Administration for aviation infrastructure, but not for the
    type of improvements that this airport needs.
        The City of San Marcos requests help to transform the airport into
    a modern, self-sustaining enterprise. After analysis and master
    planning, we have determined that the three projects herein described
    will get us the ``biggest bang for the buck.'' These projects will meet
    our highest priorities and most immediate needs, and they will be a
    highly visible indicator that the San Marcos Municipal Airport is on
    the move. We are firmly convinced that these improvements will kick-
    start further development and attract private investment that will far
    surpass the amount that we are seeking in Federal support.
        The following program descriptions outline our three requests:

                  NORTHSIDE T-HANGAR CONSTRUCTION--$3,500,000

        The layout of the former Gary Air Force Base is such that all the
    buildings and developed area of the base were to the south of the
    airfield. When the base was divided between the Gary Job Corps Center
    and the San Marcos Municipal Airport, the airport was given only a thin
    sliver of land on the south side to provide access and support the
    airfield. There is not enough room for all the support facilities such
    as hangars, maintenance shops, and terminal buildings that an active
    airport requires.
        However, on the north side of the airfield is real estate that has
    never been developed. One prime piece of the northside area consists of
    approximately 40 acres of very desirable airport land that fronts on
    Texas Highway 21 and borders a newly refurbished main airport taxiway.
    Except for the absence of infrastructure, it is the ``McDonald's''
    location on the airport. The area requires an access road, drainage
    improvements, pavements, and utilities. It also needs a seed project to
    stimulate private investors to move into the area.
        Our plan proposes to construct the infrastructure and to then build
    approximately 50 nested T-hangars in two or three city-owned buildings.
    Our planning estimate for the cost to implement this project is
    $3,500,000. We are also convinced that once this northside development
    ball starts to roll, the future of the new San Marcos Municipal Airport
    will shift from the limited and constrained south side to the several
    hundred acres of undeveloped land available on the north side.

                       NEW TERMINAL BUILDING--$4,500,000

        The commercial, economic, and public service hub of a modern
    airport is the public terminal building. The terminal building provides
    public amenities such as a waiting room or lounge, airport
    administration offices and public meeting rooms, restrooms, flight
    planning facilities and communications links to obtain flight planning
    information, commercial lease space for such businesses as an airport
    restaurant, airport shops, and other aviation-related commercial
    activities.
        These facilities are sorely lacking in our present airport
    configuration. It is opportune that the Federal Aviation Administration
    is programming a new air traffic control tower for our airport in
    fiscal year 2007. A new terminal building located adjacent to the
    control tower could be architecturally coordinated with the control
    tower for aesthetic advantage. The two facilities could achieve a
    significant efficiency in the coordinated construction of road access,
    utility services, parking facilities, drainage improvements, and
    landscaping. This same concept is being touted at several other
    airports similar to ours. (Dallas Executive Airport is a prime
    example.) The planned terminal building planning concept is for a
    building of approximately 10,000-square-feet first floor and total cost
    estimated at $4,500,000.

                 FIXED BASE OPERATOR (FBO) FACILITY--$1,500,000

        For general aviation operations, airport activity centers on the
    FBO. This is where the transient and based pilots and aircraft
    operators go to buy fuel and obtain direct support for their flights.
    It is also a place where transient and based pilots can arrange to have
    their aircraft serviced, repaired, and hangared overnight or longer
    when required.
        It is again opportune that the San Marcos Municipal Airport has an
    established FBO that is capable of accomplishing these vital services
    if a facility were available for them to lease. We propose that a
    modern, state-of-the-art FBO be constructed to meet the airport's
    present and future commercial requirements. The approximately 30,000
    square foot structure would be mainly hangar space with an attached
    business, shop, and office area. Cost is estimated at $1,500,000. Lease
    payments and other airport fees would offset this investment; and the
    investment is calculated to be a profitable enterprise for the airport
    in the long term.
        The 1,356 acre San Marcos Municipal Airport is a potential economic
    dynamo for this region of Central Texas. The three airport improvement
    projects that we are proposing will result in an increase in activity
    and private investment. This is a good investment of public revenue
    that will result in more high-paying aviation jobs, an increased tax
    base, and more direct revenues in the form of airport fees and rents.
    Our airport will also better serve the aviation needs of the region and
    spur further growth, development, and prosperity for our citizens.
    These projects are grounded in sound public policy principles. They
    will result in excellent value for the American taxpayer and for the
    traveling public that will utilize the facilities.
        The City of San Marcos sincerely appreciates your consideration of
    these requests for funding in the fiscal year 2007 cycle, and
    respectfully requests your support.
                                     ______

                     Prepared Statement of the Access Board

        The Access Board is requesting a total budget authority of
    $5,956,000 for fiscal year 2007. The proposed budget is a 1.28 percent
    increase over the amount requested for fiscal year 2006. The Board is
    not planning new costly initiatives in fiscal year 2007. The Board will
    continue its primary programs and has followed the directives issued by
    the Office of Management and Budget for the preparation of the fiscal
    year 2007 budget.

                                  INTRODUCTION

        The Board was established by section 502 of the Rehabilitation Act
    and is the only Federal agency whose mission is accessibility for
    people with disabilities. The Board has three primary programs:
    guidelines and standards development; technical assistance, training,
    and research; and enforcement.
        The Board is responsible for developing accessibility guidelines
    under the Americans with Disabilities Act, the Architectural Barriers
    Act, and the Telecommunications Act. 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. Additionally, the Board has responsibilities under the Help
    America Vote Act to serve on the Election Assistance Commission's Board
    of Advisors and Technical Guidelines Development Committee.
        The Board provides technical assistance and training on each of its
    guidelines and standards, and on a variety of other accessibility
    issues. The Board also maintains a small research program that develops
    technical assistance materials and provides information needed for
    guidelines and standards development.
        Finally, the Board enforces the Architectural Barriers Act, which
    requires federally financed facilities to be accessible.
        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 the public and private sectors.
        The Board has established long-range goals and annual objectives
    for its programs in accordance with the Government Performance and
    Results Act. 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, this discussion and
    budget justification presents information under each of the Board's
    programs and reports on the results from fiscal year 2005 activities,
    reviews the planned fiscal year 2006 activities, and presents the
    fiscal year 2007 objectives.
        The Board's long range goals are to promote accessibility by being
    a:
      --Leader in developing and updating guidelines, standards, and codes
            for accessibility;
      --Leader in information, education, and outreach on accessibility;
            and
      --Leading partner with Federal agencies to make the Federal
            Government a model of compliance with accessibility standards.
        The Board's strategies for achieving its long-range goals and
    annual objectives involve working with its stakeholders. The Board
    involves its stakeholders through advisory committees and review of
    draft guidelines and standards to establish consensus-based guidelines
    and standards that provide accessibility. The Board involves its
    stakeholders in developing and disseminating information, education,
    and outreach that will help covered entities understand and comply with
    the guidelines and standards. Where the Board has enforcement
    responsibilities over Federal agencies, the Board assists those
    agencies to achieve compliance with accessibility 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 that are required to comply with or enforce the various
    laws that guarantee the civil rights of people with disabilities.

                      GUIDELINES AND STANDARDS DEVELOPMENT

        The Board's long-range goal is to be a leader in developing and
    updating guidelines, standards, and codes for accessibility. The Board
    will continue to develop and update accessibility guidelines and
    standards and to work cooperatively with organizations that develop
    codes and standards affecting accessibility through fiscal year 2007
    and beyond.
        In January 2006, the Board committed itself to three new rulemaking
    priorities. The three priorities include: (1) updating and revising the
    Section 508 standards for accessible electronic and information
    technology and the Telecommunications Act Accessibility Guidelines; (2)
    updating and revising the Americans with Disabilities Act (ADA)
    Accessibility Guidelines for Transportation Vehicles; and (3)
    rulemaking on a variety of communications access issues.
        Updating and revising the Section 508 standards and the
    Telecommunications Act Accessibility Guidelines is the Board's top new
    rulemaking priority. The Board plays a central role in the
    implementation of Section 508 and keeping our standards current is a
    vital part of this role. The telecommunications provisions in the
    section 508 standards are based on and are consistent with the Board's
    Telecommunications Act Accessibility Guidelines. Therefore, updating
    and revising the Section 508 standards and the Telecommunications Act
    Accessibility Guidelines should be done in one rulemaking. The Board
    plans to charter a Federal advisory committee in fiscal year 2006 to
    begin this rulemaking. The committee will include representation from
    other Federal agencies, disability organizations, industry trade
    associations, and others. It will also include representation from
    other countries and international standards-setting organizations so
    the new standards are harmonized with efforts being taken around the
    globe.
        Updating and revising the ADA Accessibility Guidelines for
    Transportation Vehicles is needed to address emerging technologies such
    as bus rapid transit and low floor vehicles. This rulemaking will be
    accomplished by holding a series of information meetings in fiscal year
    2006 and 2007 to collect information before issuing a proposed rule.
        Rulemaking on communications access issues will address features
    not already addressed, or not addressed fully, by the Board's
    guidelines such as interactive transaction machines, point of sale
    machines, drive-through machines, alerting devices for deaf and hard-
    of-hearing individuals including carbon monoxide detectors and sleeping
    room applications, and public address systems. This rulemaking will be
    accomplished by holding a series of information meetings in fiscal year
    2006 and 2007 to collect information before issuing a proposed rule.
        The status of current guidelines and standards efforts is presented
    below.
    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, camping and picnic
    areas, and beach access routes. In October 2001, the Board sponsored an
    information meeting on the final report of the Outdoor Developed Areas
    Regulatory Negotiation Committee. The meeting 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 a proposed rule 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 will be enhanced by the experience of
    implementing accessibility guidelines at Federal facilities and the
    Federal Government will gain experience in implementing the guidelines.
    This experience should prove important before applying them to other
    entities. The Board expects to publish a proposed rule for public
    comment in fiscal year 2006.
    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 review the recommendations and
    begin developing a proposed rule on access to passenger vessels.
        On November 26, 2004, the Board published for public comment an
    advance notice of proposed rulemaking (ANPRM) which addressed access to
    and in smaller passenger vessels and a notice of availability (NOA)
    releasing draft guidelines that addressed access to and in larger
    passenger vessels. The Board is coordinating this rulemaking with the
    Department of Transportation. The Department of Transportation issued
    an ANPRM on operational issues affecting passenger vessels on the same
    date as the Board. The Board held three public hearings in fiscal year
    2005 to gather information and input on the ANPRM and the NOA. Over 150
    vessel designers and operators, pier operators, persons with
    disabilities, and others attended the hearings. The Board plans to
    issue a second draft of the accessibility guidelines before issuing a
    notice of proposed rulemaking. The second draft is expected to be
    published in fiscal year 2006.
    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 will 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 prior to issuing a notice of proposed rulemaking. Over
    1,400 comments were received on the draft. The Board also held one
    public hearing during the comment period. The Board has revised the
    draft guidelines based on public comments and issued a notice of
    availability in November 2005 placing the revised draft guidelines in
    our rulemaking docket. The purpose of placing the draft guidelines in
    the docket is to facilitate gathering of additional information for the
    regulatory assessment and the preparation of technical assistance
    materials to accompany a future rule. The Board is not seeking comments
    on the draft guidelines. The Board will issue a notice of proposed
    rulemaking in fiscal year 2007 and will solicit comments at that time.
    Codes and Standards
        The Board works with model codes 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.
        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.
    Fiscal Year 2005 Results--Rulemaking
        In fiscal year 2005, the Board:
      --Published a notice of availability of revised draft guidelines on
            access to public rights-of-way.
    Fiscal Year 2005 Results--Codes and Standards
        In fiscal year 2005, the Board:
      --Actively participated in the development of the NSPI-9 Standard for
            Aquatic Recreation Facilities. This new standard addresses
            water parks and water attractions. The American National
            Standards Institute's (ANSI) Board of Standards Review approved
            NSPI-9 2004 ``Aquatic Recreation Facilities'' as an American
            National Standard.
      --Provided comment on revisions to the Manual on Uniform Traffic
            Control Devices (MUTCD) which includes coverage of pedestrian
            signals, intersection design issues, pavement markings,
            signage, signalization, and other traffic control issues and
            actively participated on the Signals Committee Task Force to
            develop a draft standard for accessible pedestrian signals.
    Fiscal Year 2006 Planned Activities--Rulemaking
        In fiscal year 2006, The Board will issue two proposed guidelines:
      --NPRM on outdoor developed areas.
      --Second draft of guidelines for passenger vessels.
        The Board will also charter a Federal advisory committee to begin
    the process of updating and revising the Section 508 standards and the
    Telecommunications Act Accessibility Guidelines.
    Fiscal Year 2006 Planned Activities--Codes and Standards
        The Board worked with the Election Assistance Commission (EAC) in
    the development of voluntary voting system guidelines under the Help
    America Vote Act. The guidelines were made available in January 2006.
    The voting system guidelines were developed with the assistance and
    input of a Technical Guidelines Development Committee and Board of
    Advisors. Two Access Board members serve on these groups. In fiscal
    year 2006, the Board will continue working with the EAC on the next
    version of the guidelines.
    Fiscal Year 2007 Objectives--Rulemaking
        In fiscal year 2007, the Board will issue one final rule and two
    proposed rules:
      --Final rule on access to outdoor developed areas.
      --NPRM on public rights-of-way accessibility.
      --NPRM on access to passenger vessels.
    Fiscal Year 2007 Objectives--Codes and Standards
        In fiscal year 2007, 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, TRAINING, AND RESEARCH

        The Board's long-range goal is to be a leader in information,
    education, and outreach on accessibility. 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
            12,000 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 15,000 publications
            each year in print and alternate formats.
      --Providing training. The Board conducts about 90 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 (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 2.2 million user
            sessions on our website in fiscal year 2005.
        The Board also has informal partnerships with other organizations
    such as the American Institute of Architects, the National Association
    of ADA Coordinators, and the Disability and Business Technical
    Assistance Centers (DBTAC) to disseminate information about the Board's
    programs. Many of the Board's guidelines and publications are available
    through these organizations' on-line networks. The Board also provides
    training for these organizations.
        As the Board develops 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 2005 Results--Technical Assistance, Training, and Research
        Recently, the Board adopted a ``focus issue'' approach to public
    outreach and technical assistance that will allow the Board to reach a
    wider variety of audiences than it does now. The focused approach will
    supplement the Board's existing outreach programs. Focusing on an issue
    will allow the Board to make a large impact in a narrow segment of
    society in a way that its current approach does not allow. The Board
    selected access to courthouses as its first focus issue and in October
    2004 created a 31-member Courthouse Access Advisory Committee to guide
    this work. The committee has met five times since its creation. It is
    scheduled to complete its work in November 2006. The committee will
    develop technical assistance materials related to the accessibility of
    courthouses, particularly courtrooms, including best practices, design
    solutions, and the promotion of accessible features.
        The Board unveiled its newly redesigned website in June 2005 using
    the Board's new agency graphic identity. This new graphic identity
    provided the Board with a coordinated range of new templates for the
    layout of reports, bulletins, internet presence, and other print and
    electronic materials. The Board developed this new and more appropriate
    graphic expression, including both logo and text, for its family of
    print materials. The Board did this to reflect its professionalism and
    to communicate that the Board is the only Federal agency devoted to
    accessibility in the built environment and in communications and
    electronic technologies.
        In fiscal year 2005, the Board responded to 12,271 customer
    inquiries; distributed 1,250 information packets; and conducted 108
    training sessions, which were attended by 9,100 people. An information
    packet usually contains several publications. Since the Board does not
    collect data on publications disseminated through partner
    organizations, the actual number of publications disseminated to its
    customers is greater than the current data indicate.
        The Board has used its 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 the Board's website continues to grow.
    There were approximately 2.2 million user sessions in fiscal year 2005,
    nearly 600,000 more than the previous year. Due to the increasing use
    of the its website, the Board is focusing on web-based dissemination of
    information since this allows a variety of options for speedy
    distribution at a low cost to the Board. The Board also published and
    distributed six issues of Access Currents, a free newsletter issued
    every other month by mail and e-mail.
        Technical assistance, research, and training projects funded in
    fiscal year 2005 include:
      --Retail Checkout Counters and Point-of-Sales Machines.--This project
            will develop a technical assistance bulletin demonstrating in
            well-illustrated and detailed case studies and best practices
            the application of accessibility requirements to the design,
            engineering, fabrication, and construction of check-out
            counters and transaction machines.
      --Wheeled Mobility Research.--This multi-year project will research
            and report on the space requirements, horizontal and vertical
            maneuvering parameters, reach ranges, and other key factors of
            occupied power wheelchairs and scooters in use in buildings,
            facilities, and transportation vehicles. The data collected is
            to be presented in a report that will facilitate comparison
            with provisions in current accessibility guidelines, with key
            published studies of mobility aid space and maneuvering
            requirements, and will enable consideration of several
            increments of accommodation for both power wheelchairs and
            scooter types.
      --Effects of Static Electricity in Play Areas.--Static electricity in
            play areas is potentially harmful to children who have cochlear
            implants. This project will collect measures of the levels of
            static electricity being created in play areas where plastic
            play components are installed. The contractor will analyze the
            findings from several test areas and compare them to the
            charges that result from other sources and charges known to
            have effects on hearing technologies. A second phase of work
            will support additional site testing.
      --Measures and Materials.--This project will bring together
            representatives of design and construction industry
            organizations to work with the Board to incorporate information
            on tolerances relative to accessibility in industry
            specifications. A technical assistance publication will also be
            developed.
      --Wayfinding at Intersections.--This project funded a workshop that
            brought together highway engineers, orientation and mobility
            specialists, and people with disabilities in a 2-day workshop
            to consider possible changes to roadway design to facilitate
            wayfinding. Fiscal year 2005 funding supported continued
            discussion and development of standard intersection plans based
            upon workshop recommendations, with the objective of arriving
            at consensus schemes that can be implemented by industry.
      --Passenger Vessels Regulatory Assessment.--This project will develop
            an initial case study for use in the Passenger Vessels
            Regulatory Assessment.
    Fiscal Year 2006 Planned Activities--Technical Assistance, Training,
            and Research
        In November 2005, the Board set its research priorities for fiscal
    year 2006. The projects include the following:
      --Communications in Transportation Facilities.--This project will
            study and determine the need for changes in communications
            accessibility provisions in the Board's guidelines for
            transportation facilities and vehicles.
      --Pedestrian Signals at Roundabouts.--The draft public rights-of-way
            guidelines require pedestrian signals at multi-lane crossings
            of roundabouts. This study will identify candidate technologies
            in use elsewhere around the world.
      --Wayfinding Research.--The Department of Blind Rehabilitation at
            Western Michigan University is using seed funding from the
            National Eye Institute to assess the relative effectiveness of
            several physical wayfinding cues in the outdoor environment,
            including returned edges, tactile surfaces, guidestrips, and
            curb ramp orientation. Our funding will enable them to do more
            dispositive research with a larger group of subjects and test a
            wider range of cues.
      --Standards for Assisted Transfer.--This project will follow-up on an
            earlier one that collected and presented information on current
            practices in medical care and assisted living facilities by
            convening an expert group of stakeholders to recommend changes
            to the Board's guidelines.
      --Slope and Surface Effects on Manual Wheelchair Users.--This project
            will commission a comparative analysis relative to manual
            wheelchair use of the several standard protocols used to
            measure work, effort, energy expenditure, efficiency,
            difficulty, and rollability to develop a more accurate
            protocol.
      --APS Troubleshooting.--This project will commission a technical
            assistance bulletin regarding how to specify accessible
            pedestrian signals that are appropriate to specific
            intersection types and conditions.
      --Sign Language Versions of Selected Board Material.--People who are
            deaf would like to access materials in their native language,
            American Sign Language. This project will develop short video
            clips using American Sign Language to convey information about
            the Board and ways to file Architectural Barriers Act
            complaints and place the clips on the Board's web site.
      --Indoor Environmental Quality Follow-up.--This project will
            commission the National Institute of Building Sciences to
            pursue key recommendations of a previous Board sponsored study
            on improving the indoor environment for individuals with
            multiple chemical sensitivities and electromagnetic
            sensitivities.
      --Study Lighting for Low Vision Users.--This project will commission
            a research synthesis on existing lighting research and
            standards affecting people with low vision. This synthesis will
            be useful in providing technical assistance to improve access
            for people with low vision and could lead to eventual
            rulemaking.
      --Regulatory Assessment for Passenger Vessel Rulemaking.--This work
            is required by our rulemaking agenda.
      --Regulatory Assessment for Public Rights-of-Way Rulemaking.--This
            work is required by our rulemaking agenda. This year the Board
            will fund the incidental expenses necessary to convene industry
            leadership to plan for data gathering and analysis.
        Because of the Board's expertise in accessibility issues, many
    government agencies and private organizations ask for its assistance in
    ensuring access at their facilities. The Board provided technical
    assistance to the Department of Commerce on the proposed new Census
    Bureau building in Suitland, MD. Members of the Maryland Congressional
    delegation requested the Board's assistance to help make this building
    a model of accessibility. The Board also reviewed accessibility issues
    for the planned new Department of Transportation headquarters building.
    Fiscal Year 2007 Objectives--Technical Assistance, Training, and
            Research
        In fiscal year 2007 and beyond, the Board will develop training and
    technical assistance materials on its planned final rules on outdoor
    developed areas, passenger vessels, and public rights-of-ways. As the
    Board publishes final rules, it makes every effort to ensure that
    training and technical assistance materials will be available to
    organizations and individuals that must apply the new requirements.

                     ARCHITECTURAL BARRIERS ACT 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, courthouses, and a variety of other
    facilities. When the Board has jurisdiction and finds that the
    applicable accessibility standards were not followed, it requests a
    corrective action plan and monitors the case until the barrier is
    removed. Even when the Board does not have jurisdiction or no violation
    is found, it attempts to negotiate voluntary barrier removal.
        The Board's long-range goal is to be a leading partner with Federal
    agencies to make the Federal Government a model of compliance with
    accessibility standards. The Board's experience with enforcement of the
    ABA 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 ABA. The
    Board has also worked with the Federal agencies responsible for issuing
    accessibility standards for facilities covered by the ABA to update
    their standards to be consistent with the Board's new ADA and ABA
    Accessibility Guidelines that were issued in July 2004. In November
    2005, the General Services Administration updated its accessibility
    standards for the ABA. The new standards will apply to most Federal
    facilities that are constructed, altered, or leased after May 8, 2006.
    The United States Postal Services also updated its ABA standards for
    postal facilities in May 2005. The Board continues to work with the
    Department of Defense and the Department of Housing and Urban
    Development to update their ABA standards.
    Fiscal Year 2005 Results--ABA Enforcement
        In fiscal year 2005, the Board received 168 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 168 complaints, the
    Board opened 90 as new Architectural Barriers Act cases. Although the
    Board did not have authority under the Architectural Barriers Act in
    the other 78 complaints, the Board responded to the complainants,
    usually by referring them to the appropriate enforcement agency. In
    addition, the Board referred another 46 complainants to other agencies
    for action when our investigations revealed there was no violation of
    the Architectural Barriers Act or the Board did not have jurisdiction.
        The Board responds quickly to all new complaints and contacts
    complainants frequently to update them on the status of their
    complaints. In fiscal year 2005, 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 5 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 2005, the Board contacted 159
    complainants to provide updates on the status of their complaints.
    Fiscal Year 2006 Plans--ABA Enforcement
        In fiscal year 2006, the Board will continue to investigate
    complaints under the Architectural Barriers Act. The Board anticipates
    responding to complaints in an average of 5 or fewer business days and
    will continue to provide periodic updates to complainants on the status
    of their complaints. At the beginning of fiscal year 2006, the Board
    had 107 active cases. The Board expects to receive 180 new complaints
    in fiscal year 2006. Of this total, the Board estimates that 100 will
    be opened as new Architectural Barriers Act cases and 80 will be
    referred to other agencies for enforcement under other laws, such as
    the Americans with Disabilities Act and the Rehabilitation Act. This
    represents an increase over fiscal year 2005, which are anticipated in
    response to an outreach effort the Board just completed to provide
    informational packets on the Architectural Barriers Act to independent
    living centers and technical assistance centers throughout the country.
    Fiscal Year 2007 Objectives--ABA Enforcement
        In fiscal year 2007, the Board will continue to investigate
    complaints under the Architectural Barriers Act. The Board estimates
    that it will have 105 active cases at the beginning of fiscal year 2007
    and will receive 180 new complaints. The Board expects to open 100 new
    Architectural Barriers Act cases and refer 80 complaints to other
    agencies for enforcement under other laws. The Board will continue to
    provide good customer service.
                                     ______

    Prepared Statement of the Capital Metropolitan Transportation Authority

        Mr. Chairman and members of the subcommittee, on behalf of the
    Capital Metropolitan Transportation Authority in Austin, Texas, I am
    pleased to submit this statement for the record in support of our
    fiscal year 2007 funding requests from the Federal Transit Authority
    for Capital Metro--the transportation provider for Central Texas. I
    hope you will agree that the appropriating of funds for these Central
    Texas projects warrants serious consideration as Austin and the
    surrounding Texas communities plan for our region's growing
    transportation needs.
        First, let me thank you for your past financial support for
    transportation projects in Central Texas. Your support has proven
    valuable to Capital Metro and to our Central Texas community as we face
    new challenges.
        As you know, Interstate 35 runs from Canada to Mexico, and along
    the way it also runs through the City of Austin and Capital Metro's
    600-square-mile service area. While traffic in this important corridor
    has always been a challenge, the North American Free Trade Agreement
    has resulted in increased traffic and congestion for our region. In
    fact, a 2002 study by the Texas Transportation Institute determined
    Austin, Texas to be the 16th most-congested city nationwide.
        Also, Central Texas' air quality has reached near non-attainment
    levels. Together, our community has developed a Clean AirForce, of
    which Capital Metro is a partner, to implement cooperative strategies
    and programs for improving our air quality. Capital Metro has also
    unilaterally implemented several initiatives such as offering free
    rides on ozone action days for the last 14 years, converting its fleet
    to clean-burning Ultra Low Sulfur Diesel (ULSD), becoming the first
    transportation authority in Texas to introduce environmentally-friendly
    hybrid-electric buses, and creating a GREENRide program to carpool
    Central Texas workers in low emission hybrid gas/electric automobiles.
        To address these transportation and air quality challenges as well
    as our region's growing population, in 2004 Capital Metro conducted an
    extensive community outreach program to develop the All Systems Go
    Long-Range Transit Plan. This 25-year transportation plan for Central
    Texas was created by Capital Metro, transportation planners, and local
    citizens. More than 8,000 citizens participated in the design of the
    program that will bring commuter rail and rapid bus technologies to
    Central Texas. The plan will also double Capital Metro's bus services
    over the next 25 years.
        By a vote of over 62 percent, this long-range transportation plan
    was adopted by the Central Texas community in a public referendum on
    November 2, 2004. The plan received bipartisan support, along with
    endorsements from the business community, environmental organizations,
    neighborhood associations, and our community leaders.
        An important component of the All Systems Go Long Range Transit
    Plan is the creation of an urban commuter rail line along a 32-mile-
    long freight rail line currently owned and operated by Capital Metro.
    The proposed starter route would provide urban commuter rail service
    extending from downtown Austin (near the Convention Center) through
    East and Northwest Austin and on to Leander.
        To implement the community's All Systems Go Transit Plan, Capital
    Metro is seeking $10 million for fiscal year 2007 for five projects of
    importance to our Central Texas community:

                         RAPID BUS PROJECT--$2 MILLION

        The All Systems Go Long-Range Transit Plan relies heavily on new
    rapid bus technologies. The plan creates several new rapid bus routes
    throughout the Central Texas region. The Rapid Bus Project is designed
    to provide faster, frequent and dependable service in main bus
    corridors with high ridership while avoiding large fixed costs and long
    lead times. Capital Metro is seeking $2 million for the Rapid Bus
    Project.

      ENHANCEMENT AND IMPROVEMENT OF BUSES AND BUS FACILITIES--$5 MILLION

        Capital Metro has embarked on a long-term plan to improve and
    expand bus service. In addition to improving bus routes, the agency is
    investing in critical park and ride facilities, transit centers and
    enhanced bus stop locations and amenities. As Capital Metro's service
    area and the population we serve continue to grow, we will continue to
    enhance our system and facilities while addressing traffic congestion
    and air quality concerns. In the next 3 years, Capital Metro has
    planned to invest $82.5 million in capital projects to better serve our
    growing population. Capital Metro seeks $5 million from the
    appropriations process for these improvements and expansions of our bus
    service and facilities.
        Also, Capital Metro is seeking funds for three new strategically
    located park and ride facilities in our service area.

                   LEANDER PARK AND RIDE FACILITY--$1 MILLION

        The Leander Park and Ride will anchor Capital Metro's Urban
    Commuter Rail and express bus services serving Leander and rapidly
    growing areas of Western Williamson and Travis Counties. Connecting
    circulator service in Leander is also planned to expand and improve
    Capital Metro's service in Northwestern suburbs and throughout Central
    Texas. Capital Metro is seeking $1 million for this project.

                  OAK HILL PARK AND RIDE FACILITY--$1 MILLION

        The Oak Hill Park and Ride facility will anchor Capital Metro's
    future rapid bus services to rapidly growing areas of Southwest Austin
    and Travis County. This facility and its routes will connect local
    service to several nearby neighborhoods to serve the growing number of
    suburban commuters in this portion of Capital Metro's service area.
    Capital Metro is seeking $1 million for this project.

                 SOUTH IH-35 PARK AND RIDE FACILITY--$1 MILLION

        The South IH-35 facility will anchor Park and Ride and Rapid Bus
    services to Downtown Austin. It will also serve as a connecting point
    for local bus services in Far South Austin. These local services will
    expand as the area grows to improve Capital Metro's service in Southern
    suburbs and throughout Central Texas. Capital Metro is seeking $1
    million for this project.
        I look forward to working with the committee in order to
    demonstrate the necessity of these projects. Your consideration and
    attention are greatly appreciated.
                                     ______

          Prepared Statement of the Greater Orlando Aviation Authority

        Chairman Bond and distinguished members of the Senate
    Appropriations Subcommittee on Transportation, Treasury, the Judiciary,
    Housing and Urban Development, and Related Agencies, the Greater
    Orlando Aviation Authority (``the Authority'') greatly appreciates the
    opportunity to present written testimony in support of our funding
    request for important safety and capacity enhancements at Orlando
    International Airport.
        The Authority respectfully requests your subcommittee's
    consideration and support of the following Federal initiative: Runway
    36L Instrument Landing System Category II (ILS Cat II), with an
    Approach Lighting System with Sequenced Flashing Lights, associated
    Environmental Assessment and West Airfield modifications at Orlando
    International Airport (MCO).
        The Authority respectfully requests the subcommittee to include the
    following line item in the fiscal year 2007 FAA F&E Budget:

        ``Acquisition and Installation of Runway 36L Instrument Landing
    System Category II (ILS CAT II) with an Approach Lighting System with
    Sequenced Flashing Lights (ALSF-2); and associated Environmental
    Assessment and West Airfield modifications at Orlando International
    Airport--$4,140,000''.

        Serving nearly 34 million passengers in 2005, Orlando International
    Airport is Florida's busiest commercial service airport and is ranked
    as the 14th busiest airport nationwide. With its four parallel runway
    system, the airport averages nearly 1,000 daily aircraft operations
    (over 350,000 take-offs and landings annually). Runway 36L serves as
    the predominant arrival runway when aircraft are landing in a ``north
    flow'' approach at MCO. This runway end currently does not have
    precision instrument approach capability.
        Installation of ILS/ALS equipment will increase capacity, reduce
    flight delays and provide enhanced safety and aircraft separation, by
    allowing FAA Orlando Air Traffic Control staff to optimize its
    preferred operational procedures of landing on outer runways and taking
    off on the interior runways.
        In addition, Orlando International Airport is currently served by
    56 different air carriers. The ILS CAT II system is the only
    established navigational system that is fully compatible with existing
    air carrier instrument flight capabilities.

                           JUSTIFICATION AND CLOSING

        Orlando International Airport remains steadfast in its commitment
    to help our Nation in its mission to provide safe, efficient, and
    affordable air travel as an integral part of our Nation's aviation
    system.
        Orlando International Airport (OIA) is one of the Central Florida's
    primary assets and has been previously designated as a U.S. Security
    Category X airport. In 2005, OIA served over 34 million passengers,
    surpassing Miami International Airport as the busiest commercial
    passenger airport in Florida. Additionally, OIA is the 14th busiest
    commercial service airport in the Nation and the 24th busiest in the
    world. In terms of origin and destination (O&D) passenger traffic at
    domestic airports, OIA ranked 4th behind Los Angeles International, Las
    Vegas' McCarran International and traditional airline hub airports such
    as Chicago's O'Hare International. O&D passengers represent
    approximately 95 percent of all passengers at OIA. This high level of
    O&D activity is expected to continue.
        OIA has scheduled service to 84 non-stop domestic destinations and
    19 non-stop international destinations, promoting increased airline
    service and competitive fares. The largest rental car market in the
    world is located at OIA. The airport shares a unique relationship with
    the regional economy. An Economic Impact Study completed in 2004
    estimated that OIA generates a $20.7 billion annual economic impact to
    the Central Florida Region and is responsible for 62,100 direct and
    indirect jobs.
        The Authority expresses its gratitude for the opportunity to
    present this testimony to your subcommittee. We look forward to working
    with you and your staff in advancing these safety and capacity
    initiatives that will benefit the National Aviation System. If the
    subcommittee requires any additional information regarding the
    identified funding needs, please do not hesitate to contact the Greater
    Orlando Aviation Authority.

    RUNWAY 36L INSTRUMENT LANDING SYSTEM CATEGORY II (ILS CAT II), APPROACH
         LIGHTING SYSTEM WITH SEQUENCED FLASHING LIGHTS AND ASSOCIATED
      ENVIRONMENTAL ASSESSMENT AND WEST AIRFIELD MODIFICATIONS AT ORLANDO
                             INTERNATIONAL AIRPORT

        ``All of us who work for and with aviation safety professionals
    take pride in the results of our collective efforts, especially given
    the economic turbulence being experienced by U.S. carriers. But even as
    we recognize how safe it is to travel in commercial air transportation,
    we must look beyond to face the challenge of how to make the system
    safer. How can we continue to improve aviation safety as demand and
    complexity increase? We are facing record setting passenger numbers,
    new light jets, UAVs, . . . even space travel is not as far away as it
    once was. We cannot afford to rest on our laurels.''--Statement of
    Marion C. Blakely, FAA Administrator, before the Senate Commerce
    Committee, Subcommittee on Aviation on Safety Issues on Aviation
    Safety, November 17, 2005.

        The Authority respectfully requests the subcommittee to include the
    following line item in the fiscal year 2007 FAA F&E Budget:

        ``Acquisition and Installation of Runway 36L Instrument Landing
    System Category II (ILS CAT II), with an Approach Lighting System with
    Sequenced Flashing Lights (ALSF-2); and associated Environmental
    Assessment and West Airfield modifications at Orlando International
    Airport--$4,140,000''.

        This high priority airfield capacity enhancement project will
    include the following elements:
      --Development of an Environmental Assessment (EA) to evaluate the
            planned ILS and ALS.
      --Procurement of ILS and ALS related equipment: glide slope,
            localizer, marker beacons (inner, middle, outer/DME), Runway
            Visual Range (RVR) and ALSF-2.
      --Design, construction, installation, and certification of ILS and
            ALS equipment.
        To support this airport capacity and safety related initiative, the
    following upgrades to existing facilities will be necessary:
      --Runway/taxiway pavement markings and signage.
      --Electrical system and lighting.
        Installation of an ILS CAT II on Runway 36L will provide the
    following benefits:
      --Increased capacity.
      --Reduced flight delays.
      --Enhanced safety and aircraft separation.
      --Allow FAA Orlando Air Traffic Control staff optimization of its
            preferred operational procedures by landing on outer runways
            and taking off on the interior runways.
      --Full compatibility with existing instrumentation utilized by all 56
            air carriers currently serving Orlando International Airport.

          PROJECT COST ESTIMATE--RUNWAY 36L ILS & ALS AND WEST AIRFIELD
                IMPROVEMENTS, ORLANDO INTERNATIONAL AIRPORT (MCO)
    ------------------------------------------------------------------------
            Item Description                 Cost              Comments
    ------------------------------------------------------------------------
    ILS CAT II \1\ \2\..............         $1,500,000  ILS eqpt. to be
                                                          upgraded to CAT
                                                          III as a future
                                                          project.
    ALSF-2 \1\ \2\..................          1,500,000  To serve R/W 36R
                                                          ILS CAT II &
                                                          future ILS CAT
                                                          III.
    ILS/ALS EA......................             35,000  EA--Environmental
                                                          Assessment.
                                     -------------------
          Subtotal..................          3,035,000  ...................
    West Airfield Modifications.....            100,000  Allowance for
                                                          electrical system,
                                                          lighting, marking,
                                                          signage
                                                          improvements.
                                     -------------------
          Construction Total........          3,135,000  ...................
    Professional Fees/Markups.......          1,008,216  ...................
                                     -------------------
          TOTAL.....................          4,143,216  ...................
          TOTAL (ROUNDED)...........          4,140,000  ...................
    ------------------------------------------------------------------------
    \1\ Costs were provided by Dave Gigowski (FAA Southern Region) and are
      stated in 2006 dollars.
    \2\ Includes costs for NAVAID design, equipment procurement,
      installation/construction and flight certification.

                                     ______

                    Prepared Statement of the Navajo Nation

    NAVAJO DIVISION OF COMMUNITY DEVELOPMENT--INDIAN COMMUNITY DEVELOPMENT
                                  BLOCK GRANT

                                  INTRODUCTION

        The Navajo Nation reservation lies within the three States of
    Arizona, New Mexico and Utah and covers about 27,000 square miles--
    about the size of the State of West Virginia. According to the 2000
    Census count the Navajo Nation has a population of 269,202 enrolled
    members and is considered the largest federally recognized Indian Tribe
    in North America. Most of its members still live in substandard
    housing, consisting of one room dwelling units with no running water or
    electricity and continue to suffer from high unemployment with about 43
    percent of Navajos living below the poverty level with per capita
    income averaging about $7,269 as compared to the national poverty level
    of 9.2 percent and $21,587 for the national per capita income level.
    The Navajo people suffer chronic unemployment and must cope with a
    chronic massive need for housing and infrastructure. While unemployment
    in American averages 5 percent, the Navajo unemployment rate averages
    38 percent to 56 percent, depending on the season.
        The Navajo Nation's need for adequate housing is amply supported by
    other distressing statistics. For example, over 32 percent of Navajo
    homes do not have plumbing or water, 60 percent do not have telephone
    services and 28 percent lack of adequate kitchen facilities. We have
    estimated the need for at least 30,000 new housing units and over
    50,000 needing basic utility services.

                      NAVAJO NATION COMMUNITY DEVELOPMENT

        The Navajo Nation Division of Community Development is responsible
    for providing housing and related assistance to low-income families who
    qualify under the following programs: (1) Weatherization Assistance
    Program; (2) Housing Services Program, and (3) Community Development
    Block Grant Program.
        The Navajo Division of Community Development is established as part
    of the Executive Branch within the Navajo Nation government. It is the
    only Division responsible for providing community development
    throughout the Navajo Nation in terms of governmental buildings and
    home construction and related infrastructure. The Division of Community
    Development administers the Weatherization Assistance Program, the
    Housing Services Program, and the Community Development Block Grant
    Program, the Capital Improvement Office, Design and Engineering
    Services and Local Government Support Centers that provide assistance
    and services to communities throughout the Navajo Nation. The services
    provided by these programs are funded through the treasury of the
    Navajo Nation government and through external funds received from State
    and Federal grants and through appropriations administered through the
    Bureau of Indian Affairs.
        The Navajo Nation relies on revenues generated from mineral leases
    that flow into its tribal treasury and is used to operate the Navajo
    government. In fiscal year 2007 the Navajo Nation will lose about $21
    million from its main employers who operate mineral leases that will
    expire or will cease to continue operations if negotiations fail with
    companies that do not upgrade their operation under the Clean Air Act
    and Court Decree filed by environmental groups. For this reason, the
    Navajo Nation looks to its trustee, the Federal Government to provide
    Federal appropriations to serve its vast population, many of whom live
    in rural and remote locations of the reservation and continue to have
    inadequate housing and no running water and electricity. This is all
    due to the vast Navajo land base that requires tens upon thousands of
    dollars to run power lines, sewer lines and other basic necessities
    through the rural communities and without Federal dollars to address
    basic services from the Federal Government and as part of it trust
    obligation to the Navajo Nation, the many Navajo members will continue
    to live below the poverty level well into the next decade and beyond.

                       COMMUNITY DEVELOPMENT BLOCK GRANT

        The Navajo Nation hereby provides a position on the following
    proposed policy as it pertains to the Community Development Block
    Grant.
    The Navajo Nation Recommends More Tribal Consultation of Any Proposed
            Allocation That Impacts Tribal Governments
        At the present time there is basically no consultation between the
    Federal Government and the Navajo Nation.
        The Navajo Nation strongly opposes President Bush's proposal to
    reform the CDBG formula by consolidating Native American Programs with
    other similar programs. Native Americans live in a very unique society
    and should not be grouped or compared with other distressed
    communities.
        The President's fiscal year 2007 budget proposes to reform the
    ICDBG by consolidating and eliminating several economic development
    programs. The President's proposal will establish regional councils to
    focus more on programs that have regional impacts. The regional
    councils will not be familiar with Native American communities and have
    a different interpretation of rural communities. Indian country simply
    cannot sustain or support such a severe reduction in funding or changes
    in the ICDBG.
        If other programs are consolidated into CDBG, the primary
    intentions of the ICDBG program will be lost. The focus will shift from
    infrastructure development such as water, electric, public facilities
    and economic development other types of development.
    The Navajo Nation Opposes the Transfer of ICDBG to the Department of
            Commerce
        The Navajo Nation strongly opposes the Bush Administration's
    proposal to transfer the Indian Community Development Block Grant
    program to the Department of Commerce. The Navajo Nation urges the
    Congress to keep the ICDBG program within the U.S. Department of
    Housing and Urban Development. Most of the work the Department of
    Commerce has done has been with municipalities and urban areas. If the
    ICDBG is transferred to Commerce, the rural areas and particularly the
    Indian tribes will be neglected, because of the unfamiliarity of the
    Department of Commerce with rural development and Indian tribes.
        If the ICDBG is transferred and consolidated with other programs
    with a common set of performance goals, it will probably be oriented
    towards established communities and not rural areas.
    The Navajo Nation Opposes Any Budget Cuts in the ICDBG and NAHASDA
            Programs
        The Navajo Nation opposes any proposed budget cuts in the ICDBG and
    NAHASDA. The Navajo Nation has been providing infrastructure of basic
    utilities to hundreds of Navajo families since 1976. The need for
    infrastructure and housing continues to escalate while the funding
    remains at the same level. The cost in materials, labor, inflation, and
    the increase in the Navajo population has all resulted in increase
    costs. A large number of the Navajo people need infrastructure
    development (electricity and water/wastewater facilities). The Navajo
    Nation continues to advocate for an increase in ICDBG funding to start
    addressing a large number of families.
        Despite the proposed changes, reform, or decrease in funding, the
    ICDBG has made tremendous positive impacts to communities who have
    received ICDBG funding in the past. Within the past 5 years, the ICDBG
    has accomplished the following:

    ------------------------------------------------------------------------
                                                                  No. of
                      Year                     Amount Funded     Families
                                                                 Benefited
    ------------------------------------------------------------------------
    1999....................................      $5,000,000             407
    2000....................................      $5,000,000             314
    2001....................................      $5,000,000             240
    2002....................................      $5,000,000             345
    2003....................................      $4,345,941             295
    2004....................................      $5,491,000             314
    ------------------------------------------------------------------------

                                   CONCLUSION

        Therefore, the Navajo Nation urges the Congress to either increase
    the level of funding of ICDBG or maintain the current level of funding
    to provide the basic infrastructure for the increasing Navajo
    population. Lastly, Navajo urges Congress not to make any changes in
    organizational structure or formula structure of the CDBG until tribal
    consultation is made.
                                     ______

      Prepared Statement of the American Public Transportation Association

        APTA is a nonprofit international association of more than 1,600
    public and private member organizations including transit systems and
    commuter rail operators; planning, design, construction and finance
    firms; product and service providers; academic institutions; transit
    associations and State departments of transportation. APTA members
    serve the public interest by providing safe, efficient and economical
    transit services and products. More than 90 percent of persons using
    public transportation in the United States and Canada are served by
    APTA members.

                                  INTRODUCTION

        Mr. Chairman and members of the committee, on behalf of the
    American Public Transportation Association (APTA), we thank you for
    this opportunity to submit written testimony on the need for and
    benefits of investment in Federal Transit Administration (FTA) programs
    for fiscal year 2007.

                                    OVERVIEW

        Mr. Chairman, the fiscal year 2007 Transportation, Treasury, the
    Judiciary, Housing and Urban Development, and Related Agencies
    Appropriations bill is an opportunity to advance national goals and
    objectives through increased investment in our surface transportation
    infrastructure, particularly public transportation. For that reason, we
    strongly urge Congress to fund the Federal transit program at no less
    than the $8.975 billion level authorized in the Safe, Accountable,
    Flexible, Efficient Transportation Equity Act--A Legacy for Users
    (SAFETEA-LU), which Congress approved by overwhelming margins just last
    summer.
        Transit plays a number of important roles, including advancing
    energy independence. It reduces congestion and it provides mobility
    options. In fact, expanding public transportation options is more
    important than ever, since transit is the single quickest way for
    individuals and families to beat the high cost of gasoline.
        Americans took more than 9.7 billion transit trips in 2005, and
    transit ridership grew faster than highway travel (1.3 percent vs. 0.1
    percent). Since 1995, the use of public transportation has increased by
    25.1 percent--more than the growth of highway travel (22.5 percent)
    over that period. The growth of transit ridership during the past 10
    years demonstrates that Americans want transportation choices and will
    leave their cars behind when convenient, quality public transit service
    is available. As gas prices continue to rise, the demand for public
    transportation will only continue to grow.
        Additionally, it is important to recognize that public
    transportation benefits those who drive, as well as those who use
    transit. According to the 2005 Texas Transportation Institute's Annual
    Urban Mobility Report, transit is successfully reducing traffic delays
    and related congestion costs in America's 85 largest urban areas.
    Without transit, nationwide delays would have increased 27 percent,
    costing residents and businesses in those major urban areas an
    additional $18.2 billion in lost time and fuel.

                             FISCAL YEAR 2007 GOALS

        APTA recognizes the need to wisely invest limited Federal
    resources, and we believe that investment in public transportation is a
    wise use of limited resources. Our Nation has a tremendous need for new
    investment in transit and the rest of our surface transportation
    infrastructure. According to a recent study by the U.S. Chamber of
    Commerce's National Chamber Foundation, if the Federal share of
    transportation investment remains constant, in 2015 the Federal share
    of the average annual capital investment needed to maintain the
    Nation's existing highway and transit systems will be $64 billion, and
    the Federal share to improve highway and transit systems will be $89
    billion.
        APTA's funding request for FTA programs in fiscal year 2007 is
    based upon SAFETEA-LU, which was enacted last year. SAFETEA-LU
    authorizes and guarantees $8.975 billion for Federal Transit
    Administration programs in fiscal year 2007. APTA urges Congress to
    fund the transit program at the authorized level so that communities
    across the Nation, utilizing State and local resources in tandem with
    Federal funds, can begin to address the overwhelming need both to
    preserve the existing transit infrastructure and to expand and improve
    that infrastructure in growing communities and those without good
    transit service.
        SAFETEA-LU builds on the success of the two most recent surface
    transportation authorization laws--the 1991 Intermodal Surface
    Transportation Efficiency Act and the 1998 Transportation Equity Act
    for the 21st Century. Under SAFETEA-LU, the Federal transit program
    structure remains largely the same, retaining formula programs that
    target Federal investment to transit systems based on need and capital
    investment programs that address special needs and projects. The new
    law also provides for increased transit investment in rural
    communities, many of which have little or no transit service. It also
    establishes a number of new programs, including programs for new small
    fixed guideway projects, transit in our national parks, and another
    meant to help address the needs of people with disabilities beyond
    service required under the Americans with Disabilities Act.

                          PRESIDENT'S BUDGET PROPOSAL

        The administration's fiscal year 2007 budget proposal recognizes
    the importance of public transportation investment. While we are
    pleased that the administration's proposal adheres to the authorized
    transit program in most respects, we want to identify two concerns APTA
    has with the President's fiscal year 2007 budget proposal.
        First, the administration proposes to fund only $100 million of the
    $200 million authorized in fiscal year 2007 for the small starts
    program that is meant to assist the development and construction of
    smaller fixed guideway projects such as streetcars, trolleys, commuter
    rail, and bus rapid transit systems. This program is part of the
    program that provides funding to new fixed guideway projects--heavy and
    light rail, bus rapid transit, commuter rail, and trolleys--and the
    President's proposal would actually reduce total funding for this
    program below the fiscal year 2006 level.
        Second, the President's budget proposal for the Federal Railroad
    Administration (FRA) proposes, consistent with last year's
    appropriations bill, that commuter railroad riders will assume a higher
    portion of maintenance and capital expenses on the Amtrak-owned
    portions of the Northeast Corridor. We are concerned that the
    imposition of these fees by the Federal Government will increase
    operating costs for these commuter railroads and result in higher costs
    for commuter rail users and the State and local taxpayers who fund
    these systems, and therefore urge Congress not to include this fee in
    this year's appropriations bill.

                            NEW STARTS/SMALL STARTS

        Mr. Chairman, APTA is disappointed that the administration has
    proposed to fund transit below the level so recently authorized and
    guaranteed by Congress. The administration requested $100 million less
    than the amount authorized from the general fund for the new starts
    program, proposing only half of the funding authorized for the new
    small starts program, a program to fund less costly fixed guideway
    projects such as light rail, commuter rail, and bus rapid transit
    systems.
        As this committee knows, there is overwhelming demand for new
    starts projects, and SAFETEA-LU authorized 387 projects. New fixed
    guideway projects are an important part of meeting transit needs, but
    these major capital projects take years to develop and require a
    predictable funding commitment. Once appropriated for a fiscal year,
    new starts program funding remains available for the 2 subsequent
    fiscal years. The effect of underfunding the small starts/new starts
    program will be felt disproportionately in future years by causing
    transit providers to fall further behind in the development of new,
    less expensive projects due to the cuts that would be implemented under
    the administration's proposal, robbing communities of the congestion
    relief and environmental benefits associated with the projects.
        We want to make another point, Mr. Chairman. SAFETEA-LU
    restructured the general fund and Mass Transit Account (MTA) funding
    sources so that MTA outlays are now scored when they are actually spent
    rather than when they are appropriated. The good news is that MTA
    balances now are significantly higher than they would have been under
    the old scoring system. But this also means that the new starts program
    is now funded exclusively from the general fund. Mr. Chairman, it is
    important to emphasize that this was done to improve the overall
    financing of the Federal transit program, and was not meant to create
    funding uncertainty or program cuts, as the administration proposes.
        Finally, and importantly, we note that 2005 ridership on light rail
    systems in the United States has grown at a faster rate than any other
    form of transit. Ridership on light rail grew by 6 percent in 2005.
    Some light rail systems showed double digit increases in ridership:
    Minneapolis (168.9 percent); Houston (38.0 percent); New Jersey (17.8
    percent); Salt Lake City (13.3 percent); Sacramento (12.8 percent); and
    Los Angeles (10.5 percent). There is clearly overwhelming demand for
    these and other new starts projects. We look forward to working with
    this committee and ask for your support for fully funding new starts
    and all other elements of the fiscal year 2007 Federal transit program
    at the authorized level.

                    NORTHEAST CORRIDOR COMMUTER RAIL ISSUES

        We are also concerned about another issue in the proposed fiscal
    year 2007 budget. The administration proposes that commuter railroads
    will assume a higher portion of capital and maintenance expenses on the
    Amtrak-owned portion of the Northeast Corridor. An amount of $59
    million in fees on commuter railroads is assumed in each of fiscal year
    2006 and 2007 to support Amtrak spending.
        The provision in the fiscal year 2006 Transportation Appropriations
    law that requires the Federal Railroad Administration to assess these
    fees has proven very difficult to implement. The administration began
    the process with a ``top down'' approach that did not take heed of the
    accompanying conference report which directed the Secretary to seek to
    achieve consensus among all stakeholders in the corridor. In fact, the
    FTA went so far as to place a notice in the Federal Register indicating
    its intent to make payment of these fees a condition for receipt of
    Federal transit grants to commuter railroads. More recently, the
    process has improved, but it still requires a series of very difficult
    calculations and has absorbed a considerable amount of time among top
    leaders of the FRA, State DOTs and commuter railroads.
        The only silver lining for the 2006 process is that significant
    time has been invested by governors, State DOTs and commuter railroads
    in working with FRA on corridor issues. This time and effort should be
    devoted to developing a long-term plan for improving the corridor not
    to figuring out how to add to the substantial payments commuter
    railroads already make for corridor maintenance and capital
    improvements.
        For fiscal year 2007, APTA urges Congress not to include language
    on commuter railroads similar to last year's appropriations law.
    Commuter railroads already pay a fair share of Northeast Corridor costs
    as established through carefully negotiated legal, financial and
    operating agreements involving substantial State investments.

                 PUBLIC TRANSPORTATION AND ENERGY INDEPENDENCE

        APTA is pleased that President Bush highlighted the need to focus
    on energy independence in his State of the Union address earlier this
    year. The President said that ``keeping America competitive requires
    affordable energy . . . America is addicted to oil, which is often
    imported from unstable parts of the world.'' He further stated that
    ``the best way to break this addiction is through technology.''
        We agree, Mr. President! We cannot think of a more important
    technology in that regard than fixed guideway transit, including heavy
    and light rail, commuter rail, and bus rapid transit. This technology
    is readily available and many communities already have systems which
    can be expanded with more investment.
        We must remember also that at its current level of use, public
    transportation is already reducing Americans' energy bills:
      --For every passenger mile traveled, public transportation is twice
            as fuel efficient as private automobiles.
      --Public transportation saves more than 855 million gallons of
            gasoline a year, or 45 million barrels of oil. These savings
            equal about 1 month's oil imports from Saudi Arabia. In 2005,
            9.7 billion trips were taken on public transportation.
        Moreover, transit agencies are increasingly investing in
    alternative fuel buses to reduce dependence on oil. Almost 17 percent
    of fixed route buses now use alternative fuels and 20 percent of buses
    on order will use alternative fuels. Public transportation is clearly
    doing its part to promote energy independence through innovative
    technologies, and that is why we urge Congress to honor SAFETEA-LU and
    fully fund the transit program in fiscal year 2007.

                                   CONCLUSION

        Public transportation plays a key role in meeting the goals of the
    administration and Congress in providing energy independence,
    congestion relief and transportation mobility options for Americans.
    APTA strongly believes that the Federal Government should invest no
    less than the level authorized and guaranteed by Congress for fiscal
    year 2007 in SAFETEA-LU if we are to advance these goals.
        Mr. Chairman, on behalf of APTA's member organizations, I thank you
    for this opportunity to express our views.
                                     ______

         Prepared Statement of the National Alternative Fuels Training
                      Consortium, West Virginia University

        Chairman Bond, Ranking Member Murray and members of the
    Transportation, Treasury, the Judiciary, Housing and Urban Development,
    and Related Agencies Subcommittee on Appropriations, the National
    Alternative Fuels Training Consortium (NAFTC) respectfully supports the
    request of the National Association of State Fire Marshals (NASFM)
    fiscal year 2007 funding of $950,000 to develop, offer and implement a
    comprehensive nationwide training program for all first responders to
    learn about the specifics of Alternative Fuel and Advanced Technology
    Vehicles. This program will provide first responders with the necessary
    training to safely respond to accidents involving these vehicles to
    minimize the potential for injury to themselves as well as the accident
    victims.
        I am Al Ebron, Executive Director of the NAFTC, a consortium
    consisting currently of 27 educational institutions (listed in the
    attached table) dedicated to supporting the use of alternate fuel
    vehicles (AFVs)/advanced technology vehicles. First responders
    (including fire, police, EMT and other emergency personnel) need
    standardized training on the proper procedures to follow in accidents/
    incidents involving alternative fuel and advanced technology vehicles.
    These first responders require training to recognize the dangers
    inherent in advanced technology vehicles in order to ensure their
    safety, that of the persons involved in the accident, and bystanders.
    For example, the new hybrid technology vehicles contain battery packs
    which can discharge shocks in excess of 500 volts to the unwary. Fuel
    cell vehicles contain hot surfaces which can cause burns. Hydrogen-
    powered cars may be inherently dangerous from storage cylinders or fuel
    lines. All are safe with proper training.
        I would like permission to enter into the record as part of my
    testimony a letter dated May 24, 2006, from Frank A. Burns, President
    of the NASFM, to the leadership of the Senate and House Appropriations
    Committees making them aware of this training needed for our first
    responders. This letter adds validity and urgency to our ability to
    jointly respond to this training need in order to save lives.
        Many of these alternative fuel vehicles (AFVs) and advanced
    technology vehicles are in service today. These vehicles have all of
    the appearances of a conventional-technology vehicle, but contain
    components which can be dangerous to personnel unfamiliar with advanced
    technology vehicles.
        General Motors, Ford, Toyota, Honda and other automobile companies
    have sold hundred of thousands and have announced their intentions to
    build hundreds of thousands more of these advanced technology vehicles
    over the next 5 to 10 years. This large a fleet dramatically increases
    the potential for hazards faced by first responders at the scene of
    accidents involving these new vehicles. The U.S. Department of Energy's
    (DoE) Energy Information Administration estimates that in the near
    future, AFVs /advanced technology vehicles will comprise more than 20
    percent of the light duty vehicles in the United States. This means
    that one in every five accidents could involve an AFV/advanced
    technology vehicle.
        First responders (including other emergency personnel) should have
    standardized training on the proper procedures to follow in accidents/
    incidents involving alternative fuel and advanced technology vehicles.
    Such training can be accomplished through the development and
    dissemination of specialized courses that meet industry standards and
    the offering of such courses through a network of properly trained
    instructors. Currently available curricula are not structured to
    provide comprehensive training for working safely with damaged vehicles
    of these types. Resources to provide training for First Responders are
    limited. This program proposes to evaluate and review all known
    resources, combine the relevant resources into one training curriculum
    and associated training programs, and disseminate the materials across
    the United States. This type of integrated program is currently not
    available on a comprehensive basis. We propose to conduct 2 to 3
    regional or nationwide events/meetings to disseminate the information
    and to conduct numerous local training classes.
        West Virginia University and its National Alternative Fuels
    Training Consortium has the ability to conduct this project with the
    management of the National Association of State Fire Marshals and
    industry assistance. The NAFTC is a nationwide organization of post-
    secondary education institutions that develops advanced training
    curricula, conducts training classes taught by certified instructors,
    and promotes the use of alternative fuel and advanced technology
    vehicles. The NAFTC is prepared and ready to develop, offer and promote
    comprehensive training programs for first responders that cover the
    following alternative fuel or advanced technology vehicles:
      --Hybrid Electric;
      --Electric;
      --Fuel Cell;
      --Hydrogen ICE;
      --Biodiesel;
      --Ethanol/Methanol Flex-Fuel;
      --Natural Gas (Compressed and Liquefied); and
      --Propane.
        NAFTC training is modular in concept to allow instructors to:
      --Address all of the alternative fuels and advanced technologies in a
            course;
      --Customize the course for a specific need;
      --Training modules will include: Instructor Manuals, Participant
            Manuals/Textbooks, PowerPoint Presentations for Effective
            Lectures, and Scenario Training With Videos;
      --Classes taught by certified NAFTC instructors and industry
            instructors to train students and future instructors; and
      --Education and outreach materials.
        Individuals completing these courses would learn how to: (1)
    determine the type of vehicle being approached; (2) avoid or circumvent
    on-board systems that could cause injury during victim extraction; (3)
    safely extract victims from vehicles; and (4) minimize damage to the
    environment, others, and themselves.
        The National Alternative Fuels Training Consortium (NAFTC) is the
    only nationwide training organization dedicated to improving air
    quality and decreasing U.S. dependence on foreign oil by promoting,
    supporting, and expanding the use of alternative fuel and advanced
    technology vehicles. It is the premier organization to develop first
    responder training and provide train-the-trainer courses for first
    responder organizations.
        The NAFTC currently:
      --Offers over 20 courses and workshops nationwide on alternative
            fuels and advanced technology vehicles;
      --Develops and delivers new courses and workshops yearly to meet
            demand and updated technology needs;
      --Provides extensive technical assistance through timely and accurate
            technical data available on NAFTC web site;
      --Produces two NAFTC Newsletters reporting on alternative fuel and
            advanced technology vehicles--the NAFTC eNews, a monthly web
            based newsletter and the NAFTC Clean Alternatives Report
            (CAReport), a printed bi-annual publication.
        Since its inception in 1992, the NAFTC has created tremendous
    impact through:
      --Delivery of over 700 courses and training to over 7,000
            technicians, fleet managers, students, decision makers, and
            others on alternative fuel and advanced technology vehicles;
      --Conducting over 775 workshops and education/awareness events with
            over 160,000 attendees;
      --Enhanced liaisons with automobile manufacturers;
      --Enhanced alliances with aftermarket retailers;
      --Heightened awareness for millions about alternative fuels and
            advanced technology vehicles by conducting National AFV Day
            Odyssey. In 2004, this event consisted of 54 sites throughout
            the United States and two sites in Canada with nearly 25,000
            direct attendees and over 24,000,000 people reached through
            media coverage.
        The NAFTC has conducted training classes and workshops for
    government and private organizations such as the U.S. Department of
    Energy, U.S. DoE Clean Cities Coalitions, NASA, General Services
    Administration, U.S. Postal Service, U.S. Air Force, U.S. Navy, U.S.
    Federal Law Enforcement Training Center and Disney World.
        Organizations in support of establishing a training program for
    first responders include the National Association of State Fire
    Marshals and the 27 members of the National Alternative Fuels Training
    Consortium (NAFTC), headquartered at West Virginia University. The
    NAFTC members are post-secondary academic institutions (with 10 to 25
    new members to be added over the next year). Other supporters include
    numerous industry organizations in the AFV/Advanced Technology Vehicle
    and the Automotive Industry (including automobile manufacturers),
    Professional Associations, and Industry Trade Associations (including
    electric, biodiesel, natural gas, hydrogen and flex-fuel). The NAFTC
    will work cooperatively to promote and distribute the training through
    regional agencies (e.g., WVU Fire Extension Service and State Fire
    Academies), national agencies such as the National Association of State
    Fire Marshals, the National Fire Protection Association (NFPA), the
    National Fire Academy in Emmitsburg, Maryland, the Transportation
    Emergency Rescue Committee, International Association of Fire Chiefs
    and other first responder organizations.
        I am pleased that the NAFTC has centers in the States of Chairman
    Bond and Ranking Member Murray as well as many other members of the
    committee. The NASFM has nationwide representation and leaders of their
    organization are in your States.
        Thank you very much for your committee consideration of the joint
    NASFM-NAFTC proposal to bring our first responders up to speed on
    dealing with alternative fuel and advanced technology vehicles that are
    growing in popularity.
        Today's worsening energy crisis and consumers flocking to
    alternative fueled vehicles are cause for concern among firefighters
    and other first responders. Firefighters and emergency personnel
    arriving on the scene of accidents and vehicle fires are sometimes
    searching for the answers to complex questions about alternative fueled
    vehicles. The answer to this dilemma is fiscal year 2007 funding of
    $950,000 to launch a much-needed national program to provide
    alternative fuels safety training for emergency responders.
        The need for this program was not so apparent just a few months
    ago. With energy prices at record levels, we have seen consumers,
    corporations, and government agencies move increasingly to alternative
    energy sources. Hundreds of companies have launched alternative energy
    products into the market place and are involved in extensive R&D in
    almost all States. These new technologies are vital to the future
    security and energy independence of our country, but a barrier
    threatens to halt progress. Firefighters simply are not prepared to
    protect the public or themselves in incidents involving these new
    technologies.
        The United States has learned the hard way with pipelines, LNG and
    other energy infrastructure that local officials and the public take
    notice when emergency responders are apprehensive about new risks.
    Responders already have expressed concern about electrical hazards with
    hybrid autos, the proper firefighting foams to use on ethanol fires,
    and explosion risks with compressed gases. Fire departments have
    refused permits for some hydrogen demonstration projects.
        Proper training and education of responders is the only practical
    solution. The National Association of State Fire Marshals (NASFM)
    consists of senior State-level public safety officials who either
    manage or play a key role in emergency responder training at State,
    regional and local academies in their States. NASFM has the ability to
    reach responders quickly and efficiently.
        With modest funding from U.S. Department of Transportation, NASFM
    has organized a national consortium of emergency responders, Federal
    and State agencies, universities, auto producers, energy companies and
    others who have been working on an alternative fuels safety training
    program for emergency responders.
        Our plan is to complete work on a curriculum and materials, rapidly
    deploy the program to five existing academies which shall serve as
    regional centers, provide instructors and the program materials, and
    initiate train-the-trainer programs by the end of fiscal year 2007. The
    regional centers will require support to improve facilities and add
    training props, but these costs can be discussed at a later date.
    Without adequate resources, this program is unlikely to be ready much
    sooner than 2008 and would be slow to implement and inadequate in its
    content.
        Elements of a strong and credible curriculum already exist. The
    National Alternative Fuels Training Consortium (NAFTC) at West Virginia
    University has much of what is needed, and other elements are available
    from industry, existing hazardous materials safety curricula and other
    sources. That process is underway with NAFTC working in collaboration
    with the University of Montana's College of Technology and the Missouri
    Transportation Institute, with input from the U.S. Departments of
    Energy and Transportation.
        While the curriculum is developed, the NAFTC will adapt its
    material for the purpose of training first responders and add scenario
    and video training. NASFM and NAFTC are in the process of designating
    five State agencies to coordinate the regional training centers we will
    need to deliver the program. The leading candidates are the Missouri
    Division of Fire Safety; the Office of the State Fire Marshal, State of
    New Hampshire; the New Mexico State Fire Marshal; the Florida State
    Fire College; and the Office of the State Fire Marshal, State of
    Washington.
        To move this program forward now, the NASFM, with support from the
    NAFTC is requesting a total of $950,000 in fiscal year 2007 for the
    following tasks, consisting of these costs:
      --$600,000 to assemble and validate these components, produce and
            test a videotape and manual, and establish a website for on-
            line training.
      --$100,000 to enable us to make needs assessments of the existing
            fire academies to serve as regional alternative fuel safety
            training centers;
      --$100,000 to support two senior trainers to work with regional
            academy staff; and
      --$150,000 to produce and distribute sufficient copies of the videos
            and program materials to launch the program.
        Safety is a shared responsibility. The public must be assured that
    their safety is in the forefront of a shift to alternative fuels. We
    have the people, the ideas and the responsibility to work with Congress
    and the administration to make the transition to alternative fuels.
        The States and localities already invest much in our Nation's
    emergency responder training. In subsequent years, NASFM and NAFTC will
    seek support from industry partners. Many have been generous in helping
    State and local academies upgrade facilities for the pipeline safety
    programs that NASFM operate in cooperation with the U.S. Department of
    Transportation. But, it is doubtful that first responders can be
    adequately prepared for the influx of alternative fueled vehicles
    without fiscal year 2007 Federal dollars.

                        CURRENT NATIONAL TRAINING CENTERS
    ------------------------------------------------------------------------
                                          Educational
                  State                   Institution            City
    ------------------------------------------------------------------------
    Arizona.........................  Gateway Community   Phoenix
                                       College.
    California......................  Rio Hondo College.  Whittier
    Connecticut.....................  Gateway Community   North Haven
                                       College.
    Florida.........................  Traviss Career      Lakeland
                                       Center.
    Illinois........................  Morton College....  Cicero
    Indiana.........................  Ivy Tech Community  Gary
                                       College of
                                       Indiana.
    Iowa............................  Des Moines Area     Ankeny
                                       Community College.
    Louisiana.......................  Louisiana           Baton Rouge
                                       Technical College.
    Maryland........................  Com. Col. of        Baltimore
                                       Baltimore County
                                       (Catonsville).
    Massachusetts...................  Wentworth           Arlington
                                       Institute of
                                       Technology.
    Michigan........................  Lansing Community   Lansing
                                       College.           Kalamazoo
                                      Kalamazoo Valley
                                       Community College.
    Missouri........................  Ranken Technical    St. Louis
                                       College.
    Nebraska........................  Central Community   Columbus
                                       College.
    Nevada..........................  Community College   North Las Vegas
                                       of Southern
                                       Nevada.
    New York........................  Onondaga Community  Syracuse
                                       College.
    North Carolina..................  Wake Technical      Raleigh
                                       College.
    Ohio............................  University of       Lima
                                       Northwestern Ohio. Cleveland
                                      Ohio Technical
                                       College.
    Oregon..........................  Portland Community  Portland
                                       College.
    South Carolina..................  York Technical      Rock Hill
                                       College.
    Tennessee.......................  Nashville Auto-     Nashville
                                       Diesel College.
    Texas...........................  Tarrant County      Ft. Worth
                                       College.
    Washington......................  Shoreline           Shoreline
                                       Community College.
    West Virginia...................  West Virginia       Morgantown
                                       University.
    ------------------------------------------------------------------------

                       TARGETED NATIONAL TRAINING CENTERS
    ------------------------------------------------------------------------
                                          Educational
                  State                 Institution\1\           City
    ------------------------------------------------------------------------
    Alaska..........................  University of       Anchorage
                                       Alaska.
    Utah............................  Salt Lake           Salt Lake City
                                       Community College.
    Vermont.........................  Vermont Technical   Randolph Center
                                       College.
    Virginia........................  Northern Virginia   Alexandria
                                       Community College.
    ------------------------------------------------------------------------
    \1\ Additional training centers will be recruited next in Alabama,
      California, Colorado, Idaho, New Mexico, New York, Oklahoma, and
      Pennsylvania.

                                     ______

     Prepared Statement of the National Association of Railroad Passengers

        The National Association of Railroad Passengers strongly supports
    Amtrak's fiscal year 2007 grant request of $1.598 billion and the
    additional $275 million in ``strategic investment initiatives'' Amtrak
    outlined. That $275 million includes:
      --$100 million to be administered by the Secretary of Transportation,
            for a matching-funds program to support State efforts to
            improve and expand intercity passenger rail services. This
            would help address rail's longstanding competitive disadvantage
            with other modes of transportation, which enjoy Federal funding
            matches of 50 to 90 percent. We also support Amtrak's call for
            a Federal-State partnership including ``reliable'' Federal
            funding (80 percent Federal match).
      --$50 million (which also could be administered by the Secretary) for
            ``joint investment [with States and railroads] targeted to
            network chokepoints and linked to threshold performance
            improvements in intercity passenger rail on-time performance.''
      --$100 million to restructure some of Amtrak's debt, saving money
            both for Amtrak and the Federal Government. Amtrak says the
            restructuring ``is intended to achieve savings of $45 million,
            above the initial $100 million cost, and a rate of return of
            14.8 percent per year.''
      --$25 million for Americans with Disabilities Act compliance
            (supplementing $22 million for this purpose in the $1.598
            billion ``base request'').
        This is the second straight year that Amtrak's board, composed
    entirely of Republicans appointed by President Bush, has supported a
    significant increase in Federal investment in Amtrak and passenger
    rail.
        We of course agree with this from a May 28 New York Times
    editorial: ``Amtrak does not need to make a profit, but it does need to
    work. The government directs billions of dollars to roads and bridges.
    Airports get plenty of help, but somehow very little trickles down to
    the rails. Amtrak, which at one point was to have received zero federal
    funds after 2002, has been offered $900 million by the administration
    for next year. That amount is so low it should be an insult . . . If
    President Bush really wants transportation alternatives, it is time for
    a strategic look at how the railroads can serve as an even more
    important escape valve for the nation's overloaded transportation
    system.''
        Viewed in the context of national need and world energy concerns,
    as well as the last sentence in the above quotation, Amtrak's request,
    which totals $1.873 billion, is conservative.

                        WHY TRAINS ARE A GOOD INVESTMENT

        Citizens Want Them!--Harris Interactive, Inc. provides the latest
    major poll indicating that Americans want more rail service and believe
    that this should be mainly a responsibility of the Federal Government.
    Significantly, the poll--released February 8--was taken December 8-14,
    2005, before the latest run-up in gasoline prices.
        Harris Interactive, Inc, asked, ``In the future, as more people
    travel, which two of the following would you like to see have an
    increasing share of all passenger transportation?'' Americans
    overwhelmingly chose commuter and long-range trains (44 percent and 35
    percent, respectively) compared to long distance travel by car (10
    percent) and bus (6 percent).
        When Harris asked ``. . . which of the following would you like to
    see have an increasing share of all goods and commodities movements in
    the United States?'' the response was even more striking: fully 63
    percent of respondents favored freight railroads, more than air freight
    (35 percent) and trucks (24 percent) combined. The survey then asked:
    ``Who do you think should be mainly responsible for maintaining and
    improving the transportation system in the Nation as a whole?'' More
    than two-thirds (68 percent) of adults said the Federal Government.
    (Full poll: http://harrisinteractive.com/harris_poll/index.asp?PID=638)
        The Traveling Public Votes ``Yes''.--Amtrak ridership has risen in
    8 of the last 9 years, with fiscal year 2005 ridership 29 percent above
    that for fiscal 1996.
        I will not repeat the list of ``justifications'' for passenger rail
    I recited a year ago. However, when energy price increases are ``above-
    the-fold'' news, normal public support for passenger rail becomes even
    stronger, as does the public policy case for providing that service.
        In his State of the Union Address, President Bush said, ``America
    is addicted to oil, which is often imported from unstable parts of the
    world.'' He was correct. Strengthening and expanding passenger rail
    will help reduce the vulnerability of our citizens and our economy to
    high energy prices. Strengthening public transportation in general as a
    response to high energy prices and concerns about long-term oil
    supplies is at once popular and sound policy.
        The longer the Federal Government starves intercity passenger rail,
    the angrier the American people will be when they discover they do not
    have choices that help them adapt to higher energy costs while still
    preserving their freedom to travel and maintaining their quality of
    life.
        We urge that all Amtrak routes be continued--and the New Orleans-
    Orlando segment restored--while Amtrak improves its cost-effectiveness
    in various ways, many of which are discussed below.

                           AMTRAK EFFICIENCY CONCERNS

        We share the concern of the subcommittee--and every responsible,
    interested party--that Amtrak use its revenues (both commercial and
    taxpayers) efficiently.
        Mechanical.--Some of the biggest opportunities to improve Amtrak's
    bottom line while maintaining and even expanding service involve
    updating Amtrak's maintenance practices. The much-quoted GAO report on
    Amtrak management cites an important report by the Amtrak Inspector
    General. A key passage from the Amtrak IG's report reads: ``Both of our
    consultants independently commented that Amtrak's maintenance
    operations are being performed similar to the way the other major
    railroads in North America did maintenance over 20 years ago. The other
    Class I railroads have since moved on to more sophisticated approaches
    to maintenance to improve reliability and reduce costs.''
        Thus, Amtrak is updating and improving its practices, with an
    expectation that its Mechanical Department can boost output and quality
    while reducing costs.
        Dining Cars.--Amtrak is well underway with projects that will
    significantly reduce the net cost of on-board food and beverage
    services. On long-distance trains, Amtrak is revising dining car
    processes and reducing on-board staff; reductions began before
    Christmas and are scheduled to be complete before the end of May.
        Reducing food losses is a reasonable goal; eliminating them is not.
    Carriers worldwide consider on-board food and beverage service not as a
    profit center but as a necessary expense to attract and retain
    business. In a November 2005 speech, Jonathan Metcalf, Chief Operating
    Officer of Britain's Great Northeastern Railway, said that food service
    on his trains ``probably loses 2-3 million a
    year, if we didn't do food, we'd lose passengers . . . it's a key
    reason why they travel with us . . . we probably would have lost
    20-30 million in ticket revenue (without food
    service).''
        Mail.--Our Association repeatedly testified in support of David
    Gunn's work to improve Amtrak. We believe Amtrak is much better off for
    his having served there. Nonetheless, we have urged Amtrak to look
    seriously at undoing one ill-advised step that he took. He completely
    eliminated mail carriage even though every study of which we are aware
    indicated mail was profitable for Amtrak. Amtrak invested in the mail
    business and still owns relevant infrastructure and a sizable number of
    cars with good life expectancy. I have written to Amtrak urging a
    careful review of opportunities to restart mail carriage where this
    would be incrementally profitable.
        Fares and Technology.--Amtrak is not buying market-share with low
    prices. Amtrak ridership has grown in spite of fare increases. Amtrak's
    yield (average fare per passenger-mile) has increased every year since
    at least fiscal year 1994 with the sole exception of fiscal year 2003.
    (A passenger-mile is one passenger traveling 1 mile.) Fiscal year 2005
    yield was 65 percent above that in fiscal year 1994.
        Through the first 7 months of fiscal year 2006 (October-April), the
    yield was 9.8 percent above the same period in fiscal year 2005. If
    anything, Amtrak arguably has been too aggressive in raising fares.
        Amtrak does offer good deals on-line where this makes business
    sense--i.e., handling ``distressed inventory'' (that is, seats that
    otherwise would go empty and where eliminating their operation is
    impractical or would not achieve savings). This is also important for
    cultivating tomorrow's revenues, since some of the people who have time
    to search the internet for elusive good deals are young people who may
    become tomorrow's ``full fare,'' loyal customers. If Amtrak was not
    doing this sort of thing, others would criticize its fare-setting
    practices as out-of-date.
        Creative use of the internet is not new at Amtrak. It offered full
    booking capability on-line starting in February, 1997, at about the
    same time as Continental Airlines and well before the other major
    airlines. Another indication of Amtrak's on-line sophistication is the
    interactive route map Amtrak recently introduced.
        The DOT Inspector General, incidentally, criticized GAO's report
    for its glass-half-empty approach, that is, for not giving ``equal time
    and space [to] what works' at Amtrak, and what has been improved at
    Amtrak.''
        Fares and Public Policy.--Sound public policy should encourage low
    fares. Lower fares mean higher ridership, and help America and its
    people deal more effectively with scarce oil. California's financial
    support for its three Amtrak corridors helps support lower fares than
    are found in many other parts of the Amtrak system. This should be
    encouraged!

                STATUTORY DIRECTIVES (INCLUDING REPORT LANGUAGE)

        We urge Congress to hold Amtrak accountable for the bottom line,
    but to be as restrained as possible with regard to specific directives
    as to how to get there.
        The history of Amtrak is replete with examples of ``good
    legislative intentions'' which sometimes have resulted in higher costs
    rather than reform--including directives in the 1980's regarding food
    service.
        The more the law contains specific directives about how to manage
    the company, the greater the danger that management focus would be
    distracted from doing what is best for the bottom line, and that
    responsibility for results would shift from management to the sources
    of the specific directives.

                                 FUNDING LEVELS

        The Bush Administration's request of $900 million--30 percent below
    the current level of $1.3 billion--would not keep the trains running.
    The administration characterizes its budget request as a ``reward'' for
    progress that Amtrak has made on reforms, but the numbers are clear.
      --Debt service is estimated at $295 million. Amtrak has taken on no
            new debt since June, 2002. From September, 2002, to December,
            2005, total outstanding debt fell by $300 million--from $3.9
            billion to $3.6 billion.
      --The operating grant requirement is estimated at $498 million, which
            Amtrak's Board says ``represents a significant stretch goal . .
            . $42 million below the approved fiscal year 2006 budget [of
            $540 million] and $88 million below the DOT Inspector General's
            baseline operating budget.''
      --Amtrak seeks $730 million for capital (not counting $177 million in
            non-Federal funding), and $75 million for working capital.
        If a $900 million Federal grant did not cause an immediate
    shutdown, it certainly would begin a visible, downward spiral in
    service quality and reliability, due to elimination of rolling stock
    heavy overhauls and of work on infrastructure. Chances would grow that
    the failure of a moveable bridge would end Boston-New York service.
        After debt service and operations (the first two bullets above),
    only $107 million would remain for capital. This would be almost
    totally consumed by the $90 million Amtrak seeks for ``investment
    required to address legal and regulatory requirements, including NY
    tunnel life safety program, environmental remediation and pollution
    control, police and security, FRA-mandated rolling stock investment,
    and initial ADA station compliance work.''

                              LONG-DISTANCE TRAINS

        Amtrak's long-distance and shorter corridor services both are
    important, complementing each other and other U.S. transportation.
      --Long-distance trains continue to show strength. In fiscal 2005,
            they carried an average 356 passengers per run, and the number
            on board at any one time (passenger-miles-per-train-mile) was
            171. Sleeping car ridership was up 30,000 (or 6 percent) from
            fiscal 2004. Sleeping car passengers accounted for 15 percent
            of ridership but 39 percent of revenues on these trains.
      --A substantial number of coach passengers on long-distance trains
            travel very long distances--55 percent traveled at least 400
            miles, 25 percent at least 800 miles. These fiscal year 2005
            figures understate trip length since they are ``unlinked
            trips,'' that is, for example, a Washington-Milwaukee passenger
            must change trains in Chicago and thus is recognized as a
            Washington-Chicago passenger and a Chicago-Milwaukee passenger.
      --Therefore, elimination of dining cars would hurt coach ridership.
            Any analysis that assigns 100 percent of dining-car costs to
            sleeping car passengers is wrong. Amtrak reports that usage of
            dining cars by coach passengers has been increasing with the
            new ``simplified dining service'' Amtrak has introduced on most
            trains in the past several months.
      --Sleeping cars and food service are needed to attract discretionary
            travelers. If trains were operated only for those without any
            other option, ``bottom fishing'' would produce lower-volume,
            higher-unit costs and lower economic efficiency.
      --On a passenger-mile basis, corridor and long-distance trains
            require similar levels of operating support. [A passenger-mile
            is one passenger traveling 1 mile.] In fiscal year 2004, the
            ``fare box loss'' per passenger-mile actually was higher
            (``worse'') for short-distance trains (25 cents) than for long-
            distance trains (15 cents).
      --Long distance trains are the only intercity passenger trains in 25
            States.
      --One cannot simply ``buy everyone a plane ticket cheaper than
            running an Amtrak train'' because hundreds of cities that
            Amtrak serves have no access to discount airline service. In
            addition, many Americans cannot or chose not to fly.
        Thank you for considering our views. We stand ready to help the
    subcommittee as we are able, including by providing such further
    information as you may request.

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page
    Access Board, Prepared Statement of the..........................   483
    American Public Transportation Association, Prepared Statement of
      the............................................................   495

    Bennett, Senator Robert F., U.S. Senator from Utah, Statement of.    71
    Black, Patricia, Deputy Inspector General, Office of Inspector
      General, Federal Deposit Insurance Corporation, Prepared
      Statement of...................................................   408
    Blakey, Hon. Marion C., Administrator, Federal Aviation
      Administration, Department of Transportation...................   329
        Prepared Statement of........................................   342
        Statement of.................................................   339
    Blust, Honorable Steven R., Chairman, Federal Maritime
      Commission, Prepared Statement of..............................   433
    Boardman, Joseph H., Administrator, Federal Railroad
      Administration, Department of Transportation:
        Prepared Statement of........................................    90
        Statement of.................................................    88
    Bond, Senator Christopher S., U.S. Senator from Missouri:
        Opening Statements of..........................1, 51, 105, 203, 329
        Prepared Statements of..............................4, 54, 208, 332
        Questions Submitted by..............74, 83, 101, 164, 299, 316, 321
    Bracy, Terrence L., Chair, Morris K. Udall Foundation, Prepared
      Statement of...................................................   424
    Burns, Senator Conrad, U.S. Senator from Montana, Questions
      Submitted by...................................................   102
    Buttrey, W. Douglas, Chairman, Surface Transportation Board,
      Prepared Statement of..........................................   418

    California Industry and Government Central California Ozone Study
      (CCOS) Coalition, Prepared Statement of the....................   474
    Capital Metropolitan Transportation Authority, Prepared Statement
      of the.........................................................   490
    Chatfield, William A., Director, Selective Service System,
      Prepared Statement of..........................................   453
    City of San Marcos, Texas, Prepared Statement of the.............   481
    Coalition of Northeastern Governors, Prepared Statement of the...   475
    Cochran, Senator Thad, U.S. Senator from Mississippi:
        Questions Submitted by.......................................   176
        Statement of.................................................    70

    Dayton, Mark R., Senior Economist, Office of Inspector General,
      Department of Transportation:
        Prepared Statement of........................................    93
        Statement of.................................................    91
    DeWine, Senator Mike, U.S. Senator from Ohio, Questions Submitted
      by.............................................................    79
    Dobbs, David, Assistant Inspector General for Aviation and
      Special Program Audits, Office of Inspector General, Department
      of Transportation..............................................   329
    Domenici, Senator Pete V., U.S. Senator from New Mexico,
      Questions Submitted by........................................44, 364
    Dorgan, Senator Byron L., U.S. Senator from North Dakota:
        Questions Submitted by.................................46, 312, 367
        Statements of..............................................212, 338
    Durbin, Senator Richard J., U.S. Senator from Illinois, Questions
      Submitted by.........................................44, 79, 196, 365

    Easter Seals, Prepared Statement of..............................   459
    Everson, Mark W., Commissioner, Internal Revenue Service,
      Department of the Treasury:
        Prepared Statement of........................................   217
        Questions Submitted to.......................................   299
        Statement of.................................................   214

    Federal Election Commission, Prepared Statement of the...........   421

    Gardner, Janice, Assistant Secretary, Office of Intelligence and
      Analysis, Department of the Treasury...........................   123
        Prepared Statement of........................................   153
        Statement of.................................................   131
    George, J. Russell, Treasury Inspector General for Tax
      Administration, Internal Revenue Service, Department of the
      Treasury.......................................................   203
        Prepared Statement of........................................   248
        Statement of.................................................   246
    Gibbons, Honorable Julia S., Chair, Committee on the Budget, the
      Judicial Conference of the United States, Prepared Statement of   371
    Glynn, Marilyn L., Acting Director, U.S. Office of Government
      Ethics, Prepared Statement of..................................   398
    Greater Orlando Aviation Authority, Prepared Statement of the....   491

    Independent Sector, Prepared Statement of........................   457

    Jackson, Hon. Alphonso, Secretary, Office of the Secretary,
      Department of Housing and Urban Development....................     1
        Prepared Statement of........................................    12
        Statement of.................................................    10

    Kohl, Senator Herb, U.S. Senator from Wisconsin, Question
      Submitted by...................................................    44

    Laney, David M., Chairman, Amtrak Board of Directors, Amtrak:
        Prepared Statement of........................................    86
        Statement of.................................................    84
    Leahy, Senator Patrick J., U.S. Senator from Vermont:
        Prepared Statements of.......................................25, 62
        Questions Submitted by..............................48, 81, 84, 103
        Statement of.................................................    24
    Levey, Stuart, Under Secretary, Office of Terrorism and Financial
      Intelligence, Department of the Treasury.......................   123
        Prepared Statement of........................................   125

    McFarland, Honorable Patrick E., Inspector General, the Office of
      Personnel Management, Prepared Statement of....................   439
    Mecham, Leonidas Ralph, Director, Administrative Office of the
      U.S. Courts, Prepared Statement of.............................   383
    Michel, Paul R., Chief Judge, United States Court of Appeals for
      the Federal Circuit, Prepared Statement of.....................   396
    Mikulski, Senator Barbara A., U.S. Senator from Maryland,
      Question Submitted by..........................................   315
    Mineta, Hon. Norman Y., Secretary, Office of the Secretary,
      Department of Transportation...................................    51
        Prepared Statement of........................................    64
        Statement of.................................................    62
    Murray, Senator Patty, U.S. Senator from Washington:
        Prepared Statements of...................................8, 59, 336
        Questions Submitted by......................180, 305, 319, 320, 324
        Statements of..................................6, 56, 110, 210, 334

    National Alternative Fuels Training Consortium, West Virginia
      University, Prepared Statement of the..........................   498
    National Association of Railroad Passengers, Prepared Statement
      of the.........................................................   502
    National Treasury Employees Union, Prepared Statement of the.....   477
    Navajo Nation, Prepared Statement of the.........................   493
    Olson, Nina E., National Taxpayer Advocate, Taxpayer Advocate
      Service, Internal Revenue Service, Department of the Treasury:
        Prepared Statement of........................................   270
        Statement of.................................................   268

    Potter, John E., Postmaster General/CEO, United States Postal
      Service, Prepared Statement of.................................   400
    Powner, David A., Information Director, Government Accountability
      Office.........................................................   203

    Restani, Jane A., Chief Judge, United States Court of
      International Trade, Prepared Statement of.....................   396
    Rosenker, Mark V., Acting Chairman, National Transportation
      Safety Board, Prepared Statement of............................   436
    Rothstein, Hon. Barbara J., Director, Federal Judicial Center,
      Prepared Statement of..........................................   394

    Skokomish Tribe, Prepared Statement of the.......................   461
    Smythe, Austin, Office of Management and Budget, Prepared
      Statement of...................................................   416
    Snow, John W., Secretary, Office of the Secretary, Department of
      the Treasury...................................................   105
        Prepared Statement of........................................   113
        Summary Statement of.........................................   112
    Specter, Senator Arlen, U.S. Senator from Pennsylvania, Questions
      Submitted by...................................................    40
    Springer, Honorable Linda M., Director, Office of Personnel
      Management, Prepared Statement of..............................   441
    Stevens, Senator Ted, U.S. Senator from Alaska, Prepared
      Statement of...................................................   214
    Stratton, Honorable Hal, Chairman, U.S. Consumer Product Safety
      Commission, Prepared Statement of..............................   406

    U.S. Election Assistance Commission, Prepared Statement of the...   447
    U.S. Merit Systems Protection Board, Prepared Statement of the...   445
    United States Sentencing Commission, Prepared Statement of the...   390
    United States Tax Court, Prepared Statement of the...............   403

    Wade, Kenneth D., Chief Executive Officer, Neighborhood
      Reinvestment Corporation dba NeighborWorks America, Prepared
      Statement of...................................................   426
    Wagner, Raymond T., Jr., Chairman, IRS Oversight Board, Internal
      Revenue Service, Department of the Treasury....................   203
        Prepared Statement of........................................   232
        Statement of.................................................   230
    Werner, Robert W., Director, Financial Crimes Enforcement
      Network, Department of the Treasury............................   123
    White, James, Director, Strategic Issues, Government
      Accountability Office..........................................   203

                                 SUBJECT INDEX

                                  ----------

                    ADMINISTRATIVE OFFICE OF THE U.S. COURTS

                                                                       Page
    Administrative Office:
        Budget Request...............................................   389
        Resources Are Stretched Thin.................................   389
    Containing Costs Through Rent Relief.............................   384
    Increasing Productivity in the Courts Through Information
      Technology Systems.............................................   388
    Role of the Administrative Office................................   385

                                     AMTRAK

    Additional Committee Questions...................................   101
    Capital Program..................................................    87
    Debt Service.....................................................    88
    Operating Budget.................................................    88
    Working Capital..................................................    88

                  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                            Office of the Secretary

    Additional Committee Questions...................................    40
    Asset-based Management...........................................    19
    Block Grant Vouchers.............................................    20
    Brownfields......................................................    28
    Can HUD:
        And HHS Work Together?.......................................    45
        Provide Housing During Disasters?............................    45
    CDBG..........................................................2, 12, 27
        Cuts.........................................................    21
    Consolidation of HUD's Smaller Community Development Programs....    49
    Cuts to:
        Community Development Block Grants...........................46, 48
        Housing Programs.............................................    49
        Proposed Housing Programs....................................    50
        Section 202..................................................    44
    Elderly Disabled Housing.........................................    33
    Elimination of:
        HOPE VI......................................................    43
        Section 811..................................................    44
    FHA:
        Foreclosure Moratorium.......................................    10
        Mortgage Insurance...........................................    36
            Premiums.................................................    40
    Future of FHA....................................................     4
    HOME Program.....................................................    11
    HOPE VI....................................................3, 7, 27, 30
    High-risk Borrowers..............................................    36
    Homeless Assistance..............................................    12
    Homelessness.....................................................    37
    Homeownership Voucher Program....................................    11
    Housing:
        Choice Voucher Rental Assistance Program.....................    11
        Counseling...................................................    11
        For the Elderly and Disabled Program Cuts....................    46
    How HUD Will:
        Combat Homelessness..........................................    16
        Continue to Fight Housing Discrimination.....................    17
        Increase:
            Access to Affordable Housing.............................    14
            Its Operational Efficiency...............................    17
        Promote Economic and Community Development Through
          Homeownership..............................................    13
        Reform Community Development.................................    16
    Improper Payments................................................    34
    Interagency Council on the Homeless Reports......................    38
    Moving to Work Program (MTW).....................................    42
    Native American Housing and Self-Determination Act Bill Language
      Continuation...................................................    47
    PHAs Operating Costs.............................................    38
    Predatory Lending................................................    39
    Public Housing:
        Capital Fund.................................................    31
            Cuts.....................................................    31
        Operating Fund...............................................     2
            New Rule.................................................    40
    Reduction in CDBG................................................     3
    Rising Utility Costs in Public Housing...........................    47
    Section:
        8 Cut........................................................    39
        811..........................................................    34
    Strengthening America's Communities Initiative (SACI)............    42
    Why Cut:
        CDBG Funds?..................................................    44
        Funding For The Elderly and Disabled?........................    46

                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

    Additional Committee Questions...................................   299
    Addressing Shoddy Work by Tax Preparers and Practitioners......309, 320
    Allocation of Additional Resources...............................   283
    Balance Between Service and Enforcement........................300, 321
    Better Tax Gap Estimates..................................299, 316, 323
    BSA Direct.......................................................   304
    Budget Cuts......................................................   295
    Business Systems Modernization (BSM)...........................289, 312
        Funding......................................................   316
    Comparing the President's and Board's Fiscal Year 2007 Budget
      Recommendations................................................   237
    Cutting the IRS Office Responsible for Service While Expecting
      More From Volunteer Programs.................................305, 324
    Direct Filing Portal...........................................317, 322
    Electronic Filing (E-File).....................................254, 293
        For Corporations.............................................   303
    Estate and Gift Tax..............................................   305
    Explanation for Difference in IRS Oversight Board Budget in the
      Administration's Fiscal Year 2007 Budget Request and This
      Recommendation.................................................   246
    Fiscal Year 2007 Detailed Budget Summary.........................   220
    Free File........................................................   227
        Alliance...................................................308, 326
    How Have You Spent the Additional Enforcement Funding You Got in
      Fiscal Year 2006?..............................................   308
    Inappropriate Competitive Sourcing of Mailroom Work..............   309
    Increasing:
        Compliance Through Service and Enforcement...................   222
        E-filing.....................................................   301
    Independent Contractors..........................................   287
    Introduction and Overview........................................   232
    IRS:
        Modernization................................................   221
        Strategic Planning and Resource Allocation Decisions Should
          Be Based on More and Better Research.......................   278
    Is the IRS Complying with Sections 205 and Sec. 204 of the TTHUD
      Bill?..........................................................   311
    Legislative Proposals............................................   226
    Long-term BSM Plan...............................................   304
    Measuring:
        Indirect Effects.............................................   276
        The Direct Effect............................................   276
    Other Major Challenges Facing the IRS............................   260
    President's Fiscal Year 2007 Budget Maintains the Balance Between
      Taxpayer Service and Enforcement...............................   219
    Privacy of Taxpayer Data.......................................284, 289
    Private:
        Collection Agencies (PCA)..................................222, 302
        Debt Collection..............................................   258
    Proposed Disclosure Regulations..................................   312
    Reduction of Taxpayer Services.................................307, 326
    Refund Anticipation Loans........................................   297
    Return Preparation...............................................   276
    Services Offered At TACs..................................319, 326, 306
    Setting Taxpayer Assistance Centers (TACs) Up To Fail..........306, 325
    7216 Proposed Regulations........................................   229
    Six Strategies to Reduce the Tax Gap.............................   235
    Strategic Plan for Addressing the Tax Gap........................   303
    Tax Gap...................................................222, 282, 310
    Tax Haven Abuses.................................................   314
    Taxpayer Assistance:
        Blueprint..................................................299, 319
        Centers......................................................   291
    The:
        IRS:
            Can and Should Do a Better Job of Measuring the Impact of
              Taxpayer Service on Compliance.........................   275
            Could Do a Better Job of Allocating Its Resources
              Properly in Order to Increase Overall Compliance.......   270
            Should:
                Address the Impact of IRS Business Systems
                  Modernization Limitations on Both Taxpayer Service
                  and Enforcement Initiatives........................   278
                Include the Cost of the Downstream Consequences of
                  its Actions in Its Return on Investment (ROI)
                  Calculations.......................................   276
                Make It Possible for Taxpayers to Prepare and File
                  Their Tax Returns Electronically Without Paying a
                  Fee................................................   274
                Not Impose Unreasonable Burdens on Volunteer Income
                  Tax Assistance (VITA)..............................
                Understand More About the Impact of Taxpayer Service
                  on Compliance and the Ways in Which Taxpayers Need
                  Services to be Delivered...........................   271
                Work With ``Partners'' but Not Rely on Them
                  Excessively........................................   273
        IRS's Filing and Payment Compliance (F&PC) Initiative Should
          Be Made a Priority.........................................   279
        Return-on-Investment of the Private Debt Collection
          Initiative Will Probably Be Lower Than Expected............   281
    Trends in Taxpayer Advocate Service (TAS) Case Inventory.........   281
    2006 Filing Season.............................................218, 249

                 Office of Terrorism and Financial Intelligence

    Background on OIA................................................   154
    Banco Delta Asia Designation.....................................   158
    BSA Direct.......................................................   159
        And the Cross-border Wire Initiative.........................   160
    Building Analytic Coverage and Depth in Fiscal Year 2006.........   155
    Fiscal Year 2007 Budget Request..................................   156
    International Terrorist Financing Cooperation and the Banco Delta
      Asia Designation...............................................   162
    Key Achievements.................................................   126
    Overview of the Fiscal Year 2007 TFI Request.....................   129
    Significant Progress in Fiscal Year 2005.........................   154
    TFI:
        Authorities..................................................   157
        Redundancy Concerns and Differences Between TFI Components...   163
    Treasury Foreign Intelligence Network............................   161

                            Office of the Secretary

    Additional Committee Questions...................................   164
    Agency Cooperation...............................................   200
    Are the Russians Allies When It Comes To Combating Terrorism?....   186
    Biggest Challenges...............................................   176
    BSA Direct.......................................................   121
        TFIN.........................................................   166
        Why Did No One Spot The Problems?............................   183
    Can the President's New Community Development Program Fill the
      Role of CDFI Fund?.............................................   196
    CFIUS............................................................   171
    CIO and CFO Oversight............................................   168
    CIO's Oversight of Bureau Project Management Teams and CIOs......   169
    Collecting Taxes and Managing the Government's Finances..........   115
    Coordination with Other Agencies.................................   174
    Disrupting Terrorist Financing Networks..........................   186
    Do Banking Agencies Comply With FinCEN's Bank Secrecy
      Requirements?..................................................   192
    Dynamic Analysis Office of Tax Policy............................   173
    Enforcement Priorities...........................................   199
    Establishment of a Dynamic Tax Office at Treasury................   185
    Fighting the Global War on Terror and Safeguarding Our Financial
      Systems........................................................   114
    FinCEN's Registration of Money Service Businesses (MSBs).........   194
    How Much Can Realistically Be Accomplished?......................   187
    Hypocrisy of China vs. Cuba Policy...............................   185
    Increased Overseas Presence......................................   117
    Information Systems..............................................   117
    IRS:
        BSM..........................................................   172
        Oversight Board Nominations..................................   173
        7216 Regulations...........................................118, 120
    Is Treasury Targeting Non-Conventional Funding Sources?..........   189
    IT Business Case Documentation...................................   169
    Management.......................................................   164
    Managing Treasury Effectively....................................   116
    OFAC Designations................................................   175
    Office of Dynamic Analysis.......................................   118
    Overall Management of Treasury Projects..........................   183
    Performance Measures.............................................   200
    Progress with Charitable Organizations...........................   188
    Promoting A Prosperous and Stable U.S. Economy...................   113
    Response to GAO Report on BSA Direct.............................   167
    Roles and Responsibilities of the CIO............................   170
    Standing up TFI..................................................   174
    Stop the Wine Tax!!..............................................   184
    Strenghening Financial Institutions..............................   116
    Tax:
        Gap..........................................................   119
        Preparation Error Rates......................................   119
        Shelters.....................................................   122
    Taxpayer Assistance Centers......................................   121
    The:
        National Debt................................................   196
        Tax Gap......................................................   197
    Treasury:
        And The President's Management Agenda........................   117
        Communications Enterprise (TCE)............................173, 180
    Treasury's Office of Intelligence Analysis.......................   191
    What About Addressing Offshore Banks, Etc.?......................   190
    Where Do We Go From Here?........................................   191
    Worker Misclassification.........................................   198

                          DEPARTMENT OF TRANSPORTATION

                        Federal Aviation Administration

    A-76 Competition.................................................   344
    Additional Committee Questions...................................   364
    Air Traffic Controller Workforce Plan............................   348
    Airport Improvement Program......................................   357
    Aviation:
        Safety Inspectors............................................   349
        Trust Fund.................................................340, 353
    Controller Pay...................................................   360
    Controlling Costs................................................   343
    Ensuring A Pathway to the Future.................................   344
    Environmental Stewardship........................................   347
    FAA Telecommunications Infrastructure (FTI)....................350, 361
    Flight Plan 2006-2010............................................   345
    Increased:
        Capacity.....................................................   357
        Safety.......................................................   345
    Increasing Capacity..............................................   346
    International Leadership.........................................   347
    Keeping Pace With Today's Challenges.............................   344
    Midway Accident..................................................   358
    More Like a Business...........................................341, 351
    National Air Traffic Controllers Association (NATCA).341, 352, 359, 360
        And Retirements..............................................   362
    Organizational Excellence........................................   347
    Performing Like a Business in Fiscal Year 2007...................   343
    Prioritizing Facilities and Equipment (F&E) Needs................   344
    Promising Technology.............................................   340
    Remarks of Assistant Inspector General for Aviation..............   362
    Safety...........................................................   340
        In Alaska....................................................   354
    Security.........................................................   347
    Unmanned Aerial Vehicles and the National Airspace System........   364
    Wright Amendment.................................................   364

                          Office of Inspector General

    Absent Reauthorization, the Appropriations Process Can Provide
      Needed Fiscal Discipline Over Amtrak's Operating Losses........    97
    Amtrak Needs to Respond Aggressively to the Appropriations Bill
      Requirements and See These Initiatives Through to Completion...    97
    Amtrak's Financial Condition Remains Precarious Because it Has
      Not Structured Its Services to Match Available Funding.........    95
    Questions Submitted to the Office of Inspector General,
      Department of Transportation...................................    83
    Reauthorization is a Better Course for Reforming Intercity
      Passenger Rail Service.........................................    98

                            Office of the Secretary

    Additional Committee Questions...................................    74
    Air Traffic:
        Control Modernization........................................    60
        Controllers..................................................    79
    Airport Improvement Program......................................    77
    Amtrak.......................................................60, 78, 81
    Amtrak's:
        Real Costs...................................................    61
        Rising Ridership.............................................    61
    Bus Rapid Transit................................................    75
    Department of Transportation:
        Budget.......................................................    60
        Headquarters Building........................................    66
    Essential Air Service............................................    82
    Federal Aviation Administration..................................    68
        Programs.....................................................62, 64
        Reauthorization..............................................    70
        Telecommunications Infrastructure............................    79
    FMCSA Partnership With the States in Implementing SAFETEA-LU
      Provisions.....................................................    76
    Freight Transportation...........................................    66
    Gulf Coast.......................................................    60
    Intercity Passenger Rail.................................63, 65, 71, 72
        System.......................................................    67
    Maritime Programs................................................    65
    NPRM and Open Skies..............................................    78
    Open Roads Financing Pilot Program...............................    77
    Questions Submitted to the Department of Transportation..........    74
    Research, Pipelines, and Hazardous Materials Safety..............    65
    Rulemaking on Single Occupancy Hybrid Electric Vehicle Access to
      HOV Facilities.................................................    77
    Safety Initiatives...............................................    63
    Surface Transportation Programs..................................62, 64
    Three Funding Holes..............................................    59
    Transit Small Starts.............................................    74

                     FEDERAL DEPOSIT INSURANCE CORPORATION

    A Review of the FDIC OIG's Fiscal Year 2005 Accomplishments......   409
    Assistance to FDIC Management....................................   410
    Budget by Strategic Goals........................................   415
    Business Plan....................................................   411
    Fiscal Year 2007 Budget by Major Spending Categories.............   415
    OIG Management and Operational Initiatives.......................   411
    The OIG's Fiscal Year 2007 Budget Request........................   414

                          FEDERAL ELECTION COMMISSION

    Compliance Program...............................................   423
    Disclosure Program...............................................   422
    Public Funding Program...........................................   423

                            FEDERAL JUDICIAL CENTER

    Budget Shortfalls Will Adversely Affect Our Service for the
      Courts.........................................................   395
    The:
        Center Has Managed Its Appropriation Responsibly.............   395
        Center's:
            Contribution to the Courts...............................   394
            Fiscal Year 2007 Request.................................   395

                    JUDICIAL CONFERENCE OF THE UNITED STATES

    Contributions of the:
        Administrative Office........................................   380
        Federal Judicial Center......................................   381
    Cost-containment Strategy for the Judiciary......................   379
    Court Staffing Levels Lag Behind Workload Growth.................   373
    Director Mecham's Retirement.....................................   371
    Fiscal Year 2007 Budget Request..................................   375
    Improved Fiscal Year 2006 Outlook for the Courts.................   372
    Increase in Non-Capital Panel Attorney Rates.....................   377
    Response to Recent Hurricanes Along the Gulf Coast...............   379
    Security of Federal Judges.......................................   378
    The Judiciary's Rent Burden......................................   378
    Workload in The Courts...........................................   374

        NEIGHBORHOOD REINVESTMENT CORPORATION DBA NEIGHBORWORKS AMERICA

    Overview of the Neighborworks System.............................   426
    Priorities for Fiscal Year 2007..................................   427
    Projected Outcomes for Fiscal Year 2007..........................   427

                        OFFICE OF MANAGEMENT AND BUDGET

    Delivering Results...............................................   417
    OMB's Budget.....................................................   417
    Progress on Spending Restraint...................................   416

                         OFFICE OF PERSONNEL MANAGEMENT

    Human Resources:
        Line of Business.............................................   443
        Management (HRM) Reform......................................   442
    Implementing Human Capital Standards for Success.................   443
    Mandatory Payment Accounts.......................................   444
    Office of the Inspector General..................................   444
    OPM's New Strategic and Operational Plan.........................   441
    Pay Raise........................................................   444
    Retirement Claims Processing and Benefits Programs...............   442
    Revolving Fund...................................................   444
    Security-Related Activities......................................   443

                            SELECTIVE SERVICE SYSTEM

    Areas of Emphasis................................................   454
    Focused Yet Flexible.............................................   456
    What We Do Today.................................................   454

                          SURFACE TRANSPORTATION BOARD

    Background on the Board..........................................   418
    Fiscal Year 2006 and 2007 Activities of the Board................   420
    National Railroad Passenger Corporation (Amtrak) Directed Service
      Provision......................................................   419
    Overall Goals of the Board.......................................   419
    The Board's Fiscal Year 2007 Budget Request......................   418

                      UNITED STATES SENTENCING COMMISSION

    Justification for Commission's Appropriation Request.............   391
    Resources Requested..............................................   391

                            UNITED STATES TAX COURT

    Fiscal Year 2007 Budget Request..................................   403
    Other Matters of Concern to the Tax Court........................   405
    Tax Court Cases and Workload.....................................   403

                      U.S. ELECTION ASSISTANCE COMMISSION

    Administration...................................................   452
    Aiding in the Improvement of Voting Systems......................   450
    Distribution and Management of HAVA Funds........................   448
    Guidance and Information to the States...........................   452
    National Clearinghouse of Election Information...................   451

                      U.S. MERIT SYSTEMS PROTECTION BOARD

    Fiscal Year 2005 Accomplishments With Fiscal Year 2007 Outlook
      (By Budget Activity)...........................................   445
    Overview of the Request..........................................   445

                        U.S. OFFICE OF GOVERNMENT ETHICS

    Fiscal Year 2007.................................................   398