[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:
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\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.
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--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.
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\2\ Statistics provided to the Oversight Board by the IRS.
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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.
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\3\ Professor Claes Fornell, ``ACSI Commentary: Federal Government
Scores'', December 15, 2005.
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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.
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\4\ IRS Oversight Board, 2005 Taxpayer Attitude Survey.
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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\
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\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\
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\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\
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\7\ Tax Notes, February 16, 2006.
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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\
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\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\
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\9\ Al Crenshaw, ``Letting Cheaters Prosper,'' Washington Post,
April 14, 2004.
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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\
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\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\
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\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\
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\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.
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\14\ Tax Notes, ``Everson Says IRS Could Collect Up To $100 Billion
More Per Year'', February 16, 2006.
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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\
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\15\ IRS Press Release, ``IRS to Raise Some User Fees in 2006,''
IR-2005-144, December 19, 2005.
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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\
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\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\
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\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\
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\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).
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\19\ The National Taxpayer Advocate, 2005 Annual Report to
Congress, Executive Summary, p. I-1.
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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).
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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).
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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.
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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.
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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.
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\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).
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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.
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\12\ ``The Taxpayer Assistance Center Closure Plan Was Based on
Inaccurate Data'' (Reference Number 2006-40-061, dated March 2006).
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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.
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\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).
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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.
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\14\ The NRP was a study designed to accurately measure reporting
compliance of individual taxpayers while minimizing the burden on
taxpayers during the process.
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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.
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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.
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--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.
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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\
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\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.
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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\
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\20\ Bear Stearns, ``The Underground Labor Force Is Rising To The
Surface''.
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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.
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\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.).
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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.
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\22\ TIGTA interviewed a sample of 6 of the 20 Alliance member
companies.
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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.
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\23\ The percentage of returns an individual provider must transmit
to the IRS error free.
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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.
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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.
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\26\ Forms 1040EZ.
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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).
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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.
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\28\ 15 U.S.C. 1601 note, 1692-1920 (2000).
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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.
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\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.
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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).
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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.
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\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.
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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.
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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.
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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\
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\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).
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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.
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\37\ ``Customer Accuracy at Taxpayer Assistance Centers Showed
Little Improvement During the 2005 Filing Season'' (Reference Number
2005-40-146, date September 2005).
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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.
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\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.
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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.
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\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.
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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.
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\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).
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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).
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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).
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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.
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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.
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\46\ ``Financial Audit: IRS's fiscal years 2005 and 2004 Financial
Statement'' (GAO-06-137, dated November 2005).
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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.
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\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.
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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).
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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.
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\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).
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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).
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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\
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\54\ ``Taxpayer Rights Are Being Protected When Levies Are Issued''
(Reference Number 2004-30-072, dated June 2005).
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--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\
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\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).
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--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\
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\56\ ``Fiscal Year 2004 Statutory Review of Compliance With Lien
Due Process Procedures'' (Reference Number 2005-30-095, dated June
2005).
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--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\
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\57\ ``Fiscal Year 2005 Review of Compliance With Legal Guidelines
When Conducting Seizures of Taxpayers' Property'' (Reference Number
2005-30-091, dated June 2005).
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--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\
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\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).
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--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\
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\60\ ``Some Improvements Have Been Made to Better Comply With the
Freedom of Information Act Requirements'' (Reference Number 2005-10-
089, dated May 2005).
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--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\
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\61\ ``The Office of Appeals Should Strengthen and Reinforce
Procedures for Collection Due Process Cases'' (Reference Number 2005-
10-138, dated September 2005).
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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\
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\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).
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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\
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\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.
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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.
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\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).
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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.
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\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.
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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\
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\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.
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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.
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\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.
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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.
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\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.
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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\
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\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.
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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\
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\17\ See National Taxpayer Advocate 2004 Annual Report to Congress
471-477 (Key Legislative Recommendation: Free Electronic Filing for All
Taxpayers).
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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.
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\18\ IRS Tax Year 2004 Taxpayer Usage Study (Aug. 26, 2005).
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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\
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\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.
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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.
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\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).
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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.
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\23\ For a detailed discussion of the Questionable Refund Program,
see National Taxpayer Advocate 2005 Annual Report to Congress 25-54.
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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\
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\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.
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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\
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\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).
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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.
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\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).
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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.
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\29\ IRC 6502(a)(1).
\30\ National Taxpayer Advocate 2004 Annual Report to Congress 180-
192.
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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:
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\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.
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--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\
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\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).
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--Enforcement.--For those cases that cannot be resolved through
communication efforts with the taxpayer, traditional
enforcement efforts would be used.\35\
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\35\ Filing and Payment Compliance Concept of Operations, Filing
and Payment Compliance Project Office, April 18, 2005, 75-80.
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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\
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\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.
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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.
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\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).
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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.
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\43\ Taxpayer Advocate Service customer satisfaction survey data
for the period from October 2003 through September 2005, as collected
by The Gallup Organization.
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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\
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\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).
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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\
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\2\ See National Taxpayer Advocate 2004 Annual Report to Congress
471-477 (Key Legislative Recommendation: Free Electronic Filing for All
Taxpayers).
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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\
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\3\ Internal Revenue Service Restructuring and Reform Act, Public
Law No. 105-206, 2001(a)(2), 112 Stat. 685 (1998).
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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.
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\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.
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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.
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\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.''
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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\
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\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).
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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.
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\1\ 542 U.S. 296 (2004).
\2\ 543 U.S. 220, 125 S. Ct. 738 (2005).
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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\
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\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\
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\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\
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\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.
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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