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




                                                 S. Hrg. 109-330, Pt. 7

                                                        Senate Hearings

                                 Before the Committee on Appropriations

_______________________________________________________________________


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

                                                            Fiscal Year
                                                                   2007

                                         109th CONGRESS, SECOND SESSION
                                                              H.R. 5576

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

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

27-572 PDF

2007

                                                 S. Hrg. 109-330, Pt. 7

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

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

                                HEARINGS

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   on

                               H.R. 5576

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

                               __________

                                 PART 7

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

                               __________

         Printed for the use of the Committee on Appropriations


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

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                      COMMITTEE ON APPROPRIATIONS

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

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

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

                           Professional Staff

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

                    Administrative Support

                           Person's name deg.


                            C O N T E N T S

                              ----------                              

                        Thursday, March 2, 2006

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

                        Thursday, March 16, 2006

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

                        Thursday, April 6, 2006

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

                        Thursday, April 27, 2006

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

                         Thursday, May 4, 2006

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

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

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

                              ----------                              


                        THURSDAY, MARCH 2, 2006

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

              DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                        Office of the Secretary

STATEMENT OF HON. ALPHONSO JACKSON, SECRETARY


            opening statement of senator christopher s. bond


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


                                  CDBG


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


                     PUBLIC HOUSING OPERATING FUND


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


                                HOPE VI


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


                           REDUCTION IN CDBG


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


                             FUTURE OF FHA


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


                           PREPARED STATEMENT


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

           Prepared Statement of Senator Christopher S. Bond

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

                   STATEMENT OF SENATOR PATTY MURRAY

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

                                HOPE VI

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

                           PREPARED STATEMENT

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

               Prepared Statement of Senator Patty Murray

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

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

                   STATEMENT OF HON. ALPHONSO JACKSON

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

                       FHA FORECLOSURE MORATORIUM

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

                              HOME PROGRAM

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

                     HOMEOWNERSHIP VOUCHER PROGRAM

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

                           HOUSING COUNSELING

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

            HOUSING CHOICE VOUCHER RENTAL ASSISTANCE PROGRAM

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

                          HOMELESS ASSISTANCE

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

                                  CDBG

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

                           PREPARED STATEMENT

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

                 Prepared Statement of Alphonso Jackson

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

    HOW HUD WILL PROMOTE ECONOMIC AND COMMUNITY DEVELOPMENT THROUGH 
                             HOMEOWNERSHIP

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

               HOW HUD WILL REFORM COMMUNITY DEVELOPMENT

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

                    HOW HUD WILL COMBAT HOMELESSNESS

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

         HOW HUD WILL CONTINUE TO FIGHT HOUSING DISCRIMINATION

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

            HOW HUD WILL INCREASE ITS OPERATIONAL EFFICIENCY

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

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

                         ASSET-BASED MANAGEMENT

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

                          BLOCK GRANT VOUCHERS

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

                               CDBG CUTS

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

                 STATEMENT OF SENATOR PATRICK J. LEAHY

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

                           PREPARED STATEMENT

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

             Prepared Statement of Senator Patrick J. Leahy

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

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

                                HOPE VI

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

                                  CDBG

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

                              BROWNFIELDS

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

                                HOPE VI

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

                      PUBLIC HOUSING CAPITAL FUND

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

                    PUBLIC HOUSING CAPITAL FUND CUTS

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

                        ELDERLY DISABLED HOUSING

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

                              SECTION 811

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

                           IMPROPER PAYMENTS

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

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

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

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

                         FHA MORTGAGE INSURANCE

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

                          HIGH-RISK BORROWERS

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

                              HOMELESSNESS

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

              Interagency Council on the Homeless Reports

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

                          PHAS OPERATING COSTS

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

                             SECTION 8 CUT

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

                           PREDATORY LENDING

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

                    FHA Mortgage Insurance Premiums

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

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

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Bond. All right. Well, the nice thing about it is 
this conversation will be continued. We have lots of things to 
work on. I believe that that concludes it. There will be--I am 
sure that the ranking member and I will have several questions 
for the record, and if any other members of the subcommittee 
have questions for the record, we would ask them to get them in 
by the end of this week. And we will expect your replies in a 
timely fashion and look forward to continuing these 
discussions.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]
              Questions Submitted by Senator Arlen Specter

                PUBLIC HOUSING OPERATING FUND--NEW RULE

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

                      MOVING TO WORK PROGRAM (MTW)

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

         STRENGTHENING AMERICA'S COMMUNITIES INITIATIVE (SACI)

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

                         ELIMINATION OF HOPE VI

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

                       ELIMINATION OF SECTION 811

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

                          CUTS TO SECTION 202

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

                          WHY CUT CDBG FUNDS?

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

                     CAN HUD AND HHS WORK TOGETHER?

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

               CAN HUD PROVIDE HOUSING DURING DISASTERS?

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

             WHY CUT FUNDING FOR THE ELDERLY AND DISABLED?

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

           HOUSING FOR THE ELDERLY AND DISABLED PROGRAM CUTS

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

               CUTS TO COMMUNITY DEVELOPMENT BLOCK GRANTS

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

   NATIVE AMERICAN HOUSING AND SELF-DETERMINATION ACT BILL LANGUAGE 
                              CONTINUATION

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

                 RISING UTILITY COSTS IN PUBLIC HOUSING

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

               CUTS TO COMMUNITY DEVELOPMENT BLOCK GRANTS

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

               CUTS TO COMMUNITY DEVELOPMENT BLOCK GRANTS

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

     CONSOLIDATION OF HUD'S SMALLER COMMUNITY DEVELOPMENT PROGRAMS

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

                        CUTS TO HOUSING PROGRAMS

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

                   CUTS TO PROPOSED HOUSING PROGRAMS

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

                          SUBCOMMITTEE RECESS

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


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

                              ----------                              


                        THURSDAY, MARCH 16, 2006

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

                      DEPARTMENT OF TRANSPORTATION

                        Office of the Secretary

STATEMENT OF HON. NORMAN Y. MINETA, SECRETARY

            OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

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

                           PREPARED STATEMENT

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

           Prepared Statement of Senator Christopher S. Bond

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

                   STATEMENT OF SENATOR PATTY MURRAY

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

                           PREPARED STATEMENT

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

               Prepared Statement of Senator Patty Murray

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

                          THREE FUNDING HOLES

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

                               GULF COAST

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

                              DOT'S BUDGET

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

                   AIR TRAFFIC CONTROL MODERNIZATION

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

                                 AMTRAK

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

                          AMTRAK'S REAL COSTS

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

                       AMTRAK'S RISING RIDERSHIP

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

                           PREPARED STATEMENT

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

             Prepared Statement of Senator Patrick J. Leahy

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

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

                STATEMENT OF SECRETARY NORMAN Y. MINETA

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

                    SURFACE TRANSPORTATION PROGRAMS

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

                       FEDERAL AVIATION PROGRAMS

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

                        INTERCITY PASSENGER RAIL

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

                           SAFETY INITIATIVES

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

                           PREPARED STATEMENT

    Thank you again for this opportunity to testify today and I 
will be pleased to respond to any questions that you may have.
    Senator Bond. Thank you very much, Mr. Secretary.
    [The statement follows:]

                 Prepared Statement of Norman Y. Mineta

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

                    SURFACE TRANSPORTATION PROGRAMS

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

                       FEDERAL AVIATION PROGRAMS

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

                        INTERCITY PASSENGER RAIL

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

                           MARITIME PROGRAMS

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

          RESEARCH, PIPELINES, AND HAZARDOUS MATERIALS SAFETY

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

           DEPARTMENT OF TRANSPORTATION HEADQUARTERS BUILDING

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

                         FREIGHT TRANSPORTATION

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

                    INTERCITY PASSENGER RAIL SYSTEM

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

                    FEDERAL AVIATION ADMINISTRATION

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

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

                          FAA REAUTHORIZATION

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

                   STATEMENT OF SENATOR THAD COCHRAN

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

                 STATEMENT OF SENATOR ROBERT F. BENNETT

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

                        INTERCITY PASSENGER RAIL

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

                        INTERCITY PASSENGER RAIL

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

                     ADDITIONAL COMMITTEE QUESTIONS

    Secretary Mineta. We will submit for the record responses 
to the questions sent by the members. Thank you very much, 
Chairman Bond and members of the committee.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

        Questions Submitted to the Department of Transportation
           Questions Submitted by Senator Christopher S. Bond

                          TRANSIT SMALL STARTS

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

                           BUS RAPID TRANSIT

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

                   OPEN ROADS FINANCING PILOT PROGRAM

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

                      AIRPORT IMPROVEMENT PROGRAM

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

 RULEMAKING ON SINGLE OCCUPANCY HYBRID ELECTRIC VEHICLE ACCESS TO HOV 
                               FACILITIES

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

                          NPRM AND OPEN SKIES

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

                                 AMTRAK

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

                        AIR TRAFFIC CONTROLLERS

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

                FAA'S TELECOMMUNICATIONS INFRASTRUCTURE

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

                                 AMTRAK

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

                         ESSENTIAL AIR SERVICE

    Question. The President's budget requests only $50 million for the 
Essential Air Service program--less than half of the $110 million that 
was appropriated to the program by Congress last year. Since over 60 of 
the communities currently receiving EAS funding would be dropped from 
the program under the administration's proposal, the $50 million 
funding level is clearly insufficient to meet EAS communities' needs. 
How do you believe that the Essential Air Service program can survive 
with only $50 million in direct funding? How do you expect small 
communities around the country, like Rutland, Vermont, to be able to 
meet the 10-15 percent match you envision?
    Answer. We are proposing a fundamental change in the way the 
government supports transportation services to rural America. The EAS 
program subsidizes scheduled air service to communities that received 
scheduled service at the time of deregulation in 1978. There have been 
tremendous changes in the industry since then, but the program has 
remained static. Many communities benefiting from this program have 
done little to help make the service successful. Requiring a modest 
contribution from these communities may energize civic officials and 
business leaders at the local and State levels to encourage use of the 
service.
    For the most isolated communities, those more than 210 driving 
miles from the nearest large or medium hub airport, we propose to 
continue to subsidize air service to the extent of 90 percent of the 
total subsidy required. The least isolated communities, quantified as 
those that are within: (a) 100 driving miles of a large or medium hub 
airport; (b) 75 miles of a small hub; or (c) 50 miles of a non-hub with 
jet service would not qualify for subsidy for air service; however, 
they would qualify for a Federal subsidy of 50 percent of the total 
cost for surface transportation. At all other subsidized EAS 
communities, we would offer an array of options, including paying for 
75 percent of the cost of the traditional EAS-type scheduled service.
    In addition, we would work with the communities and State 
transportation departments to procure charter service, single-engine, 
single-pilot service, regionalized service, or ground transportation in 
cases where those options seem to be more responsive to communities' 
needs. Finally, our experience with the Small Community Air Service 
Development Program has been that small communities have been able to 
raise matching funds. In that regard, we note that the funds do not 
have to come from the city budget. Rather, the funds can come from the 
chamber of commerce, individual businesses, or even from the State. 
With these reforms, the Department's $50 million budget request would 
keep the most isolated communities connected to the national air 
transportation system.
                                 ______
                                 
 Questions Submitted to the Office of Inspector General, Department of 
                             Transportation

           Questions Submitted by Senator Christopher S. Bond

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

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

                                 AMTRAK

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

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

                           PREPARED STATEMENT

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

                  Prepared Statement of David M. Laney

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

                            CAPITAL PROGRAM

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

                            OPERATING BUDGET

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

                            WORKING CAPITAL

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

                              DEBT SERVICE

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

                      DEPARTMENT OF TRANSPORTATION

                    Federal Railroad Administration

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

                           PREPARED STATEMENT

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

                Prepared Statement of Joseph H. Boardman

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

                      Office of Inspector General

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

                           PREPARED STATEMENT

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

                  Prepared Statement of Mark R. Dayton

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

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

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



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



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



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



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

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

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

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

 REAUTHORIZATION IS A BETTER COURSE FOR REFORMING INTERCITY PASSENGER 
                              RAIL SERVICE

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

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

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

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

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

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

                          SUBCOMMITTEE RECESS

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


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

                              ----------                              


                        THURSDAY, APRIL 6, 2006

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

                       DEPARTMENT OF THE TREASURY

                        Office of the Secretary

STATEMENT OF JOHN W. SNOW, SECRETARY

            OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

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

                   STATEMENT OF SENATOR PATTY MURRAY

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

                   SUMMARY STATEMENT OF JOHN W. SNOW

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

                           PREPARED STATEMENT

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

                   Prepared Statement of John W. Snow

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

             PROMOTING A PROSPEROUS AND STABLE U.S. ECONOMY

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

   FIGHTING THE GLOBAL WAR ON TERROR AND SAFEGUARDING OUR FINANCIAL 
                                SYSTEMS

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

        COLLECTING TAXES AND MANAGING THE GOVERNMENT'S FINANCES

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

                  STRENGHENING FINANCIAL INSTITUTIONS

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

                     MANAGING TREASURY EFFECTIVELY

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

             TREASURY AND THE PRESIDENT'S MANAGEMENT AGENDA

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

                               CONCLUSION

    Mr. Chairman, I look forward to working with you, members of the 
committee, and your staff to maximize Treasury's resources in the best 
interest of the American people and our country as we move into fiscal 
year 2007. We have hard work ahead of us and I am hopeful that together 
we can work to make the Treasury a model for management and service to 
the American people, and continue to generate economic growth, increase 
the number of jobs for our citizens, and keep our financial systems 
strong and secure.
    Thank you again for the opportunity to present the President's 
budget for the Treasury Department today. I would be pleased to answer 
your questions.

                          INFORMATION SYSTEMS

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

                      INCREASED OVERSEAS PRESENCE

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

                          IRS 7216 REGULATIONS

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

                       OFFICE OF DYNAMIC ANALYSIS

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

                                TAX GAP

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

                      TAX PREPARATION ERROR RATES

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

                          IRS 7216 REGULATIONS

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

                      TAXPAYER ASSISTANCE CENTERS

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

                               BSA DIRECT

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

                              TAX SHELTERS

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

             Office of Terrorism and Financial Intelligence

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

                           PREPARED STATEMENT

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

                   Prepared Statement of Stuart Levey

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

                            KEY ACHIEVEMENTS

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

              OVERVIEW OF THE FISCAL YEAR 2007 TFI REQUEST

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

                               CONCLUSION

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

    Senator Bond. Thank you, Mr. Levey.

                      STATEMENT OF JANICE GARDNER

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

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

                           PREPARED STATEMENT

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

                  Prepared Statement of Janice Gardner

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

                           BACKGROUND ON OIA

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

                SIGNIFICANT PROGRESS IN FISCAL YEAR 2005

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

        BUILDING ANALYTIC COVERAGE AND DEPTH IN FISCAL YEAR 2006

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

                    FISCAL YEAR 2007 BUDGET REQUEST

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

                               CONCLUSION

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

                            TFI AUTHORITIES

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

                      BANCO DELTA ASIA DESIGNATION

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

                               BSA DIRECT

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

            BSA DIRECT AND THE CROSS-BORDER WIRE INITIATIVE

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

                 TREASURY FOREIGN INTELLIGENCE NETWORK

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

INTERNATIONAL TERRORIST FINANCING COOPERATION AND THE BANCO DELTA ASIA 
                              DESIGNATION

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

     TFI REDUNDANCY CONCERNS AND DIFFERENCES BETWEEN TFI COMPONENTS

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

           Questions Submitted by Senator Christopher S. Bond

                               MANAGEMENT

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

                            BSA DIRECT/TFIN

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

                  RESPONSE TO GAO REPORT ON BSA DIRECT

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

                         CIO AND CFO OVERSIGHT

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

                     IT BUSINESS CASE DOCUMENTATION

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

      CIO'S OVERSIGHT OF BUREAU PROJECT MANAGEMENT TEAMS AND CIOS

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

                 ROLES AND RESPONSIBILITIES OF THE CIO

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

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

                                 CFIUS

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

                                IRS BSM

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

                 DYNAMIC ANALYSIS OFFICE OF TAX POLICY

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

                TREASURY COMMUNICATIONS ENTERPRISE (TCE)

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

                    IRS OVERSIGHT BOARD NOMINATIONS

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

                            STANDING UP TFI

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

                    COORDINATION WITH OTHER AGENCIES

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

                           OFAC DESIGNATIONS

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

                           BIGGEST CHALLENGES

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

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

                TREASURY COMMUNICATIONS ENTERPRISE (TCE)

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

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

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

                OVERALL MANAGEMENT OF TREASURY PROJECTS

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

                          STOP THE WINE TAX!!

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

           ESTABLISHMENT OF A DYNAMIC TAX OFFICE AT TREASURY

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

                   HYPOCRISY OF CHINA VS. CUBA POLICY

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

     ARE THE RUSSIANS ALLIES WHEN IT COMES TO COMBATING TERRORISM?

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

                DISRUPTING TERRORIST FINANCING NETWORKS

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

              HOW MUCH CAN REALISTICALLY BE ACCOMPLISHED?

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

                 PROGRESS WITH CHARITABLE ORGANIZATIONS

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

        IS TREASURY TARGETING NON-CONVENTIONAL FUNDING SOURCES?

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

              WHAT ABOUT ADDRESSING OFFSHORE BANKS, ETC.?

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

               TREASURY'S OFFICE OF INTELLIGENCE ANALYSIS

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

                       WHERE DO WE GO FROM HERE?

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

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

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

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

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

                           THE NATIONAL DEBT

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

                              THE TAX GAP

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

                        WORKER MISCLASSIFICATION

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

                         ENFORCEMENT PRIORITIES

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

                          PERFORMANCE MEASURES

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

                           AGENCY COOPERATION

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

                          SUBCOMMITTEE RECESS

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


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

                              ----------                              


                        THURSDAY, APRIL 27, 2006

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

                       DEPARTMENT OF THE TREASURY

                        Internal Revenue Service

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

            OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

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

                           PREPARED STATEMENT

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

           Prepared Statement of Senator Christopher S. Bond

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

                   STATEMENT OF SENATOR PATTY MURRAY

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

                  STATEMENT OF SENATOR BYRON L. DORGAN

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

               PREPARED STATEMENT OF SENATOR TED STEVENS

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

               Prepared Statement of Senator Ted Stevens

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

                      STATEMENT OF MARK W. EVERSON

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



                           PREPARED STATEMENT

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

                   Prepared Statement of Mark Everson

                              INTRODUCTION

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

                           2006 FILING SEASON

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

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

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

                FISCAL YEAR 2007 DETAILED BUDGET SUMMARY

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

                           IRS MODERNIZATION

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

                   PRIVATE COLLECTION AGENCIES (PCA)

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

                              THE TAX GAP

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

         INCREASING COMPLIANCE THROUGH SERVICE AND ENFORCEMENT

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

                         LEGISLATIVE PROPOSALS

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

                               FREE FILE

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

                       7216 PROPOSED REGULATIONS

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

                              CONCLUSIONS

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

                  STATEMENT OF RAYMOND T. WAGNER, JR.

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

                           PREPARED STATEMENT

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

              Prepared Statement of Raymond T. Wagner, Jr.

                       INTRODUCTION AND OVERVIEW

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

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

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

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

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

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

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

                  SIX STRATEGIES TO REDUCE THE TAX GAP

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                               APPENDIX 1

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

                               appendix 2

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

                               APPENDIX 3

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

                               APPENDIX 4

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

                               APPENDIX 5

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

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

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

                     STATEMENT OF J. RUSSELL GEORGE

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

                           PREPARED STATEMENT

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

                Prepared Statement of J. Russell George

                              INTRODUCTION

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

                         THE 2006 FILING SEASON

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

                           ELECTRONIC FILING

    The IRS has seen a steady growth in electronic filing (e-file) of 
income tax returns over the past several years. In Calendar Year 2002, 
35.9 percent of the 130.3 million individual income tax returns 
received by the IRS were e-filed. Last year, the percentage of e-filed 
returns increased to 51.7 percent of the total individual income tax 
returns received. The number of e-filed returns increased 46.2 percent 
over the 3-year span. While the IRS will not meet its goal of having 80 
percent of all tax returns e-filed by 2007, it does expect to see 
continued growth in electronic filing, although at a somewhat 
diminished growth rate from year to year. For example, the IRS expects 
the e-file percentage to reach 54.1 percent this year, 57.7 percent in 
2007, and 60.6 percent in 2008.
    Although e-filing continues to increase overall, TIGTA found some 
indications that taxpayers are shifting between the various types of e-
filed returns, and some segments of e-filed returns are starting to 
show a decrease in the numbers filed. E-filed returns are generated 
from three basic sources--paid preparers who transmit their clients' 
tax returns, taxpayers who purchase tax-preparation software and file 
their own returns via the Internet from their personal computers, and 
taxpayers who take advantage of free e-filing options, such as the Free 
File Program, or in previous years via the TeleFile Program.
    Overall, as of April 8, 2006, e-filing has increased 3.5 percent 
compared to the same period in 2005, which is significantly less than 
the 6 percent increase the IRS expected. While the number of taxpayers 
e-filing from their home computers is up 16.6 percent this Filing 
Season, the number of taxpayers taking advantage of free online filing 
is down 22 percent below last year. I am concerned that more taxpayers 
are not using the free e-filing services offered by the IRS.
Free File Program
            Background
    The IRS Restructuring and Reform Act of 1998 (RRA 98)\21\ 
established a goal for the IRS to have 80 percent of Federal tax and 
information returns filed electronically by 2007. It also required the 
IRS to work with private industry to increase electronic filing.
---------------------------------------------------------------------------
    \21\ Public Law No. 105-206, 112 Stat. 685 (codified as amended in 
scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22 
U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).
---------------------------------------------------------------------------
    In February 2002, President Bush established the President's 
Management Agenda to improve the overall management of the Federal 
Government. One of the five initiatives in the President's Agenda is E-
Government. The goal of this initiative is to make it easier for 
citizens and businesses to interact with the government, save taxpayer 
dollars and streamline citizen-to-government transactions. In response 
to the President's E-Government initiative, the Office of Management 
and Budget (OMB) developed the EZ Tax Filing Initiative. EZ Tax Filing 
was intended to make it easier for citizens to file taxes in an 
Internet-enabled environment. Citizens would no longer have to pay for 
basic, automated tax preparation. The goal of this initiative was to 
increase the number of citizens who filed their tax returns 
electronically.
    In response to this requirement and the statutory requirement of 
RRA 98, in 2003 the Treasury, the OMB and the IRS launched the Free 
File Program featuring private-sector partners that allow qualifying 
taxpayers to prepare and file their taxes online for free. The 
Treasury, OMB and IRS made this possible through a public-private 
partnership with a consortium of tax software companies, the Free File 
Alliance, LLC (Alliance).
    The Free File Program provides taxpayers with access to free online 
tax preparation and e-filing services made possible through a 
partnership agreement between the IRS and the tax software industry. 
Eligible taxpayers may prepare and e-file their Federal income tax 
returns using commercial online software provided by Alliance members. 
After the IRS and Alliance entered into a Free File Agreement, the Free 
File Program debuted in January 2003. According to statistics provided 
by the Alliance, more than 2.79 million taxpayers used the program in 
its first year. In subsequent years, use of the Free File Program 
increased significantly to about 3.51 million taxpayers in 2004 and 
5.12 million taxpayers in 2005.
            The Amended Free File Alliance Agreement and Its Potential 
                    Impact on Electronic Filing
    After the 2005 Filing Season, the IRS and the Alliance amended 
their agreement to continue the Free File Program through October 2009. 
With the amended agreement, the overall focus of the Free File Program 
changed significantly. While the amended agreement still contributes to 
the original goal of increasing the number of citizens who 
electronically file their tax returns, new limits effectively changed 
the intent of the Free File Program. The original intent of the program 
was to provide free tax preparation and electronic filing services to 
all taxpayers. The revised intent is to assist lower income and 
underserved taxpayers.
    The original 2002 agreement between the IRS and the Alliance 
established a minimum number of taxpayers who should be served by the 
Free File Program and was more in line with the intent of the EZ Tax 
Filing Initiative. There is, however, some support in Congress for the 
shift in the program's focus to lower income and underserved taxpayers. 
For example, according to the House Appropriations Committee Report 
accompanying the IRS's fiscal year 2005 Budget Appropriations, the 
committee reaffirmed its position that the Alliance is first and 
foremost intended to provide electronic Federal tax return preparation 
and e-filing services at no cost to the working poor and other 
disadvantaged and underserved taxpayers.
    As part of the amended agreement, new limits were set for 
participation in the Free File Program. The new limits stem, in part, 
from the differing objectives of the IRS and the Alliance members. One 
of the IRS's principal purposes for establishing the program was to add 
another avenue for electronic filing with the intent of increasing 
electronic filing overall. However, Alliance members are businesses 
that incur a cost to provide free services. According to 
representatives of Alliance member companies who TIGTA interviewed, 
their primary goal is to keep the Federal Government from entering the 
tax preparation business.\22\ A secondary benefit of their 
participation in the program is the opportunity to market their other 
products for free. Taxpayers opting to use these services provide 
additional revenues to Alliance members.
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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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    To improve, the IRS must conduct an analysis of downstream 
consequences, including their impact on taxpayer service, and 
incorporate the results of that analysis into its strategic plans. 
Without adequate analysis of the downstream consequences of its 
options, the IRS cannot make informed strategic decisions about how to 
allocate resources between taxpayer service and enforcement activities 
and cannot tell its appropriators that it is using its limited 
resources wisely. Moreover, problems with IRS technology create 
additional downstream consequences. The IRS must be funded sufficiently 
to correct problems now with its existing technology--while it 
simultaneously strives to modernize its computer systems.
    In the balance of my testimony, I will identify key issues I 
believe the IRS should address to get the biggest compliance bang for 
its buck.

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

    Over the last 3 years, in hearings before the Senate Finance, 
Budget, and Homeland Security and Governmental Affairs committees, I 
have testified about ways to close the tax gap, both by reducing 
opportunities for noncompliance and by enhancing traditional 
enforcement actions.\5\ In the National Taxpayer Advocate's 2005 Annual 
Report to Congress, I discussed in detail what the IRS can do 
administratively and what Congress can do legislatively to address the 
``cash economy,'' which is the largest component of the tax gap.\6\
---------------------------------------------------------------------------
    \5\ See Written Statement of Nina E. Olson, National Taxpayer 
Advocate, Before United States Senate Committee on the Budget on The 
Causes of and Solutions to the Federal Tax Gap (Feb. 15, 2006); Written 
Statement of Nina E. Olson, National Taxpayer Advocate, Before the 
United States Senate Committee on Homeland Security and Governmental 
Affairs Subcommittee on Federal Financial Management, Government 
Information, and International Security (Oct. 26, 2005); Statement of 
Nina E. Olson, National Taxpayer Advocate, Before the United States 
Senate Committee on Finance on the Tax Gap (April 14, 2005); Testimony 
of Nina E. Olson, National Taxpayer Advocate, Before the Senate 
Committee on Finance on The Tax Gap and Tax Shelters (July 21, 2004).
    \6\ National Taxpayer Advocate 2005 Annual Report to Congress 55-
75, 381-396. See also National Taxpayer Advocate 2004 Annual Report to 
Congress 478-489; National Taxpayer Advocate 2003 Annual Report to 
Congress 20-25, 256-269.
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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\
---------------------------------------------------------------------------
    \7\ S. Rep. No. 109-109, at 133-134 (2005).
    \8\ Statement of Nina E. Olson, National Taxpayer Advocate, Before 
the United States House Appropriations Subcommittee on Transportation, 
Treasury, and Housing and Urban Development, the Judiciary, District of 
Columbia, and Related Agencies (March 29, 2006); National Taxpayer 
Advocate 2005 Annual Report to Congress 2-24; Statement of Nina E. 
Olson, National Taxpayer Advocate, Before the United States Senate 
Appropriations Subcommittee on Transportation, Treasury, the Judiciary, 
Housing and Urban Development, and Related Agencies (Apr. 7, 2005).
---------------------------------------------------------------------------
    The IRS is facing a challenge. It has a responsibility to serve all 
taxpayers with limited resources. Thus, it must decide by taxpayer 
segment how to deliver needed services in the most effective and 
efficient manner possible, and in a way that does not negatively impact 
taxpayers' ability to comply with the tax laws. Toward this end, the 
IRS must gather data and develop criteria to make those decisions. The 
recently released report on Phase I of the Taxpayer Assistance 
Blueprint (TAB) is the first step toward developing a comprehensive 5-
year plan for taxpayer service that will establish a long-term strategy 
for delivering needed taxpayer services within existing resource 
limitations.
    In Phase I, we gathered both primary and secondary data about 
taxpayer needs and preferences. We also collected some information 
about our current level of services offered to taxpayers. From this and 
other information, we developed five hypotheses or ``themes'' that we 
think will improve service to taxpayers. However, Phase I is only the 
beginning. Phase II of the TAB will be even more critical because the 
goal of Phase II should be to test those hypotheses. To determine 
whether any of the hypotheses is correct, we must collect more primary 
source data about taxpayer service needs. We must then identify the 
gaps between taxpayer service needs and our present service offerings 
by analyzing how well our current level and type of service is actually 
serving different taxpayer segments. We will then see whether our 
hypotheses would improve service to different taxpayer segments.
    I applaud the dedicated work of the IRS team that has labored over 
this strategic plan and gathered important information over the last 5 
months. While we embark on the next phase of the TAB, we must focus on 
a number of areas that could have significant impact on Congressional 
or IRS decisions about service delivery to taxpayers.
    We must develop a baseline of services.--This baseline should 
consist of specific numbers addressing how well the IRS is currently 
meeting customer service preferences and needs by service, taxpayer 
segment, and delivery method. Although the TAB Phase I report states 
that the current baseline of taxpayer services is one item on which the 
strategic improvement themes of the report are predicated, I do not 
believe this statement is completely accurate. Throughout the TAB Phase 
I report, we examine the current usage and volume of current IRS 
services. However, these current usage statistics do not serve as a 
proxy for taxpayer preference. We cannot assume that the current level 
of service reflects taxpayer preferences. The status quo is not 
necessarily what taxpayers want--it is merely what the IRS has been 
willing (or able) to deliver. Instead, during Phase II, we must conduct 
research to develop this baseline of services. Only after this research 
is completed will we be able to measure how effective we are in 
improving our ability to meet taxpayer needs.
    We must identify what we don't know.--Before we can move forward 
with our research in Phase II, we need to understand what we still need 
to know and what questions we need to ask in order to find the right 
answers. It is important that the TAB not rely on pre-conceived 
decisions, but instead identify what we are doing now, what we still do 
not know about taxpayer needs, and what we need to do to address those 
needs or educate taxpayers and move them to other channels.
    We must identify the best channels through which to deliver 
services to taxpayers.--While electronic and self-assistance channels 
may be growing in popularity, mere use or access to these services does 
not necessarily mean that taxpayers are able to frame questions, 
conduct complex searches, and process or use the information correctly. 
Additionally, we must always remain cognizant that there is a segment 
of the population that cannot and will not avail itself of self-service 
options. However, by providing more self-service opportunities for 
taxpayers, the IRS should be able to reserve its in-person (face-to-
face or telephone) interaction for those issues and taxpayers that need 
such engagement.
    Thus, as part of the TAB, the IRS must commit to conduct--or at 
least to attempt to conduct--the additional research necessary to 
enable it to establish a broad baseline identifying how well taxpayer 
needs and preferences are currently being met for each of the major 
types of services by customer segment and channel--and to quantify the 
impacts associated with not meeting those needs (i.e., the downstream 
costs and taxpayer-compliance impact). Moreover, we need to understand 
why certain taxpayer segments have difficulties with our various types 
of services and why they are reluctant to use lower cost channels (if 
indeed they are). Only then can we develop effective ``migration'' 
strategies to encourage and educate taxpayers about appropriate lower 
cost channels--ones that will not ultimately increase noncompliance and 
lead to greater downstream costs.
    For example, it is true that computer ownership and Internet access 
have increased over the last decade.\9\ But those numbers do not 
necessarily mean that the computer owner is computer literate and can 
conduct site searches for complex tax information, much less understand 
how to apply that information once he finds it. In fact, in the 
financial services sector, banks have reversed the trend of closing 
branches in the hope of moving taxpayers to Internet banking.\10\ 
Instead, they are developing migration strategies for customers to 
complete certain types of transactions on-line or by phone, and are 
retaining their in-person services for more complicated transactions or 
for those customers who really cannot navigate the phones or Internet. 
Banks are certainly not turning those customers away, and now recognize 
that those customer segments are a relatively untapped market in need 
of services. There are lessons here for the IRS.
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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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \41\ For a detailed discussion of the IRS Private Debt Collection 
initiative and its constitutional and taxpayer rights implications, see 
``Use of Private Agencies to Improve IRS Debt Collection'', 
Subcommittee on Oversight, House Committee on Ways and Means, 108th 
Cong., 1st Sess. (statement of Nina E. Olson, National Taxpayer 
Advocate, May 13, 2003); see also National Taxpayer Advocate 2005 
Annual Report to Congress 76-93.
---------------------------------------------------------------------------
    Thus, the PDC initiative is a paradigm example of how looking at 
the narrow justification for a program can make it look brilliant, 
while viewing the program in its totality paints a very different 
picture.

        TRENDS IN TAXPAYER ADVOCATE SERVICE (TAS) CASE INVENTORY

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

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

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

                                TAX GAP

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

                   ALLOCATION OF ADDITIONAL RESOURCES

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

                        PRIVACY OF TAXPAYER DATA

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

                        INDEPENDENT CONTRACTORS

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

                        PRIVACY OF TAXPAYER DATA

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

                     BUSINESS SYSTEMS MODERNIZATION

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

                      TAXPAYER ASSISTANCE CENTERS

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

                                 E-FILE

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

                              BUDGET CUTS

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

                       REFUND ANTICIPATION LOANS

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

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

                     TAXPAYER ASSISTANCE BLUEPRINT

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

                        BETTER TAX GAP ESTIMATES

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

                BALANCE BETWEEN SERVICE AND ENFORCEMENT

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

                          INCREASING E-FILING

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

                      PRIVATE COLLECTION AGENCIES

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

                       E-FILING FOR CORPORATIONS

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

               STRATEGIC PLAN FOR ADDRESSING THE TAX GAP

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

                           LONG-TERM BSM PLAN

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

                               BSA DIRECT

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

                          ESTATE AND GIFT TAX

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

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

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

         SETTING TAXPAYER ASSISTANCE CENTERS (TACS) UP TO FAIL

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

                        SERVICES OFFERED AT TACS

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

                     REDUCTION OF TAXPAYER SERVICES

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

                               YEAR 2006?

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

                           FREE FILE ALLIANCE

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

          INAPPROPRIATE COMPETITIVE SOURCING OF MAILROOM WORK

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

                                TAX GAP

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

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

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

                  BUSINESS SYSTEMS MODERNIZATION (BSM)

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

                    PROPOSED DISCLOSURE REGULATIONS

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

                            TAX HAVEN ABUSES

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

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

                              BSM FUNDING

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

                        BETTER TAX GAP ESTIMATES

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

                          DIRECT FILING PORTAL

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

                     TAXPAYER ASSISTANCE BLUEPRINT

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

                        SERVICES OFFERED AT TACS

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

       ADDRESSING SHODDY WORK BY TAX PREPARERS AND PRACTITIONERS

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

                BALANCE BETWEEN SERVICE AND ENFORCEMENT

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

                          DIRECT FILING PORTAL

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

                        BETTER TAX GAP ESTIMATES

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

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

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

         SETTING TAXPAYER ASSISTANCE CENTERS (TACS) UP TO FAIL

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

                        SERVICES OFFERED AT TACS

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

                     REDUCTION OF TAXPAYER SERVICES

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

                           FREE FILE ALLIANCE

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

                          SUBCOMMITTEE RECESS

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


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

                              ----------                              


                         THURSDAY, MAY 4, 2006

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

                      DEPARTMENT OF TRANSPORTATION

                    Federal Aviation Administration

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

            OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

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

                           PREPARED STATEMENT

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

           Prepared Statement of Senator Christopher S. Bond

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

                   STATEMENT OF SENATOR PATTY MURRAY

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

                           PREPARED STATEMENT

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

               Prepared Statement of Senator Patty Murray

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

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

                  STATEMENT OF SENATOR BYRON L. DORGAN

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

                   STATEMENT OF HON. MARION C. BLAKEY

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

                                 SAFETY

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

                          PROMISING TECHNOLOGY

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

                          AVIATION TRUST FUND

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

                          MORE LIKE A BUSINESS

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

              NATIONAL AIR TRAFFIC CONTROLLERS ASSOCIATION

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

                           PREPARED STATEMENT

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

                 Prepared Statement of Marion C. Blakey

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

             PERFORMING LIKE A BUSINESS IN FISCAL YEAR 2007

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

                           CONTROLLING COSTS

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

                            A-76 COMPETITION

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

           PRIORITIZING FACILITIES AND EQUIPMENT (F&E) NEEDS

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

                  KEEPING PACE WITH TODAY'S CHALLENGES

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

                    ENSURING A PATHWAY TO THE FUTURE

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

                         FLIGHT PLAN 2006-2010

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

                            INCREASED SAFETY

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

                          INCREASING CAPACITY

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

                        INTERNATIONAL LEADERSHIP

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

                       ENVIRONMENTAL STEWARDSHIP

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

                                SECURITY

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

                       ORGANIZATIONAL EXCELLENCE

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

                                CLOSING

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

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

                 AIR TRAFFIC CONTROLLER WORKFORCE PLAN

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

                       AVIATION SAFETY INSPECTORS

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

              FAA TELECOMMUNICATIONS INFRASTRUCTURE (FTI)

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

                          MORE LIKE A BUSINESS

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

                                 NATCA

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

                          AVIATION TRUST FUND

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

                            SAFETY IN ALASKA

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

                      AIRPORT IMPROVEMENT PROGRAM

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

                           INCREASED CAPACITY

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

                            MIDWAY ACCIDENT

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

                                 NATCA

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

                             CONTROLLER PAY

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

                                 NATCA

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

                 FAA TELECOMMUNICATIONS INFRASTRUCTURE

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

          REMARKS OF ASSISTANT INSPECTOR GENERAL FOR AVIATION

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

                         NATCA AND RETIREMENTS

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

                            WRIGHT AMENDMENT

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

            Questions Submitted by Senator Pete V. Domenici

       UNMANNED AERIAL VEHICLES AND THE NATIONAL AIRSPACE SYSTEM

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

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

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

                         CONCLUSION OF HEARINGS

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


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

                              ----------                              

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.

    MATERIAL SUBMITTED BY AGENCIES NOT APPEARING FOR FORMAL HEARINGS

    [Clerk's Note.--The following agencies of the Subcommittee 
on Departments of Transportation, Treasury, the Judiciary, 
Housing and Urban Development, and Related Agencies did not 
appear before the subcommittee this year. Chairman Bond 
requested these agencies to submit testimony in support of 
their fiscal year 2007 budget request. Those statements 
submitted by the chairman follow:]

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

                              INTRODUCTION

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

                      DIRECTOR MECHAM'S RETIREMENT

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

            IMPROVED FISCAL YEAR 2006 OUTLOOK FOR THE COURTS

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

            COURT STAFFING LEVELS LAG BEHIND WORKLOAD GROWTH

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



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

                         WORKLOAD IN THE COURTS

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

                    FISCAL YEAR 2007 BUDGET REQUEST

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



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

              INCREASE IN NON-CAPITAL PANEL ATTORNEY RATES

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

                       SECURITY OF FEDERAL JUDGES

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

                      THE JUDICIARY'S RENT BURDEN

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

              COST-CONTAINMENT STRATEGY FOR THE JUDICIARY

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

           RESPONSE TO RECENT HURRICANES ALONG THE GULF COAST

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

               CONTRIBUTIONS OF THE ADMINISTRATIVE OFFICE

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

              CONTRIBUTIONS OF THE FEDERAL JUDICIAL CENTER

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

                               CONCLUSION

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

                               APPENDIX A

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

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

                              INTRODUCTION

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

                  CONTAINING COSTS THROUGH RENT RELIEF

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

                   ROLE OF THE ADMINISTRATIVE OFFICE

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

 INCREASING PRODUCTIVITY IN THE COURTS THROUGH INFORMATION TECHNOLOGY 
                                SYSTEMS

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

                  ADMINISTRATIVE OFFICE BUDGET REQUEST

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

                    AO RESOURCES ARE STRETCHED THIN

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



                               CONCLUSION

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

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

                          RESOURCES REQUESTED

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

          JUSTIFICATION FOR COMMISSION'S APPROPRIATION REQUEST

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

                                SUMMARY

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

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

                THE CENTER'S CONTRIBUTION TO THE COURTS

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

          THE CENTER HAS MANAGED ITS APPROPRIATION RESPONSIBLY

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

   BUDGET SHORTFALLS WILL ADVERSELY AFFECT OUR SERVICE FOR THE COURTS

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

                 THE CENTER'S FISCAL YEAR 2007 REQUEST

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

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

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

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

                            FISCAL YEAR 2007

    In order to enhance our ethics program and continue to foster 
public confidence in government programs and operations, OGE 
established three strategic goals as outlined in our new strategic plan 
for fiscal years 2007-2011. OGE's three strategic goals are: (1) 
strengthening the ethical culture, and promoting an ethical workplace 
within the executive branch, (2) preventing conflicts of interest, and 
(3) promoting good governance. What follows is a summary of the major 
programs OGE is planning to implement to achieve these goals during 
fiscal year 2007.
    OGE expects that there will continue to be a significant number of 
Presidential nominees to positions requiring Senate confirmation during 
the third year of the current administration. OGE performs a key role 
in clearing these nominees, a process which is designed to help them 
understand the application of the conflict of interest requirements to 
their government service and to secure their agreement to take the 
necessary steps to resolve potential conflicts of interest. Our goal is 
to review nominee financial disclosure statements in a timely manner to 
avoid any unnecessary delay in the nomination and confirmation process. 
Once an individual is appointed, OGE follows through to see that any 
agreements made by an appointee to address potential conflicts of 
interest are carried out. In addition, over this period, OGE will 
continue to conduct a second level review of over 1,000 annual and 
termination financial disclosure statements filed by Presidential 
appointees each year.
    Through the use of improved technology OGE will enhance the 
financial disclosure reporting and review process by developing a 
confidential financial disclosure form that can be filed 
electronically. In addition, OGE will modify the confidential financial 
disclosure form in order to make the reporting process more streamlined 
and user friendly. OGE will also partner with the Department of the 
Army to develop an electronic filing system for public financial 
disclosure filers. During fiscal year 2007, this electronic filing 
system will be available to those agencies within the Department of 
Defense that meet the web-based security requirements set by the 
Department of the Army. OGE will continue to partner with the 
Department of the Army in an attempt to make the electronic filing of 
public financial disclosure forms more widely available.
    OGE prepared and submitted two reports to Congress in fiscal years 
2005 and 2006 pursuant to the Intelligence Reform and Terrorism 
Prevention Act of 2004 (Public Law 108-458). The first report, which 
was delivered in March 2005, evaluated the executive branch financial 
disclosure requirements. The second report, which OGE compiled in 
consultation with the Department of Justice, and delivered in January 
2006, examined the criminal conflict of interest laws as they pertain 
to the executive branch. OGE will work with the Office of Management 
and Budget and the Congress on any Congressional efforts to consider 
and implement any changes identified by these two reports. OGE will 
take the necessary steps to revise its financial disclosure forms and 
regulations to implement any changes in existing law. In addition to 
implementing any changes in legislative mandates, OGE also plans to 
improve the effectiveness of ethics policy by publishing a proposed 
regulation revising the Standards of Conduct for Executive Branch 
Employees.
    OGE expects to purchase some new computer hardware and software. 
This includes security software to protect our network and keep it 
FISMA compliant, software necessary to keep our network up to date, and 
hardware to replace computers that fail. In addition, OGE will 
implement a comprehensive update to its web site making the information 
contained on the site more accessible to a variety of users including, 
designated agency ethics officials, Congress, the media, and the 
public.
    OGE will continue to provide international technical assistance in 
the areas of anti-corruption and good governance programs in support of 
international agreements and regional initiatives of the United States 
in general and the Departments of State and Justice in particular. For 
example, during the fiscal year, OGE will, as a principal member of the 
U.S. delegation, represent the United States before the Group of States 
Against Corruption (GRECO) in the plenary discussion and adoption of a 
report on GRECO's evaluation of the U.S. adherence to certain of the 
adopted Guiding Principles in the Fight Against Corruption. OGE will 
also assist the State Department in the mutual evaluation mechanism 
that is a follow-up to the Inter-American Convention Against Corruption 
and with regional good governance/anti-corruption initiatives such as 
Good Governance for Development for the Middle East and North Africa 
states (MENA) and the Asian Pacific Economic Cooperation (APEC). 
Primarily at the request of the State Department, OGE continues to 
provide briefings to about 40 foreign delegations visiting Washington 
each year.
    As part of our ongoing education and training efforts, OGE will 
prepare and conduct ethics training for agency ethics officials. To 
reach ethics officials outside the Washington area, OGE plans to offer 
three regional symposia. In addition, OGE will hold the fifteenth 
National Government Ethics Conference for approximately 700 ethics 
practitioners. These events provide an introduction to the ethics rules 
and laws for new agency officials and advanced updates and refresher 
sessions for those who are more experienced. Attendees will include 
ethics practitioners, trainers, counselors, financial disclosure 
reviewers, and enforcement officials. In addition, we also plan to 
develop a 2-day orientation program for new ethics officials and offer 
the program at OGE headquarters as well as on a regional basis as 
needed.
    OGE desk officers will maintain their day-to-day communications 
with agencies assigned to them. This continuing liaison between OGE and 
agency ethics staffs enables OGE to respond to the needs of the 
agencies in a timely and accurate manner, as well as provide OGE with 
an early warning that an agency ethics program is deficient or has 
problems that require specialized attention. OGE plans to conduct 
employee surveys regarding individual agency ethics programs, and the 
information gathered through these surveys provides OGE with a better 
basis on which to judge the effectiveness of the individual agency 
programs under review and of the overall ethics program. We also plan 
to conduct ethics program evaluations in 35 Federal agencies, regional 
offices and military commands. In addition, OGE will develop a program 
of self-assessment for agencies to use in years that OGE is not 
scheduled to perform a program review.
    OGE also plans to increase the effectiveness of our support to 
agencies' ethics programs by raising awareness of ethical issues 
arising from the presence of contractors in the Federal work place. For 
example, during fiscal year 2006, OGE participated in and contributed 
to a National Academy of Public Administration working group on the 
issues presented by the multi-sector workforce. We will continue to 
expand our outreach activities to Federal agencies and contractors by 
providing educational materials and presentations on ethics issues that 
arise when contractors work side-by-side with Federal employees. 
Finally, we will also expand our educational and outreach activities to 
Federal agency procurement officials in order to increase their 
awareness of various ethical issues that arise from interacting with 
contractors.
    The programs and activities we have described are just some of 
those envisioned for fiscal year 2007. We are pleased with the past 
success of the executive branch ethics program and look forward to the 
challenge of maintaining and enhancing the quality of the program.
                                 ______
                                 
 Prepared Statement of John E. Potter, Postmaster General/CEO, United 
                         States Postal Service

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

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

                      TAX COURT CASES AND WORKLOAD

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

                    FISCAL YEAR 2007 BUDGET REQUEST

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

               OTHER MATTERS OF CONCERN TO THE TAX COURT

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

                               CONCLUSION

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

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

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

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

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

                     ASSISTANCE TO FDIC MANAGEMENT

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

               OIG MANAGEMENT AND OPERATIONAL INITIATIVES

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

                             BUSINESS PLAN

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

               THE OIG'S FISCAL YEAR 2007 BUDGET REQUEST

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

                       BUDGET BY STRATEGIC GOALS

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



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

          FISCAL YEAR 2007 BUDGET BY MAJOR SPENDING CATEGORIES

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



                           CONCLUDING REMARKS

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

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

                     PROGRESS ON SPENDING RESTRAINT

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

                           DELIVERING RESULTS

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

                              OMB'S BUDGET

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

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

                        BACKGROUND ON THE BOARD

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

              THE BOARD'S FISCAL YEAR 2007 BUDGET REQUEST

    The budget request submitted by the Board for fiscal year 2007 
totals $25,618,000. This budget level mirrors the Board's fiscal year 
2006 budgetary authority enacted by Congress, adjusted for a decrease 
in funding associated with the one-time build-out cost in fiscal year 
2006 for the Board's new office space and offset by the fiscal year 
2007 pay raise as well as the amount required to physically move to the 
new space. The Board also seeks resources and authority to operate at 
150 FTEs, the current staffing level authorized by Congress.
    The Board is requesting $375,000 for moving services to complete 
the agency's relocation by the General Services Administration (GSA) 
from its current physical site. The Board has been at its current site 
for the duration of its 10-year lease, which expires early in 2007. The 
Board cannot remain in its current building and must find new space 
because the building owners intend to vacate the building to provide 
for extensive renovation and modernization. GSA had the replacement 
lease prospectus approved by Congress during 2004. GSA advertised the 
lease solicitation during the summer of 2005 and will award the lease 
by the summer of 2006. GSA will begin the design and interior 
construction in 2006 with an anticipated move-in date of January 2007. 
Funds included in the fiscal year 2006 appropriations bill will provide 
GSA with the resources to schedule the network and telecommunication 
connections and interfaces and perform the required structural changes 
to the leased space to support the Board's mission. The Board is 
requesting funds in fiscal year 2007 for the physical relocation of its 
furniture, equipment and files to the new space, as well as an amount 
to pay for the new level of rent.
    The Board would use the remaining additional funds requested to 
cover salary and employee benefit costs associated with the fiscal year 
2006 and fiscal year 2007 pay increase and increases associated with 
employee health benefit and retirement costs. Unlike many agencies, 
there is little room in the Board's budget to absorb a pay increase 
without additional resources, because fixed costs, including salary and 
rent, comprise about 95 percent of the agency's expenses. Absorbing 
even a small amount of the pay increase would impair the Board's 
ability to perform its statutory mission.
    The requested authorization for 150 FTEs will enable the Board to 
hire staff to replace retirement eligible staff prior to their 
anticipated retirement date. Currently, 47 employees, or 34 percent of 
the Board staff, are retirement eligible. Several retirements can be 
expected in the near future. Having the flexibility to hire qualified 
people when they are available is particularly important for an agency 
that must hire professionals with technical expertise when they are 
available in the labor market.
    Consistent with appropriation acts for past fiscal years, the Board 
requests a provision allowing user fee collections to be credited to 
the appropriation as offsetting collections and used for necessary and 
authorized expenses to the extent that they are collected. The overall 
budget request reflects the workload that is expected and the statutory 
and regulatory deadlines associated with the resolution of the cases 
filed.

                       OVERALL GOALS OF THE BOARD

    The Board seeks to resolve matters brought before it fairly and 
expeditiously. Through use of its regulatory exemption authority, 
streamlining of its decisional process and the regulations, and 
consistent application of legal and equitable principles, the Board 
seeks to facilitate commerce by providing an effective forum for 
efficient dispute resolution and facilitation of appropriate business 
transactions. The Board continues to strive to develop, through 
rulemakings and case disposition, new and better ways to analyze unique 
and complex problems, to reach fully justified decisions more quickly, 
and to reduce the costs associated with regulatory oversight. The Board 
will continue to:
  --strive for a more streamlined process for the expeditious handling 
        of rail rate reasonableness and other complaint cases in an 
        effort to provide additional regulatory predictability to 
        shippers and carriers;
  --diligently process cases before the Board and ensure that 
        appropriate market-based transactions in the public interest 
        are facilitated;
  --adhere to all statutory deadlines for the resolution of matters 
        pending before the Board;
  --encourage new opportunities for the various sectors of the 
        transportation community to work cooperatively with the Board 
        and with one another to find creative solutions to persistent 
        industry and/or regulatory problems involving carriers, 
        shippers, employees, and local communities;
  --work to ensure the provision of rail service that is responsive to 
        the needs of customers; and
  --ensure that the Board's processes are open and transparent to the 
        public.

   NATIONAL RAILROAD PASSENGER CORPORATION (AMTRAK) DIRECTED SERVICE 
                               PROVISION

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

           FISCAL YEAR 2006 AND 2007 ACTIVITIES OF THE BOARD

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

                                SUMMARY

    The Board's budget request would ensure the resources needed for 
the Board to continue to implement its responsibilities expeditiously 
and effectively as Congress intends. I appreciate the opportunity to 
submit this statement for the record and would be happy to respond to 
any questions that the committee may have about the Board's fiscal year 
2007 budget request.
                                 ______
                                 
         Prepared Statement of the Federal Election Commission

    Mr. Chairman, Ranking Member Murray, and members of the committee, 
it is my privilege to present the Federal Election Commission's (FEC's) 
fiscal year 2007 appropriation request. To begin, on behalf of the 
agency, I thank you for last year's appropriation. Your bipartisan 
support of the FEC budget has enabled us to continue to implement the 
Bipartisan Campaign Reform Act of 2002 (BCRA), which amended the 
Federal Election Campaign Act of 1971. We have used those funds to 
continue a process of constantly seeking to improve the FEC's operation 
in all three of its core missions: disclosure, enforcing compliance 
with the law, and operation of the presidential matching funds system. 
Despite some financial belt-tightening in fiscal year 2006, we can see 
a measurable improvement in the FEC's ability to meet its core 
functions.
    Our fiscal year 2007 appropriation request is for $57,138,000, an 
increase of $2,985,000 or 5.51 percent over our enacted fiscal year 
2006 appropriation. This increase will permit the agency to continue 
its current functions while meeting statutorily mandated salary and 
benefit increases. This year, the FEC is seeking only a modest increase 
over its fiscal year 2006 budget of $54,153,000 ($54,700,000, less the 
fiscal year 2006 across-the-board rescission). The fiscal year 2007 
request represents a continuation of fiscal year 2006 funding levels, 
adjusted for inflation and salary and benefit increases. As such, it 
represents essentially a Current Services request for fiscal year 2007, 
with no additional funds or staff for new programs or initiatives. I am 
pleased to report this request conforms to the President's fiscal year 
2007 budget request for the FEC. We have provided detailed support for 
this request in our fiscal year 2007 budget justification.
    I would also like to note that our fiscal year 2007 request sets 
the agency's authorized personnel level at 375 FTE, a decrease of 16 
FTE from our previous authorized level of 391. Although the agency is 
authorized for 391 FTE in fiscal year 2006, we found it necessary to 
reduce staffing in order to handle the increased cost of operations and 
to fund some non-recurring expenses in fiscal year 2006. As spelled out 
in our fiscal year 2006 Management Plan, the FEC's projected FTE 
utilization for fiscal year 2006 will be approximately 380 FTE. In 
fiscal year 2007, we estimate that an FTE level of 375 will enable us 
to maintain operations at the current service level and absorb the full 
cost of the fiscal year 2007 COLA.
    Generally, the Commission submits a package of legislative 
recommendations to the President and the Congress in March. However, 
this year the district court's decision in Shays v. FEC required the 
Commission to rewrite some portion of nine of its previous rules in a 
condensed timeframe. Therefore, the annual review of legislative 
recommendations will be submitted at a later date. In the meantime, 
there is one legislative change that the Commission unanimously decided 
to include in its fiscal year 2007 budget request to Congress.
    We are seeking statutory authority to charge and use registration 
fees for FEC-hosted conferences. The Commission has always relied on 
effective outreach and our informational programs to reduce violations 
due to lack of understanding of the law. These programs, such as the 
800 informational line, the campaign finance workshops and seminars, 
and the campaign guides and brochures, have all received high marks 
from the election community, the media, and the public. Unfortunately, 
due to budget constraints we found it necessary to cancel our campaign 
finance workshops and seminars for 2006. In order to preserve these 
conferences in the future, we are seeking legislative authority to 
charge and use registration fees to help offset the costs of these 
conferences. If legislative authority is not granted, the Commission 
will require additional appropriated funds in order to host future 
conferences.
    Over the past few years, the FEC has achieved several major 
successes, while also seeing a steady improvement in its operations. 
These significant achievements include meeting statutory and court 
deadlines for implementing BCRA, successfully defending legal 
challenges to the constitutionality of BCRA, and settling the largest 
enforcement case in the history of the agency. In addition, the agency 
has expanded and invigorated its compliance program and improved the 
timeliness of reporting. These successes are the result of FEC efforts 
and support from our Congressional oversight committees.
    I now will provide a brief overview of the FEC's three core program 
areas and relate those areas to the agency's fiscal year 2007 budget 
request.

                           DISCLOSURE PROGRAM

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

                           COMPLIANCE PROGRAM

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

                         PUBLIC FUNDING PROGRAM

    The Commission also administers the Presidential public funding 
program. During fiscal year 2007, approximately 55 FTE from the Audit 
Division, Office of General Counsel, and Information Technology 
Division will be directly involved in this program. Their 
responsibilities will include completing the audits of the remaining 
two candidates who received matching funds for the 2004 election, and 
the two general election candidate committees, for a total of four 
Presidential audits continuing from the 2004 cycle. In addition, they 
will be preparing for the 2008 Presidential election cycle by replacing 
the sampling software used to process matching funds requests and 
updating the Commission's ``Guideline for Presentation in Good Order''. 
The Guideline sets forth the uniform format required for the 
presentation of matching funds requests and specifies the quality of 
content standard that must be met.
    On a related matter, we believe it is appropriate to bring to your 
attention the potential shortfall in the Presidential Public Funding 
Program. There was a brief shortfall in the February primary matching 
payments for the 2004 Presidential election, which was restored the 
following month with the February deposits to the Fund. This was the 
only shortfall for the 2004 cycle. We did not experience a major 
shortfall for the 2004 Presidential election because several major 
candidates decided not to take Federal matching funds for the 2004 
primaries. This may change, however, in future elections. The Treasury 
Department maintains the matching fund account, which is comprised of 
money derived from a taxpayer check-off system. Shortfalls in 1996, 
2000, and 2004 occurred for several reasons. First, the Treasury 
Department does not consider expected election-year check-off proceeds 
to be available when calculating payout resources on January 1 of the 
election year. Second, while payouts under the program have been 
adjusted upward, due to inflation, the $3 check-off amount has not been 
increased since 1993. Third, the number of taxpayers participating in 
the check-off has been declining. Fourth, the ``front-loading'' of 
primaries and caucuses, which puts a premium on early fundraising, has 
resulted in a high demand for matching payments early in the election 
year. Finally, the eligibility requirements for matching funds have not 
been adjusted since 1974, and many candidates can qualify for public 
funding as a result. Absent legislative action, the shortfall problem 
will recur in future elections.
    The foregoing summarizes the FEC's fiscal year 2007 budget request. 
For a more detailed review of this request, I would urge members of the 
committee to consult our budget justification, which includes charts 
delineating how our budget request would be allocated and how it 
compares to previous years. It also demonstrates how the FEC has 
developed and used strategic and performance planning.
    Again, I thank you, Mr. Chairman and the committee, for your 
continued support and the opportunity to present our fiscal year 2007 
budget request.
                                 ______
                                 
    Prepared Statement of Terrence L. Bracy, Chair, Morris K. Udall 
                               Foundation

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

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

                  OVERVIEW OF THE NEIGHBORWORKS SYSTEM

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

                PROJECTED OUTCOMES FOR FISCAL YEAR 2007

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

                    PRIORITIES FOR FISCAL YEAR 2007

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

                               CONCLUSION

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

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

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

    Mr. Chairman and members of the subcommittee, thank you for 
providing me with this opportunity to discuss the President's fiscal 
year 2007 request for appropriations for the Office of the Inspector 
General. The total request for the Office of the Inspector General is 
$17,764,000 which is $452,000 below the amount enacted in fiscal year 
2006. Of this amount, $1,598,000 is from the salaries and expenses/
general fund and $16,166,000 is from the trust funds. These resources 
are requested to perform our core functions which include:
  --Conduct audits of agency programs and operations, primarily 
        carriers participating in the Federal Employees Health Benefits 
        Program (FEHBP), associated information systems, and internal 
        agency operations and financial systems;
  --Provide investigative oversight of the OPM-administered employee 
        benefit programs; and
  --Issue administrative sanctions, including debarments, suspensions, 
        and civil monetary penalties, to health care providers who pose 
        a financial risk to the FEHBP itself or a health care risk to 
        persons who receive health insurance coverage through the 
        FEHBP.
    The Office of the Inspector General recognizes that oversight of 
the retirement and health and life insurance trust funds administered 
by OPM is, and will remain, its most significant challenge. These trust 
funds are among the largest held by the United States Government. Their 
assets totaled $715.8 billion in fiscal year 2005, their receipts were 
$85.1 billion, and their annual outlays were $94.4 billion. The amounts 
of their balances are material to the integrity of the government's 
financial position. I continue to allocate the vast majority of the 
Office of the Inspector General's efforts and resources to trust fund 
oversight, and we remain fully committed to trust fund activities.
    OPM makes outlays from the retirement trust funds in the form of 
payments to millions of annuity recipients. The health insurance trust 
fund provides payments to approximately 270 health insurance plans 
nationwide. In turn, the health insurance carriers pay millions of 
claims for services filed by their enrollees and health care providers. 
We have shown through our investigations and audits that such health 
insurance payments may be at risk through improper, inaccurate or 
fraudulent claims.
    We are obligated to Federal employees and annuitants to protect the 
integrity of their earned benefits. Our audit and criminal 
investigative work reduces losses due to fraud and improper payments 
and recovers misspent funds whenever possible. We have a special 
obligation to the Federal agencies and the American taxpayers who 
provide the majority of the funding.
    The Office of the Inspector General has achieved an impressive 
record of cost effectiveness. Audits and criminal investigations of the 
OPM administered trust fund programs have resulted in significant 
financial recoveries to the trust fund and commitments by program 
management to recover additional amounts. Since fiscal year 1992, these 
recoveries and commitments total approximately $1.2 billion which is 
approximately $10 of positive financial impact for each direct program 
dollar spent. During fiscal year 2005, the positive financial impact 
exceeded $121.7 million, and current estimates for fiscal year 2006 and 
fiscal year 2007 are $130 million and $115 million respectively. In 
addition, we believe that audits and criminal investigations provide a 
significant deterrent against future instances of fraud, waste, and 
abuse.
    With the additional resources received over the past few years, the 
Office of the Inspector General has established 21 investigative field 
offices. We have determined that the most effective deployment of 
investigative staff is to locate them in areas of the country where 
FEHBP and retirement benefits are more concentrated. Experience has 
shown that criminal investigators located in these areas often work in 
cooperation with other law enforcement entities similarly located 
resulting in additional criminal leads and better protection of OPM 
programs. In many instances, criminal investigators located outside of 
Washington, DC work exclusively on cases referred to them by local 
authorities. During fiscal year 2005, investigative work resulted in 38 
arrests, 43 indictments, and 20 convictions and we are projecting 
similar outcomes in fiscal years 2006 and 2007.
    During fiscal year 2007, we will continue to conduct audits of 
pharmacy benefit managers (PBMs). The premiums paid for prescription 
drug coverage have risen exponentially over the last 10 years and 
allegations against PBMs have also increased. It is estimated that 
approximately $6 billion was paid during 2004 in prescription drug 
premiums to experience-rated carriers by the Office of Personnel 
Management and Federal employees. This represents approximately 26 
percent of experience-rated carrier premiums paid for health benefits 
coverage for Federal employees and annuitants.
    Also during fiscal year 2007, we will further our development of a 
data warehouse of health benefits claims. A data warehouse offers the 
best opportunity for detecting erroneous health benefit payment 
transactions by medical providers, insurance carriers and subscribers 
by accumulating all benefit claims for all fee-for-service insurance 
carriers in a single data repository. This effort will enhance our 
current claims reviews by enabling the auditors to target certain types 
of potential claim payment errors on a program-wide rather than on a 
plan-by-plan basis. This will provide a significant improvement in our 
audit efficiency and effectiveness by offering us the opportunity to 
address significant issues one time only, instead of multiple times per 
year and to recover overcharges to the program when appropriate.
    The data warehouse also provides information enabling our criminal 
investigative staff to react quickly to criminal investigative leads. 
For example, the OIG investigators are able to determine the potential 
program risks associated with an identified provider or subscriber 
fraud allegation, and take appropriate action in a matter of hours 
instead of the days or weeks currently required.
    Our administrative sanctions program has continued to improve its 
effectiveness in protecting FEHBP and its enrollees against 
untrustworthy health care providers. This program enforces the FEHBP 
sanctions statute, which authorizes suspension or debarment of 
providers on the basis of 18 different categories of violations. The 
most frequently-encountered violations represent criminal convictions 
or loss of professional licensure. The highest priority sanctions cases 
involve providers who are the subject of investigation by our Office of 
Investigations. We have also developed a state-of-the-art capability to 
obtain sanctions-related information online and integrate it into our 
decision-making processes. With the nature and extent of electronically 
accessible information constantly growing, we are now able to identify 
violations involving providers nationwide who are directly associated 
with FEHBP as members of preferred provider organization networks and 
or who have actually submitted claims to FEHBP carriers. We select 
cases for action on the basis of the seriousness of the provider's 
violations and the risks that the provider poses to the FEHBP and its 
subscribers. We currently have over 29,350 active debarments and 
suspensions in effect.
    Thank you for this opportunity to present my resource request for 
fiscal year 2007.
                                 ______
                                 
Prepared Statement of the Honorable Linda M. Springer, Director, Office 
                        of Personnel Management

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

                OPM'S NEW STRATEGIC AND OPERATIONAL PLAN

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

           RETIREMENT CLAIMS PROCESSING AND BENEFITS PROGRAMS

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

                HUMAN RESOURCES MANAGEMENT (HRM) REFORM

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

            IMPLEMENTING HUMAN CAPITAL STANDARDS FOR SUCCESS

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

                    HUMAN RESOURCES LINE OF BUSINESS

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

                      SECURITY-RELATED ACTIVITIES

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

                    OFFICE OF THE INSPECTOR GENERAL

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

                             REVOLVING FUND

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

                       MANDATORY PAYMENT ACCOUNTS

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

                               PAY RAISE

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

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

                        OVERVIEW OF THE REQUEST

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

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

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

                               CONCLUSION

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

                              INTRODUCTION

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



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

               DISTRIBUTION AND MANAGEMENT OF HAVA FUNDS

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



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

              AIDING IN THE IMPROVEMENT OF VOTING SYSTEMS

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

             NATIONAL CLEARINGHOUSE OF ELECTION INFORMATION

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

                 GUIDANCE AND INFORMATION TO THE STATES

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

                             ADMINISTRATION

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

                               CONCLUSION

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



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

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

                            WHAT WE DO TODAY

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

                           AREAS OF EMPHASIS

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

                          FOCUSED YET FLEXIBLE

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

                                CLOSING

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

    [Clerk's note.--The following testimonies were received by 
the Subcommittee on Transportation, Treasury, the Judiciary, 
Housing and Urban Development, and Related Agencies for 
inclusion in the record. The submitted materials relate to the 
fiscal year 2007 budget request.
    The subcommittee requested that public witnesses provide 
written testimony because, given the Senate schedule and the 
number of subcommittee hearings with Department witnesses, 
there was not enough time to schedule hearings for 
nondepartmental witnesses.]

                Prepared Statement of Independent Sector

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

          CONTINUE RESTORATION OF THE IRS ENFORCEMENT PROGRAM

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

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

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

                               CONCLUSION

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

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

    Chairman Bond, Ranking Member Murray and members of the 
subcommittee, Easter Seals appreciates this opportunity to share the 
successes and needs of Easter Seals Project ACTION.

                        PROJECT ACTION OVERVIEW

    The Transportation appropriations process initiated Project ACTION 
in 1988 by providing funding to the Federal Transit Administration to 
undertake this effort with Easter Seals. We are indeed grateful for 
that initiative and the ongoing strong support of this subcommittee in 
subsequent years.
    Following its initial round of appropriations, Congress authorized 
assistance to Project ACTION in 1990 with the passage of ISTEA, 
continued the authorization in 1997 in TEA-21 and reauthorized the 
project in 2005 as part of SAFETEA-LU. The strong interest and support 
of all members of Congress has been greatly appreciated by Easter Seals 
as it has pursued project ACTION's goals and objectives.
    Since the project's inception, Easter Seals has administered the 
project through a cooperative agreement with the Federal Transit 
Administration. Through steadfast appropriations support, Easter Seals 
Project ACTION has become the Nation's leading resource on accessible 
public transportation for people with disabilities. The current project 
authorization level is $3 million, and Easter Seals is pleased to 
request the appropriation of that sum for fiscal 2007.
    The strength of Easter Seals Project ACTION is its continued 
effectiveness in meeting the congressional mandate to work with both 
the transit and disability communities to create solutions that improve 
access to transportation for people with disabilities of all ages and 
to assist transit providers in complying with transportation provisions 
in the Americans with Disabilities Act (ADA).
    The activities of the project are guided by input from a national 
steering committee that includes representatives from transportation 
and disability organizations. Easter Seals Project ACTION has worked 
effectively with the Department of Transportation under four 
Presidents, and numerous Department of Transportation (DOT) Secretaries 
and Federal Transit Administration (FTA) Administrators. Today, Project 
ACTION is working closely with Secretary Mineta and the FTA. Secretary 
Mineta, who worked on the original authorization of Project ACTION, has 
worked closely with us since taking over DOT.
    Easter Seals Project ACTION was also heavily featured in the 
President's New Freedom Initiative Progress Report released in 2004. 
This demonstrates how closely the administration is working with 
Project ACTION to reach our shared goal of a safe, accessible, 
reliable, efficient and affordable transportation for and by citizens 
with disabilities at the local, State, regional and national levels 
throughout the United States.

                SUPPORT FOR EASTER SEALS PROJECT ACTION

    Easter Seals Project ACTION's successes are diverse and the value 
of the Project to both the transit and disability communities can be 
well documented. For instance, Barry Barker, Executive Director of the 
Transit Authority of River City (Louisville, KY) states that, ``Easter 
Seals Project ACTION's support has enhanced our ability to maximize the 
quality of service we provide to all of our customers. The project 
helps us provide our customers with the mobility necessary to fully 
participate in the community.''
    Maureen McCloskey, National Advocacy Director of the Paralyzed 
Veterans of America states that, ``The forum that Easter Seals Project 
ACTION has provided has created a dynamic dialogue between the 
disability and transit communities that has resulted in increased 
access to transportation for people with disabilities.''

       EASTER SEALS PROJECT ACTION WORKING AT THE COMMUNITY LEVEL

    Among the programs pursued by the project in the recent period have 
been efforts aimed at increasing community capacity to meet the 
transportation needs of people with disabilities. For instance, in 
2001, Easter Seals Project ACTION initiated the first Mobility Planning 
Services (MPS) Institute. The latest Institute will take place in April 
of this year and approximately 25 communities will take place in the 2-
day event. The teams are representing localities across the country 
including Thomas Jefferson District, VA; Harford County, MD; Montgomery 
County, PA; Aiken County, SC; Santee Wateree Region, SC; Jacksonville, 
FL; Louisville, KY; Ann Arbor, MI; Genesee County, MI; Lake County, OH; 
Polk County, MN; Washburn County, WI; Capital Area Region, TX; Valencia 
County, NM; Spearfish, SD; Orange County, CA; Fairbanks County, AK; and 
Multnomah-Clackamas-Washington Counties, OR. This was the fourth group 
of communities to go through the MPS training. The first three groups 
of communities remain active and working with Project ACTION to 
continue their work at the community level. To participate in the 
Institute, each community had to identify a leadership team to attend 
the training. The leadership team had to consist of representatives 
from transit providers, disability service providers and disability 
advocacy organizations. This team approach will assure that all 
stakeholders are involved in implementing MPS. The greatest success so 
far of the MPS concept has been that it provides the disability 
community and the transportation industry an opportunity to develop 
tools for working together where in the past there had often been a 
lack of communication and in some cases even animosity. By implementing 
MPS, communities do a better job of meeting the transportation needs of 
people with disabilities and therefore better meet the transportation 
needs of all residents. Communities that participate in MPS receive 
ongoing in-depth technical assistance from Project ACTION staff ranging 
from access to Project ACTION materials to on-site training and 
facilitation by Project ACTION staff.

         EASTER SEALS PROJECT ACTION WORKING AT THE STATE LEVEL

    Project ACTION has partnered with the FTA on several initiatives 
designed to increase the capacity of States to support accessible 
transportation for people with disabilities.
    A good example of this collaboration is the work that Project 
ACTION is doing with the FTA to support the success of the multi-
Federal Department ``United We Ride'' initiative. Project ACTION helped 
facilitate a national meeting in March of 2003 of Governor-appointed 
representatives from State Departments of Labor, Transportation, 
Education and Health and Human Services. Forty-six States and 
territories participated in this forum that was one of five elements of 
an FTA effort to bring together Federal and State agencies to help 
identify, plan and alleviate barriers to human service transportation 
coordination. Project ACTION is assisting in the dissemination of the 
FTA developed Framework for Action planning process guide to help 
States and communities build and operate coordinated transportation 
systems and is providing technical assistance on its use throughout the 
country.

       EASTER SEALS PROJECT ACTION WORKING AT THE NATIONAL LEVEL

    Some of the materials that Easter Seals Project ACTION has 
developed over the years include:
  --A toolkit for assessing bus stop accessibility;
  --A guide for employment professionals working with people with 
        disabilities on how to solve transportation issues that serve 
        as a barrier to employment;
  --A public transportation curriculum for children with disabilities 
        in grade 8-12; and,
  --A guide to transportation resources in rural communities for people 
        with disabilities.
    All resource materials available from Easter Seals Project ACTION 
activities are available free of charge through the Project ACTION 
clearinghouse on the Project ACTION website: www.projectaction.org.
    As mentioned, Project ACTION staff also are involved in 
continuously providing technical assistance to transit providers, 
nonprofit human service organizations, people with disabilities, and 
the general public. The forms of technical assistance provided are 
provided based on the determination of what would be the most helpful 
in the situation being addressed. Assistance from Project ACTION ranges 
from the delivery of basic information in the form of brochures from 
our national clearinghouse to telephone, e-mail, participation in the 
training program and on single or ongoing on-site work.

            CONTINUING NEED FOR EASTER SEALS PROJECT ACTION

    Access to transportation is a vital issue for people with 
disabilities. For many people with disabilities, a lack of accessible, 
affordable pubic transportation is the primary barrier to employment, 
education and participation in community life. In his New Freedom 
Initiative, President Bush recognized the importance of accessible 
transportation for people with disabilities, and has proposed an 
increase in Federal support for promoting innovative and alternative 
transportation solutions for people with disabilities. As these 
proposals are implemented, it will become increasingly important that 
the resources and skills, relationships and knowledge that Easter Seals 
Project ACTION has fostered remain strong. Should the appropriations 
process support this New Freedom Initiative, Project ACTION is 
committed to working with DOT on implementation.
    There is a growing need for outreach by Project ACTION to specific 
populations. While Project ACTION has historically worked with rural 
communities to help address their transportation issues, the lack of 
access for rural residents with disabilities is still unacceptable. 
Easter Seals national headquarters and Project ACTION are working 
together to coordinate efforts to better serve rural residents with 
disabilities in a variety of service areas including transportation. 
Further, as the population ages, there is also a need to develop and 
provide additional specific resources and assistance to transit 
providers and older passengers. Since most people will experience some 
level of disability as they age and require accessible transportation, 
Project ACTION's resources will again be invaluable as transit 
providers struggle to meet the needs of this new wave of riders.

                        FISCAL YEAR 2007 REQUEST

    In order to continue the outstanding work of Easter Seals Project 
ACTION, Easter Seals national headquarters respectfully requests that 
$3 million be allocated in fiscal 2007 to the Department of 
Transportation for project activities.
    Mr. Chairman, thank you for the opportunity to present this 
testimony to the subcommittee. Your efforts have improved the 
accessibility of transportation for persons with disabilities and the 
ability of the transportation community to provide good service to all 
Americans. Easter Seals Project ACTION looks forward to continuing to 
work with you toward the pursuit of these objectives.
                                 ______
                                 
               Prepared Statement of the Skokomish Tribe

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

                          BACKGROUND AND NEED

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

                           STATUS OF PROJECT

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

                    STATE, LOCAL AND FEDERAL SUPPORT

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




                                 ______
                                 
 Prepared Statement of the California Industry and Government Central 
                California Ozone Study (CCOS) Coalition

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

                        COOPERATIVE PARTNERSHIP

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

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

                             TRANSPORTATION

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

                         COMMUNITY DEVELOPMENT

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

                      FISCAL YEAR 2007 IRS BUDGET

     NTEU represents 150,000 Federal employees in 30 Federal agencies 
and departments, including the men and women who work at the Internal 
Revenue Service. I appreciate the opportunity to provide the 
subcommittee with comments on the IRS budget for fiscal year 2007.
    There are several items in the administration's IRS budget that 
NTEU believes would be detrimental to the IRS's mission. The two most 
egregious items include the administration's plans to contract out tax 
collection to private collection agencies starting this summer, and an 
inadequate budget request that will prevent the IRS from continuing to 
improve its customer service record while bolstering enforcement.

                                 BUDGET

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

                            SPAN OF CONTROL

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

                            CUSTOMER SERVICE

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

                         PRIVATE TAX COLLECTION

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

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

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

                               PAY PARITY

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

                            CONTRACTING OUT

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

                                  RIFS

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

                               CONCLUSION

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

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

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

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

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

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

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

                   NEW TERMINAL BUILDING--$4,500,000

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

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

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

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

                              INTRODUCTION

    The Board was established by section 502 of the Rehabilitation Act 
and is the only Federal agency whose mission is accessibility for 
people with disabilities. The Board has three primary programs: 
guidelines and standards development; technical assistance, training, 
and research; and enforcement.
    The Board is responsible for developing accessibility guidelines 
under the Americans with Disabilities Act, the Architectural Barriers 
Act, and the Telecommunications Act. The Board is also responsible for 
developing standards under section 508 of the Rehabilitation Act for 
accessible electronic and information technology used by Federal 
agencies. Additionally, the Board has responsibilities under the Help 
America Vote Act to serve on the Election Assistance Commission's Board 
of Advisors and Technical Guidelines Development Committee.
    The Board provides technical assistance and training on each of its 
guidelines and standards, and on a variety of other accessibility 
issues. The Board also maintains a small research program that develops 
technical assistance materials and provides information needed for 
guidelines and standards development.
    Finally, the Board enforces the Architectural Barriers Act, which 
requires federally financed facilities to be accessible.
    The Board has adopted this mission statement to guide its programs: 
The Board is the catalyst for achieving an accessible America. The 
statement recognizes that achieving an accessible America requires 
bringing together the public and private sectors.
    The Board has established long-range goals and annual objectives 
for its programs in accordance with the Government Performance and 
Results Act. The objectives are described in terms that permit future 
assessment regarding whether the objectives were achieved. To satisfy 
the requirements for an annual performance plan, this discussion and 
budget justification presents information under each of the Board's 
programs and reports on the results from fiscal year 2005 activities, 
reviews the planned fiscal year 2006 activities, and presents the 
fiscal year 2007 objectives.
    The Board's long range goals are to promote accessibility by being 
a:
  --Leader in developing and updating guidelines, standards, and codes 
        for accessibility;
  --Leader in information, education, and outreach on accessibility; 
        and
  --Leading partner with Federal agencies to make the Federal 
        Government a model of compliance with accessibility standards.
    The Board's strategies for achieving its long-range goals and 
annual objectives involve working with its stakeholders. The Board 
involves its stakeholders through advisory committees and review of 
draft guidelines and standards to establish consensus-based guidelines 
and standards that provide accessibility. The Board involves its 
stakeholders in developing and disseminating information, education, 
and outreach that will help covered entities understand and comply with 
the guidelines and standards. Where the Board has enforcement 
responsibilities over Federal agencies, the Board assists those 
agencies to achieve compliance with accessibility standards.
    The Board's programs will result in accessible buildings and 
facilities, transportation vehicles, telecommunications equipment, and 
electronic and information technology across our country and, 
ultimately, the full economic and social integration of people with 
disabilities into our society. Achieving these results will depend not 
only on the Board's activities, but also on the level of commitment and 
action taken by other Federal agencies, State and local governments, 
and businesses that are required to comply with or enforce the various 
laws that guarantee the civil rights of people with disabilities.

                  GUIDELINES AND STANDARDS DEVELOPMENT

    The Board's long-range goal is to be a leader in developing and 
updating guidelines, standards, and codes for accessibility. The Board 
will continue to develop and update accessibility guidelines and 
standards and to work cooperatively with organizations that develop 
codes and standards affecting accessibility through fiscal year 2007 
and beyond.
    In January 2006, the Board committed itself to three new rulemaking 
priorities. The three priorities include: (1) updating and revising the 
Section 508 standards for accessible electronic and information 
technology and the Telecommunications Act Accessibility Guidelines; (2) 
updating and revising the Americans with Disabilities Act (ADA) 
Accessibility Guidelines for Transportation Vehicles; and (3) 
rulemaking on a variety of communications access issues.
    Updating and revising the Section 508 standards and the 
Telecommunications Act Accessibility Guidelines is the Board's top new 
rulemaking priority. The Board plays a central role in the 
implementation of Section 508 and keeping our standards current is a 
vital part of this role. The telecommunications provisions in the 
section 508 standards are based on and are consistent with the Board's 
Telecommunications Act Accessibility Guidelines. Therefore, updating 
and revising the Section 508 standards and the Telecommunications Act 
Accessibility Guidelines should be done in one rulemaking. The Board 
plans to charter a Federal advisory committee in fiscal year 2006 to 
begin this rulemaking. The committee will include representation from 
other Federal agencies, disability organizations, industry trade 
associations, and others. It will also include representation from 
other countries and international standards-setting organizations so 
the new standards are harmonized with efforts being taken around the 
globe.
    Updating and revising the ADA Accessibility Guidelines for 
Transportation Vehicles is needed to address emerging technologies such 
as bus rapid transit and low floor vehicles. This rulemaking will be 
accomplished by holding a series of information meetings in fiscal year 
2006 and 2007 to collect information before issuing a proposed rule.
    Rulemaking on communications access issues will address features 
not already addressed, or not addressed fully, by the Board's 
guidelines such as interactive transaction machines, point of sale 
machines, drive-through machines, alerting devices for deaf and hard-
of-hearing individuals including carbon monoxide detectors and sleeping 
room applications, and public address systems. This rulemaking will be 
accomplished by holding a series of information meetings in fiscal year 
2006 and 2007 to collect information before issuing a proposed rule.
    The status of current guidelines and standards efforts is presented 
below.
Outdoor Developed Areas
    The Board's Outdoor Developed Areas Regulatory Negotiation 
Committee presented its report to the Board in September 1999. This 
committee developed new sections for parks, trails, camping and picnic 
areas, and beach access routes. In October 2001, the Board sponsored an 
information meeting on the final report of the Outdoor Developed Areas 
Regulatory Negotiation Committee. The meeting was held in Denver, CO 
during the annual meeting of the National Recreation and Park 
Association. The meeting was informal and provided an opportunity for a 
dialogue with Board members about the report.
    In September 2003, the Board decided to develop a proposed rule on 
outdoor developed areas using only its rulemaking authority under the 
Architectural Barriers Act. Taking this approach will help move this 
rulemaking forward and allow the Federal Government to take the 
initiative of addressing accessibility in this area before applying 
requirements to State and local governments or private entities. Future 
rulemaking under the ADA will be enhanced by the experience of 
implementing accessibility guidelines at Federal facilities and the 
Federal Government will gain experience in implementing the guidelines. 
This experience should prove important before applying them to other 
entities. The Board expects to publish a proposed rule for public 
comment in fiscal year 2006.
Passenger Vessels
    In September 1998, the Board convened a 21-member Passenger Vessel 
Access Advisory Committee to develop accessibility guidelines for 
cruise ships, ferries, excursion boats, and other vessels covered by 
the Americans with Disabilities Act. The Committee presented its report 
with recommendations to the Board in November 2000. The Board created 
an ad hoc committee of Board members to review the recommendations and 
begin developing a proposed rule on access to passenger vessels.
    On November 26, 2004, the Board published for public comment an 
advance notice of proposed rulemaking (ANPRM) which addressed access to 
and in smaller passenger vessels and a notice of availability (NOA) 
releasing draft guidelines that addressed access to and in larger 
passenger vessels. The Board is coordinating this rulemaking with the 
Department of Transportation. The Department of Transportation issued 
an ANPRM on operational issues affecting passenger vessels on the same 
date as the Board. The Board held three public hearings in fiscal year 
2005 to gather information and input on the ANPRM and the NOA. Over 150 
vessel designers and operators, pier operators, persons with 
disabilities, and others attended the hearings. The Board plans to 
issue a second draft of the accessibility guidelines before issuing a 
notice of proposed rulemaking. The second draft is expected to be 
published in fiscal year 2006.
Public Rights-of-Way
    In October 1999, the Board created a 32-member Public Rights-of-Way 
Access Advisory Committee to assist it in developing new guidelines for 
access to sidewalks, street crossings, and related pedestrian 
facilities. The Committee presented its report with recommendations to 
the Board in January 2001. The Committee will develop recommendations 
for a technical assistance manual for agencies and practitioners to 
support implementation of the future guidelines. In June 2002, the 
Board released draft guidelines on accessible public rights-of-way for 
public comment prior to issuing a notice of proposed rulemaking. Over 
1,400 comments were received on the draft. The Board also held one 
public hearing during the comment period. The Board has revised the 
draft guidelines based on public comments and issued a notice of 
availability in November 2005 placing the revised draft guidelines in 
our rulemaking docket. The purpose of placing the draft guidelines in 
the docket is to facilitate gathering of additional information for the 
regulatory assessment and the preparation of technical assistance 
materials to accompany a future rule. The Board is not seeking comments 
on the draft guidelines. The Board will issue a notice of proposed 
rulemaking in fiscal year 2007 and will solicit comments at that time.
Codes and Standards
    The Board works with model codes organizations and voluntary 
consensus standards groups that develop and periodically revise codes 
and standards affecting accessibility. We have voting membership in 
several codes and standards organizations, and monitor or are actively 
involved in the development or revision of dozens of other codes and 
standards affecting accessibility.
    By working cooperatively with codes and standards-setting bodies, 
Federal and private codes and standards will be more similar, or 
harmonized, and the Board will be more alert to non-Federal influences 
affecting its constituencies. Harmonization between Federal and private 
requirements will make it more likely that buildings and facilities 
will be accessible, thus reducing the necessity for complaints and 
litigation.
Fiscal Year 2005 Results--Rulemaking
    In fiscal year 2005, the Board:
  --Published a notice of availability of revised draft guidelines on 
        access to public rights-of-way.
Fiscal Year 2005 Results--Codes and Standards
    In fiscal year 2005, the Board:
  --Actively participated in the development of the NSPI-9 Standard for 
        Aquatic Recreation Facilities. This new standard addresses 
        water parks and water attractions. The American National 
        Standards Institute's (ANSI) Board of Standards Review approved 
        NSPI-9 2004 ``Aquatic Recreation Facilities'' as an American 
        National Standard.
  --Provided comment on revisions to the Manual on Uniform Traffic 
        Control Devices (MUTCD) which includes coverage of pedestrian 
        signals, intersection design issues, pavement markings, 
        signage, signalization, and other traffic control issues and 
        actively participated on the Signals Committee Task Force to 
        develop a draft standard for accessible pedestrian signals.
Fiscal Year 2006 Planned Activities--Rulemaking
    In fiscal year 2006, The Board will issue two proposed guidelines:
  --NPRM on outdoor developed areas.
  --Second draft of guidelines for passenger vessels.
    The Board will also charter a Federal advisory committee to begin 
the process of updating and revising the Section 508 standards and the 
Telecommunications Act Accessibility Guidelines.
Fiscal Year 2006 Planned Activities--Codes and Standards
    The Board worked with the Election Assistance Commission (EAC) in 
the development of voluntary voting system guidelines under the Help 
America Vote Act. The guidelines were made available in January 2006. 
The voting system guidelines were developed with the assistance and 
input of a Technical Guidelines Development Committee and Board of 
Advisors. Two Access Board members serve on these groups. In fiscal 
year 2006, the Board will continue working with the EAC on the next 
version of the guidelines.
Fiscal Year 2007 Objectives--Rulemaking
    In fiscal year 2007, the Board will issue one final rule and two 
proposed rules:
  --Final rule on access to outdoor developed areas.
  --NPRM on public rights-of-way accessibility.
  --NPRM on access to passenger vessels.
Fiscal Year 2007 Objectives--Codes and Standards
    In fiscal year 2007, the Board will continue efforts to harmonize 
its guidelines with model codes and standards, including the ICC/ANSI 
A117.1 Standard for Accessible and Usable Buildings and Facilities.

              TECHNICAL ASSISTANCE, TRAINING, AND RESEARCH

    The Board's long-range goal is to be a leader in information, 
education, and outreach on accessibility. The Board provides technical 
assistance to a wide variety of people regarding the accessibility 
guidelines and standards it issues. The Board's customers include 
architects, builders, designers, manufacturers, people with 
disabilities, State and local governments, and Federal agencies. The 
Board's technical assistance program has four components:
  --Responding to customer inquiries. The Board responds to about 
        12,000 customer inquiries each year. We have four toll-free 
        telephone lines for customers to call with questions. Customers 
        also e-mail and fax us questions. Many literally are sitting at 
        a drawing table with a design problem. They want accurate, 
        reliable, and timely advice. Our customers value being able to 
        discuss their questions directly with our accessibility 
        specialists who developed the guidelines and standards.
  --Developing and disseminating bulletins, manuals, and other 
        publications. The Board maintains about 30 publications on 
        accessibility issues. These range from short bulletins 
        responding to frequently asked questions about specific issues 
        such as accessible parking, to manuals on the Board's 
        guidelines and standards. We send out about 15,000 publications 
        each year in print and alternate formats.
  --Providing training. The Board conducts about 90 training sessions 
        each year. Training usually is provided at conferences and 
        seminars sponsored by other organizations. Training sponsors 
        generally reimburse us for travel expenses.
  --Maintaining the Board's website. The Board's website (www.access-
        board.gov) has become a very effective way to distribute 
        information to the public. Customers can download many of our 
        publications and view our accessibility guidelines and 
        standards from our website. We received over 2.2 million user 
        sessions on our website in fiscal year 2005.
    The Board also has informal partnerships with other organizations 
such as the American Institute of Architects, the National Association 
of ADA Coordinators, and the Disability and Business Technical 
Assistance Centers (DBTAC) to disseminate information about the Board's 
programs. Many of the Board's guidelines and publications are available 
through these organizations' on-line networks. The Board also provides 
training for these organizations.
    As the Board develops guidelines for new areas such as outdoor 
developed areas, passenger vessels, and public rights-of-ways, there 
will be increased demands for technical assistance from existing and 
new customer groups. There also will be opportunities to use existing 
partnerships and establish new partnerships with customer groups to 
disseminate information about the Board's guidelines and standards.
Fiscal Year 2005 Results--Technical Assistance, Training, and Research
    Recently, the Board adopted a ``focus issue'' approach to public 
outreach and technical assistance that will allow the Board to reach a 
wider variety of audiences than it does now. The focused approach will 
supplement the Board's existing outreach programs. Focusing on an issue 
will allow the Board to make a large impact in a narrow segment of 
society in a way that its current approach does not allow. The Board 
selected access to courthouses as its first focus issue and in October 
2004 created a 31-member Courthouse Access Advisory Committee to guide 
this work. The committee has met five times since its creation. It is 
scheduled to complete its work in November 2006. The committee will 
develop technical assistance materials related to the accessibility of 
courthouses, particularly courtrooms, including best practices, design 
solutions, and the promotion of accessible features.
    The Board unveiled its newly redesigned website in June 2005 using 
the Board's new agency graphic identity. This new graphic identity 
provided the Board with a coordinated range of new templates for the 
layout of reports, bulletins, internet presence, and other print and 
electronic materials. The Board developed this new and more appropriate 
graphic expression, including both logo and text, for its family of 
print materials. The Board did this to reflect its professionalism and 
to communicate that the Board is the only Federal agency devoted to 
accessibility in the built environment and in communications and 
electronic technologies.
    In fiscal year 2005, the Board responded to 12,271 customer 
inquiries; distributed 1,250 information packets; and conducted 108 
training sessions, which were attended by 9,100 people. An information 
packet usually contains several publications. Since the Board does not 
collect data on publications disseminated through partner 
organizations, the actual number of publications disseminated to its 
customers is greater than the current data indicate.
    The Board has used its website to provide copies of the Board's 
guidelines and answers to frequently asked questions about the 
guidelines so that more customers can get the information they need. 
The number of user sessions on the Board's website continues to grow. 
There were approximately 2.2 million user sessions in fiscal year 2005, 
nearly 600,000 more than the previous year. Due to the increasing use 
of the its website, the Board is focusing on web-based dissemination of 
information since this allows a variety of options for speedy 
distribution at a low cost to the Board. The Board also published and 
distributed six issues of Access Currents, a free newsletter issued 
every other month by mail and e-mail.
    Technical assistance, research, and training projects funded in 
fiscal year 2005 include:
  --Retail Checkout Counters and Point-of-Sales Machines.--This project 
        will develop a technical assistance bulletin demonstrating in 
        well-illustrated and detailed case studies and best practices 
        the application of accessibility requirements to the design, 
        engineering, fabrication, and construction of check-out 
        counters and transaction machines.
  --Wheeled Mobility Research.--This multi-year project will research 
        and report on the space requirements, horizontal and vertical 
        maneuvering parameters, reach ranges, and other key factors of 
        occupied power wheelchairs and scooters in use in buildings, 
        facilities, and transportation vehicles. The data collected is 
        to be presented in a report that will facilitate comparison 
        with provisions in current accessibility guidelines, with key 
        published studies of mobility aid space and maneuvering 
        requirements, and will enable consideration of several 
        increments of accommodation for both power wheelchairs and 
        scooter types.
  --Effects of Static Electricity in Play Areas.--Static electricity in 
        play areas is potentially harmful to children who have cochlear 
        implants. This project will collect measures of the levels of 
        static electricity being created in play areas where plastic 
        play components are installed. The contractor will analyze the 
        findings from several test areas and compare them to the 
        charges that result from other sources and charges known to 
        have effects on hearing technologies. A second phase of work 
        will support additional site testing.
  --Measures and Materials.--This project will bring together 
        representatives of design and construction industry 
        organizations to work with the Board to incorporate information 
        on tolerances relative to accessibility in industry 
        specifications. A technical assistance publication will also be 
        developed.
  --Wayfinding at Intersections.--This project funded a workshop that 
        brought together highway engineers, orientation and mobility 
        specialists, and people with disabilities in a 2-day workshop 
        to consider possible changes to roadway design to facilitate 
        wayfinding. Fiscal year 2005 funding supported continued 
        discussion and development of standard intersection plans based 
        upon workshop recommendations, with the objective of arriving 
        at consensus schemes that can be implemented by industry.
  --Passenger Vessels Regulatory Assessment.--This project will develop 
        an initial case study for use in the Passenger Vessels 
        Regulatory Assessment.
Fiscal Year 2006 Planned Activities--Technical Assistance, Training, 
        and Research
    In November 2005, the Board set its research priorities for fiscal 
year 2006. The projects include the following:
  --Communications in Transportation Facilities.--This project will 
        study and determine the need for changes in communications 
        accessibility provisions in the Board's guidelines for 
        transportation facilities and vehicles.
  --Pedestrian Signals at Roundabouts.--The draft public rights-of-way 
        guidelines require pedestrian signals at multi-lane crossings 
        of roundabouts. This study will identify candidate technologies 
        in use elsewhere around the world.
  --Wayfinding Research.--The Department of Blind Rehabilitation at 
        Western Michigan University is using seed funding from the 
        National Eye Institute to assess the relative effectiveness of 
        several physical wayfinding cues in the outdoor environment, 
        including returned edges, tactile surfaces, guidestrips, and 
        curb ramp orientation. Our funding will enable them to do more 
        dispositive research with a larger group of subjects and test a 
        wider range of cues.
  --Standards for Assisted Transfer.--This project will follow-up on an 
        earlier one that collected and presented information on current 
        practices in medical care and assisted living facilities by 
        convening an expert group of stakeholders to recommend changes 
        to the Board's guidelines.
  --Slope and Surface Effects on Manual Wheelchair Users.--This project 
        will commission a comparative analysis relative to manual 
        wheelchair use of the several standard protocols used to 
        measure work, effort, energy expenditure, efficiency, 
        difficulty, and rollability to develop a more accurate 
        protocol.
  --APS Troubleshooting.--This project will commission a technical 
        assistance bulletin regarding how to specify accessible 
        pedestrian signals that are appropriate to specific 
        intersection types and conditions.
  --Sign Language Versions of Selected Board Material.--People who are 
        deaf would like to access materials in their native language, 
        American Sign Language. This project will develop short video 
        clips using American Sign Language to convey information about 
        the Board and ways to file Architectural Barriers Act 
        complaints and place the clips on the Board's web site.
  --Indoor Environmental Quality Follow-up.--This project will 
        commission the National Institute of Building Sciences to 
        pursue key recommendations of a previous Board sponsored study 
        on improving the indoor environment for individuals with 
        multiple chemical sensitivities and electromagnetic 
        sensitivities.
  --Study Lighting for Low Vision Users.--This project will commission 
        a research synthesis on existing lighting research and 
        standards affecting people with low vision. This synthesis will 
        be useful in providing technical assistance to improve access 
        for people with low vision and could lead to eventual 
        rulemaking.
  --Regulatory Assessment for Passenger Vessel Rulemaking.--This work 
        is required by our rulemaking agenda.
  --Regulatory Assessment for Public Rights-of-Way Rulemaking.--This 
        work is required by our rulemaking agenda. This year the Board 
        will fund the incidental expenses necessary to convene industry 
        leadership to plan for data gathering and analysis.
    Because of the Board's expertise in accessibility issues, many 
government agencies and private organizations ask for its assistance in 
ensuring access at their facilities. The Board provided technical 
assistance to the Department of Commerce on the proposed new Census 
Bureau building in Suitland, MD. Members of the Maryland Congressional 
delegation requested the Board's assistance to help make this building 
a model of accessibility. The Board also reviewed accessibility issues 
for the planned new Department of Transportation headquarters building.
Fiscal Year 2007 Objectives--Technical Assistance, Training, and 
        Research
    In fiscal year 2007 and beyond, the Board will develop training and 
technical assistance materials on its planned final rules on outdoor 
developed areas, passenger vessels, and public rights-of-ways. As the 
Board publishes final rules, it makes every effort to ensure that 
training and technical assistance materials will be available to 
organizations and individuals that must apply the new requirements.

                 ARCHITECTURAL BARRIERS ACT ENFORCEMENT

    The Board enforces the Architectural Barriers Act (ABA), which 
requires that most buildings designed, constructed, altered, or leased 
by the Federal Government and certain other federally financed 
facilities be accessible to people with disabilities. Complaints 
received by the Board concern post offices, national parks, military 
facilities, veterans hospitals, courthouses, and a variety of other 
facilities. When the Board has jurisdiction and finds that the 
applicable accessibility standards were not followed, it requests a 
corrective action plan and monitors the case until the barrier is 
removed. Even when the Board does not have jurisdiction or no violation 
is found, it attempts to negotiate voluntary barrier removal.
    The Board's long-range goal is to be a leading partner with Federal 
agencies to make the Federal Government a model of compliance with 
accessibility standards. The Board's experience with enforcement of the 
ABA is that most violations are not intentional. When violations are 
found, it is usually because the people responsible for designing 
buildings, reviewing plans, and on-site construction did not have a 
good understanding of the accessibility standards and how to apply 
them. People responsible for building planning and design at 
headquarters, regional and field offices, and local sites must have a 
working knowledge of the accessibility standards if compliance is to be 
achieved. As Federal agencies are reorganized and personnel assignments 
and responsibilities change, it is important that agencies have 
effective systems for training new people responsible for applying the 
accessibility standards and for monitoring compliance with the ABA. The 
Board has also worked with the Federal agencies responsible for issuing 
accessibility standards for facilities covered by the ABA to update 
their standards to be consistent with the Board's new ADA and ABA 
Accessibility Guidelines that were issued in July 2004. In November 
2005, the General Services Administration updated its accessibility 
standards for the ABA. The new standards will apply to most Federal 
facilities that are constructed, altered, or leased after May 8, 2006. 
The United States Postal Services also updated its ABA standards for 
postal facilities in May 2005. The Board continues to work with the 
Department of Defense and the Department of Housing and Urban 
Development to update their ABA standards.
Fiscal Year 2005 Results--ABA Enforcement
    In fiscal year 2005, the Board received 168 written complaints. 
These included complaints investigated under the Architectural Barriers 
Act, and also those concerning facilities not covered by that law but 
potentially covered by other laws, such as the Americans with 
Disabilities Act and the Rehabilitation Act. Of the 168 complaints, the 
Board opened 90 as new Architectural Barriers Act cases. Although the 
Board did not have authority under the Architectural Barriers Act in 
the other 78 complaints, the Board responded to the complainants, 
usually by referring them to the appropriate enforcement agency. In 
addition, the Board referred another 46 complainants to other agencies 
for action when our investigations revealed there was no violation of 
the Architectural Barriers Act or the Board did not have jurisdiction.
    The Board responds quickly to all new complaints and contacts 
complainants frequently to update them on the status of their 
complaints. In fiscal year 2005, the Board sent initial letters to 
complainants acknowledging receipt of their complaint or began an 
investigation of the issues they raised within an average of 5 days. 
The Board's customers regularly say they are pleased to hear from a 
Federal agency so promptly. It is Board practice to keep complainants 
informed on a regular basis throughout the course of our 
investigations. In fiscal year 2005, the Board contacted 159 
complainants to provide updates on the status of their complaints.
Fiscal Year 2006 Plans--ABA Enforcement
    In fiscal year 2006, the Board will continue to investigate 
complaints under the Architectural Barriers Act. The Board anticipates 
responding to complaints in an average of 5 or fewer business days and 
will continue to provide periodic updates to complainants on the status 
of their complaints. At the beginning of fiscal year 2006, the Board 
had 107 active cases. The Board expects to receive 180 new complaints 
in fiscal year 2006. Of this total, the Board estimates that 100 will 
be opened as new Architectural Barriers Act cases and 80 will be 
referred to other agencies for enforcement under other laws, such as 
the Americans with Disabilities Act and the Rehabilitation Act. This 
represents an increase over fiscal year 2005, which are anticipated in 
response to an outreach effort the Board just completed to provide 
informational packets on the Architectural Barriers Act to independent 
living centers and technical assistance centers throughout the country.
Fiscal Year 2007 Objectives--ABA Enforcement
    In fiscal year 2007, the Board will continue to investigate 
complaints under the Architectural Barriers Act. The Board estimates 
that it will have 105 active cases at the beginning of fiscal year 2007 
and will receive 180 new complaints. The Board expects to open 100 new 
Architectural Barriers Act cases and refer 80 complaints to other 
agencies for enforcement under other laws. The Board will continue to 
provide good customer service.
                                 ______
                                 
Prepared Statement of the Capital Metropolitan Transportation Authority

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

                     RAPID BUS PROJECT--$2 MILLION

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

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

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

               LEANDER PARK AND RIDE FACILITY--$1 MILLION

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

              OAK HILL PARK AND RIDE FACILITY--$1 MILLION

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

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

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

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

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

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

                       JUSTIFICATION AND CLOSING

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

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

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

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

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

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

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

                                 ______
                                 
                Prepared Statement of the Navajo Nation

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

                              INTRODUCTION

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

                  NAVAJO NATION COMMUNITY DEVELOPMENT

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

                   COMMUNITY DEVELOPMENT BLOCK GRANT

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

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

                               CONCLUSION

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

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

                              INTRODUCTION

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

                                OVERVIEW

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

                         FISCAL YEAR 2007 GOALS

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

                      PRESIDENT'S BUDGET PROPOSAL

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

                        NEW STARTS/SMALL STARTS

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

                NORTHEAST CORRIDOR COMMUTER RAIL ISSUES

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

             PUBLIC TRANSPORTATION AND ENERGY INDEPENDENCE

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

                               CONCLUSION

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

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

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


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

                                 ______
                                 
 Prepared Statement of the National Association of Railroad Passengers

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

                    WHY TRAINS ARE A GOOD INVESTMENT

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

                       AMTRAK EFFICIENCY CONCERNS

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

            STATUTORY DIRECTIVES (INCLUDING REPORT LANGUAGE)

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

                             FUNDING LEVELS

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

                          LONG-DISTANCE TRAINS

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


       LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                             SUBJECT INDEX

                              ----------                              

                ADMINISTRATIVE OFFICE OF THE U.S. COURTS

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

                                 AMTRAK

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

              DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                        Office of the Secretary

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

                       DEPARTMENT OF THE TREASURY

                        Internal Revenue Service

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

             Office of Terrorism and Financial Intelligence

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

                        Office of the Secretary

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

                      DEPARTMENT OF TRANSPORTATION

                    Federal Aviation Administration

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

                      Office of Inspector General

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

                        Office of the Secretary

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

                 FEDERAL DEPOSIT INSURANCE CORPORATION

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

                      FEDERAL ELECTION COMMISSION

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

                        FEDERAL JUDICIAL CENTER

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

                JUDICIAL CONFERENCE OF THE UNITED STATES

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

    NEIGHBORHOOD REINVESTMENT CORPORATION DBA NEIGHBORWORKS AMERICA

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

                    OFFICE OF MANAGEMENT AND BUDGET

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

                     OFFICE OF PERSONNEL MANAGEMENT

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

                        SELECTIVE SERVICE SYSTEM

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

                      SURFACE TRANSPORTATION BOARD

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

                  UNITED STATES SENTENCING COMMISSION

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

                        UNITED STATES TAX COURT

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

                  U.S. ELECTION ASSISTANCE COMMISSION

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

                  U.S. MERIT SYSTEMS PROTECTION BOARD

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

                    U.S. OFFICE OF GOVERNMENT ETHICS

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

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